Every year that Labour was in power they announced a clampdown on avoidance and evasion of tax. Every year more complicated provisions were put into Finance Acts to make it more difficult for people to evade tax (illegal), and to make more avoidance schemes (legal) into illegal devices. You might have thought that after 13 years of doing that, the job would be done.
Apparently not. Now some Labour figures tell us there is £120 billion of evasion and avoidance. All we need to do, is stop all this overnight, and most of the deficit disappears. Meanwhile the Coalition government continues much like Labour before it in this area,with complicated Finance Bills designed to chip away at evasion and avoidance.
The truth is more complicated. Avoidance is what most people do. It is actively promoted by all governments, as avoidance is another name for tax incentives or preferential treatment as government seeks to influence our conduct. No government has ever wanted to stop avoidance, because no government has ever wanted to stop influencing how we spend and save our money.
The main incentives or avoidance methods for individuals include tax relief on pensions contributions, tax exemption for investments held within a pension plan, CGT relief on your prime residence, tax relief on ISAs, tax exemption on interest earned on certain National Savings accounts, and VAT exemption for purchases of basic items.
Individuals are often looking at ways of lowering the total amount of tax they pay. Avoidance could include the following legal decisions for example:
1. Using a contractor to do work on your home who is below the VAT registration threshold to avoid VAT charges
2. Entering Central London by car outside the hours of the Congestion Charge
3. Buying a larger home than you need so more of your total investment is covered by the CGT relief on first homes
4. Investing as much through National Savings and ISAs as you can afford to avoid tax on investments
5. Going by subsidised bus rather than car to avoid fuel duty
6. Buying larger items that attract VAT just before a VAT rise
7. Home brewing to avoid various liquor duties
8. Playing the lottery instead of betting to avoid gambling taxes
Some people go further and break the law to evade tax. They might, for example, pay a tradesman in cash to escape VAT when the local business is registered to pay VAT. Such cash payments may also contribute to other tax evasion by the tradesman. They might place money abroad and fail to declare the income to the authorities. They might fail to declare all their cash earnings if they have any.
The tax system is now so complicated that people who do intend to pay all their tax and make honest declarations can make mistakes, as I see from my constituents cases sometimes. The Revenue would be wise to distinguish between those out to fool the system, and those who fall foul of its complexities. Tomorrow I will look at corporate tax.