What is tax evasion?

Tax evasion, tax avoidance, tax efficiency, tax arbitrage, tax rationalisation, tax management – these are all terms used to describe the various methods of reducing the tax bill of a legal or natural person.

But how do you distinguish between them?  What is allowed and what is not allowed?  What happens if you get it wrong?

The most simplistic way to think about this is that tax evasion is illegal whereas the others terms refer to activity that is not illegal. It is, therefore, not allowed.

So how do you know what is tax evasion or what falls into the not impermissible category? You are not a tax expert.  You are not omniscient.  You do not have a crystal ball.  And tax evaders are not renowned for their honesty and integrity! AND tax evasion covers all types of tax including corporate tax, personal employment tax, inheritance tax, excise duty and value added tax.

Tax evasion is a sticky subject with increasingly onerous obligations put on the regulated sector to play their part in its deterrence and detection and failure to have in place reasonable procedures to mitigate the risk of a firm becoming involved can result in the commission of the offence of ‘failure to prevent the facilitation of’ in relation to domestic and foreign tax evasion (Criminal Finances Act 2017).

Spotting tax evasion can be difficult enough, but increasingly the powers that be are using the terms tax evasion and tax avoidance interchangeably in an example of regulatory creep – with more and more expected of the regulated sector to form the first line of defence for UK PLC because whilst not actually illegal, tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law and is very much on the regulatory radar.

So what does that mean for firms?

Firms need to take a number of steps to protect themselves from exposure to, and risk of being involved in, tax evasion:

  • Understand the legal and regulatory framework in which you operate. g. do you have reporting requirements under FATCA or the CRS;
  • Identify, understand and assess the tax evasion risks you are exposed to as a firm and areas of vulnerability (clients, employees, products and services, jurisdiction, operating environment, internal governance framework);
  • Understand typologies and risk indicators for tax evasion such as complexity in a corporate structure or choice of jurisdiction known for tax advantage and secrecy laws;
  • Put in place policies and procedures – both preventative and detective; and
  • Educate employees on their obligations and what they must/must not do.

As more emphasis is placed on challenging the legitimacy of avoidance schemes firms must also be constantly horizon scanning for changes to legislation – the upcoming DAC 6 being a prime example of legislation that will expand the remit of regulated firms to report avoidance schemes so that tax authorities can focus their efforts and clamp down on those.

Tax evasion, and avoidance are subject to intense legal and regulatory scrutiny with the onus on firm to show that they had in place reasonable procedures to mitigate the risk – reversing the burden of proof.

It is therefore imperative that employees understand where they might be at risk and are able to take the necessary action.