Which means what? It’s daft enough that we have “tax evasion” and “tax avoidance” as two different practices in the eyes of the law. I know you were paraphrasing, but where does “tax dodge” fit into this?

Its legality was undetermined. As a general rule, schemes whose primary purpose is to avoid tax are unlawful – so the issue here was whether or not Barlow’s scheme fell into that category. That judgement has now been made.

As a general rule, schemes whose primary purpose is to avoid tax are unlawful

This is where I have to admit I’m out of depth with my knowledge of all this. I thought that working within the rules to avoid paying tax was morally wrong, frowned upon perhaps, but not illegal. As a general rule it is innocent until proved guilty, so how come tax avoidance schemes can be unlawful if the legality is undetermined?

I thought that working within the rules to avoid paying tax was morally wrong, frowned upon perhaps, but not illegal.

It hadn’t been determined whether or not the scheme was within the rules.

As a general rule it is innocent until proved guilty, so how come tax avoidance schemes can be unlawful if the legality is undetermined?

Because HMRC had to prove their case – that the scheme was being used primarily to avoid tax. That’s now happened, and the rule is that you have to pay the avoided tax back, plus a penalty.

As an aside – my wife is a chartered tax adviser and she says that no-one qualified in the field could possibly have thought this scheme was set up for any reason other than to avoid tax.

This is where I have to admit I’m out of depth with my knowledge of all this. I thought that working within the rules to avoid paying tax was morally wrong, frowned upon perhaps, but not illegal. As a general rule it is innocent until proved guilty, so how come tax avoidance schemes can be unlawful if the legality is undetermined?

@still – working within the rules to reduce tax is not morally wrong, IMO it’s just daft to describe it as such. Its totally moral and legal to put money into your pension and get a tax benefit for example. Where it’s more complex is when an internal company creates many subsidiaries in different countries and moves money around/makes use of tax laws to pay very little. But the fact is if governments (the people) don’t like it change the rules.

With regard to the schemes it is illegal to create a scheme purely to avoid tax, that’s why they are dressed up as business investments

The one that springs to mind is one for small service companies and VAT – charge 20% on your invoices, but only pay 13% to HMRC. No idea how that works, but it’s legal so why not take advantage?

Not sure what the other reply refering to opticians was, but in the rest of the economy the reason for this is you then don’t reclaim VAT on all your expenses to reduce the accountin burden.

E.g. you could buy a crate load of bike parts from a machien shop (and pay the factory 20% VAT), then charge customes 20% VAT on everything you sell, then at the end of the year do a VAT calculation which should result in a figure that is roughly 20% of the value added to the products (i.e. 20% of the markup).

Rather than do that, HMRC just did a calculation that figured out most businesses end up paying 13% of the value of the product (i.e. Value Added was about 200%). So it’s really an exercise in avoiding paperwork and protential fraud as it’s harder to fiddle a flat rate as you can’t reclaim VAT.

If you’re a business opperating tighter margins like a shop (it’s mainly aimed at contractors selling their services rather than a product, thus a very high value added) then the full system of paying/reclaiming VAT is better.

A tradesman’s request for cash payment and an unwillingness to provide an invoice might also be an indication of someone who is working without appropriate business/third party liability insurance . . . good luck with trying to get them to fix a fault/problem now or at some time down the line.

As a general rule, schemes whose primary purpose is to avoid tax are unlawful

This isn’t true at all.

To really understand this you need to read an awful lot of tax cases to understand how the law of tax avoidance has developed. Further it can change quite quickly between when a transaction was entered into if one of higher courts introduces a new doctrine of interpretation. In addition there is some legislation which requires transactions with certain characteristics common to mass marketed tax scheme to be disclosed specifically. The primary purpose of which was to ensure the tax authorities did not miss schemes so they had the opportunity to challenge them with the tools (legislation etc) available to them. Their toolchest has been considerably enhanced in recent years. HMRC will look at each scheme on its merits and will often try to reach a negotiated settlement where they think that offers the best value to the taxpayer (i.e the law is ambiguous and they are not certain of success). The worst schemes will be taken to court. The first tier determines the facts of the case that will be taken into account for future appeals. Sometimes they reach rather surprisng conclusions which ties the hands of the later appellant bodies, especially now the quality of the people sitting on these tribunals is not as high as it used to be.

This is just a taster of some of the issues involved, but to reduce it to avoidance transactions are unlawful is a massive oversimplfication.

no-one qualified in the field could possibly have thought this scheme was set up for any reason other than to avoid tax

Avoid tax or evade tax? It’s an important semantic difference as far as tax is concerned and is the point I was getting at. Tax avoidance is not illegal. Why is saving money in an ISA not seen as tax avoidance?

