Avoidance of tax
No one enjoys paying tax but we all have to do it. It is hardly surprising that many people
put as much effort as they can into reducing their tax bill. There are plenty of perfectly
legitimate ways to do this, but some people go further into the realm of loopholes and
grey areas, if not outright illegality.
There are different ways of reducing your tax bill.
It is important to precisely define our terms here, as technical terms are used in the debate
surrounding tax that could easily be misinterpreted or mixed-up if not well understood.
Efforts by an individual, household, or corporation to reduce their tax bill can be sorted into
three categories:
1. Tax planning: also called tax efficiency or tax mitigation. This is when people reduce
their tax bill through entirely legitimate means; using legal methods in the way they were
intended. Methods of tax planning include getting tax relief on private pension
contributions [link 1] or deducting business expenses from taxable profits [link 2]. These reliefs were
created by legislation with the intention that they would be used as such, typically in order
to incentivise certain behaviours – saving for retirement or being more entrepreneurial
perhaps. (The wisdom of offering such reliefs could be debated, but that’s a separate
question from whether their use is legitimate.)
2. Tax avoidance: this is usually defined as reducing your tax bill by exploiting legal
methods in a way that was not intended by legislators and is usually considered
illegitimate or immoral. This could include convoluted attempts to get around tax rules such
as disguised remuneration schemes [link 3] or multi-national corporations shifting incomes
between jurisdictions to take advantage of differences between tax laws in different places [link 4].
Tax avoidance schemes generally attempt to follow the letter of the law, but undermine
the spirit of it. In many cases, tax authorities such as HMRC in the UK are nevertheless able to
take legal action to ensure payment [link 5] so a lot of tax avoidance is better described as being
in a legal grey area than being unproblematically legal.
3. Tax evasion: this is simply reducing your tax bill by breaking the law. For
example, by not reporting taxable income, claiming illegitimate deductions and reliefs, or just
not paying your bill.
While most methods of reducing your tax bill can be easily sorted into one of these three
categories, the lines between them are often blurry. The difference between legitimate tax
planning and illegitimate tax avoidance could be a debatable moral question, and
sometimes the difference between legal methods and illegal evasion is just as vague.
David Gauke, then a junior Treasury Minister, summed up the terminology succinctly in
2010: “Tax evasion occurs when someone acts against the law. Tax avoidance involves
compliance with the letter but not the spirit of the law […] Tax planning is a case of acting
in both the spirit and the letter of the law. There is a distinction, although there will be
occasions when the line is a little blurred.” [link 6]
How much does it cost us?
HMRC produces annual estimates of the ‘tax gap’ – the difference between how much tax
they think they should have received and how much was actually paid. The most recent
analysis estimates that £31 billion or 4.7% of total tax liabilities went unpaid in 2018-19.
Most of that total describes money lost due to errors, poor record-keeping, insolvency,
differences of “legal interpretation” and other fairly mundane inefficiencies. HMRC
estimates that just £4.6 billion was lost to outright tax evasion and £1.7 billion to
avoidance. [link 7]
The accountant Richard Murphy has been a persistent critic of HMRC’s estimates and
believes the real tax gap could be as much as £90 billion, almost treble the HMRC figure.
He argues that limited and not necessarily representative samples used by HMRC in its
methodology produce estimates which are implausibly low. Furthermore, Murphy disputes
what HMRC defines and does not define as avoidance. He suggests that the £4.9 billion
categorised as lost to “legal interpretation” – i.e. legal disputes that HMRC loses – may as
well be counted as avoidance; plenty of avoidance is legal, why should it be discounted
just because it is successful? Most notably, Murphy criticises HMRC for ignoring most
corporate profit-shifting and wealth hiding in offshore accounts on the basis that they are
legal; potentially somewhere in the region of £6 billion in avoidance not counted [link 8].
The economist Gabriel Zucman has also pursued the issue of tax dodging, particularly
focusing on tax havens which enable companies to artificially shift their profits around and
wealthy individuals to stash wealth tax-free. He estimated in 2017 that the UK loses about
€12.7 billion (~£11.6 billion) in corporate tax revenue due to profit-shifting and a further €6
billion (~£5.5 billion) due to wealth concealment, with the wealthiest 0.01% of British
households hiding about one-third of their wealth in offshore tax havens [link 9].
What do we think?
It’s fairly safe to say that the British public believe tax avoidance is widespread and
unacceptable. A 2015 survey by HMRC found that 63% of respondents felt
that tax avoidance was widespread and 61% thought that it was never acceptable, the
most frequent reasoning given that “it is unfair on others who pay their taxes” [link 10].