This isn’t true at all.

It’s a simplification, but to say it’s untrue, is untrue.

As you say, under DOTA details of schemes have to be disclosed and HMRC will judge them on their merits, but if you use a scheme whose primary purpose is to avoid tax, you would be well advised to not spend the saving you make…

It is avoid and even some transactions specifically set up to avoid tax may still be effective.

It’s a simplification, but to say it’s untrue, is untrue.

First, it is only abusive avoidance transactions that are caught by the general anti avoidance rule that was brought in in 2013 so this wouldn’t apply to any cases currently in the Press. Second, they are not unlawful they just don’t achieve their objectives, this may seem like semantics but it is an important difference. You can get done for penalties and interest but you have not done anything criminal, which I think is how most will envisage something being unlawful. On the other hand, if you make false representations (i.e. lie), you have.

Avoid tax or evade tax? It’s an important semantic difference as far as tax is concerned and is the point I was getting at. Tax avoidance is not illegal. Why is saving money in an ISA not seen as tax avoidance?

Avoidance/ evasion isn’t quite the binary difference it’s portrayed as. If you’re using a scheme that meets the HMRC tests under DOTAS, then whilst they may well allow you to carry on using it, they may try to reach a settlement or get a ruling to declare it illegal.

As for ISAs, using schemes as they were intended by the government (e.g. pensions, childcare vouchers) are not seen as avoidance because the government is encouraging you to use them.

I think of it as a sliding scale, with no clear divding lines.

planning
avoidance (that works)
avoidance (that doesn’t work)
Evasion
Fraud

Most people that talk about avoidance are probably thinking about tax planning.

jfletch, it’s nothing like doping in sport. Doping in sport is illegal. As you point out, tax avoidance is just working within the rules to pay the minimum amount of tax possible. Morally wrong perhaps, but not illegal

I’m afriad it’s exactly the same.

As a point of pedantry doping in sport isn’t actually illegal in this country but anyway that’s irelevant.

My point was to equate the rules and regs put in place by HMRC with the WADA code. In both instances if you are one side of the line you are OK but the other an that is not OK.

As a society we seem to want our sports people/traders to be norwhere near the line, as a sportsman that means pure as the driven snow. But the reality is a sportsman is doing a job. To compete they need to be up against the limits of the line to be competitive. Tramadol is a good example. It’s not on the banned list but there is current moral outrage that it may be in use in the peleton, but to an athlete it’s no different to ibuprofen or caffene. It’s legal.

Same with businesses we would like them to be straight down the line, pay tax on every last penny of earnings. But we exhibt different behavoiurs ourselves and wouldn’t hesitate to take advantage of legal tax avoidance schemes such as sallary sacrafice.

The analogy goes further. Most of us would shop a tradesman for not giving a reciept despite us knowing that is over the line. Omerta!

When i go into a small independant newsagent to buy misc goods, or a takeaway etc they never give me a receipt, must remember now on the advice of singletrakers with a chip on their shoulder to avoid them and report them for tax avaoidance, while amazon costa etc pay hardly any tax, Take that.

As a point of pedantry doping in sport isn’t actually illegal in this country but anyway that’s irelevant.

Wouldn’t it be fraud? Haven’t looked into it or anything…

The one that springs to mind is one for small service companies and VAT – charge 20% on your invoices, but only pay 13% to HMRC. No idea how that works, but it’s legal so why not take advantage?

That is the Flat Rate VAT Scheme and was brought in to make life easier all round. You pay a percentage of turnover, and the percentage is based on your business type and got from an HMRC published table.

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

It’s a good system, and really cuts down on Admin plus if you are smart you can save a bit – ie Computer Consultancy is %14.5 but Management Consultancy is 14% while Business Services are 12%.

I learnt my lesson vicariously through my father. He was converting a barn next door to their house to turn into a holiday let. Did a lot of work himself but employed a lot of trades too. One of the guys that did a lot of work for him was paid cash and if I’m honest I think dad was aware that it wasn’t all going to be declared and the job was priced accordingly. The guy was prosecuted for a benefits fraud issue (he had claimed north of £50K in benefits whilst working) which snowballed into a tax investigation which ended up with HMRC investigating my father’s accounts for proof of payment. Lots of difficult questions, lots of hassle.

I only pay cheque or bank transfer now – and am organised enough to know I’ll sort payment asap when requested. If that’s not good enough for some tradesmen then they don’t have to take the work- there are plenty that will. Besides, getting cash is a right hassle – 20mile round trip and working hours only.