More recently, since 2019 a YouGov tracking poll has consistently found that more
than 60% of respondents believe it is unacceptable to legally avoid tax while less than
30% believe that it is acceptable [link 11]. A 2017 YouGov poll found that tax avoidance or
evasion is the most frequent reason for consumer boycotts [link 12] and in 2020 they found that
30% of Britons said that they would not buy from a brand that did not pay their taxes [link 13].
Focusing more specifically on one definitional issue, it seems quite clear that public
opinion does not look kindly on companies which use tax havens to lower their bills. A
2020 poll by YouGov and Kandar about Covid-19 recovery priorities found near-unanimous
support for the proposition that companies’ access to bailout funds should be conditional
on their tax-paying record and ending the use of tax havens [link 14].
How do they do it?
Most workers and households with modest incomes have little opportunity to avoid tax,
with the taxes they pay being levied more or less automatically. Consider the three largest
taxes in terms of revenue – Income Tax, National Insurance Contributions (NICs) and
Value Added Tax (VAT) – which account for about two-thirds of total receipts. Employees
have their Income Tax and NICs deducted from their payslips under the Pay-As-You-Earn
(PAYE) system, with about 85% of Income Tax revenue collected through PAYE [link 15].
Consumers pay VAT and other consumption taxes like Fuel Duty as part of the price of
goods and services. The average taxpayer has no active input into most of the taxes they
pay, it just happens to them.
For the richest and wealthiest, however, the burden of taxation is not quite so automatic.
The top 1% of income tax payers rely on employment income for just under 60% of their
total income, a much lower proportion than the remaining 99%, with most of the rest
coming in the form of partnership and dividend incomes which come with substantial tax
advantages [link 16]. Notably, if less of your income comes from employment, then less of it is
subject to the automatic collection of PAYE and more opportunities arise to structure your
finances in an advantageous way. The richest households also pay less in indirect
taxes on consumption, such as VAT and other duties as a proportion of their income. The
bottom fifth of households pay more than 25% of their disposable incomes on indirect
taxation, the top fifth less than 15% [link 17]. This is because better-off households tend to be
able to save a greater proportion of their incomes, while those who have less have to
spend a greater share on basic consumption.
Corporations have even more room for manoeuvre. Companies pay tax on their profits
rather than their total income or revenue and are not billed by HMRC, instead calculating
and paying their tax themselves [link 18]. This provides plenty of opportunities to mitigate or avoid
taxation and plenty of businesses exploit those opportunities as much as they can.
Below are just some of the methods that the well-off and the incorporated use to avoid and
mitigate tax.
Wealth concealment: the wealthy can use a range of methods to make their fortunes and
estates seem smaller for tax purposes. Large estates which would be liable to pay a
substantial Inheritance Tax bill can be shrunk by giving away as much as possible tax-free
in advance [link 19] or by putting it into a trust so that you are no longer the legal owner - you and
your family just happen to be the sole beneficiaries - [link 20]. Alternatively they can simply move
their wealth into secret accounts in offshore tax havens so that it is outside HMRC’s
jurisdiction [link 21]. UK residents nominally living abroad can also access non-domiciled (“non-
dom”) status to avoid UK tax on income and assets held offshore as long as they are not
remitted to the UK [link 22]. This can be exploited by individuals who technically build up their
fortunes abroad even while living and working in the UK; for example, many Premier
League footballers set up companies in tax havens to receive non-salary income streams,
such as image rights payments [link 23].
Choice of payment: most of us are paid a salary by our employer and that’s that. But
business owners and partners can choose how to pay themselves from their companies
and confer substantial tax advantages upon themselves. Choosing to pay yourself in
dividends rather than a salary, for example, means paying much less tax. The IFS
estimates that an owner-manager paying themselves £200,000, mostly in dividends with
just a nominal salary, pays about £13,000 less in taxes than an employee paid a salary of
£200,000 [link 24]. Of course this is all perfectly legal and calling it tax avoidance is debatable,
but it nevertheless raises significant questions about the equity of tax policy.
Exploitative employment: HMRC’s own estimates show that businesses are responsible for
most of the recorded tax gap [link 25], much of it due to errors or carelessness, but a great deal
due to convoluted avoidance schemes, which deliberately seek to exploit the
employer/employee relationship to gain a tax advantage. Specific examples include
mis-classifying workers as self-employed in order to save on employer NICs or pensions
contributions [link 26], and disguised remuneration schemes, which try to avoid Income Tax and
NICs by paying employees in convoluted arrangements, often involving loans from third
parties instead of salaries [link 27].
Base erosion and profit shifting (BEPS): this is the technical term that the OECD uses to
describe multinational corporate tax avoidance. BEPS involves corporations artificially
shifting their profits from relatively high-tax jurisdictions where they actually make their
money to subsidiaries in low- or no-tax havens [link 28]. Firms such as Google [link 29], Starbucks [link 30] and
Amazon [link 31] are able to pay incredibly low rates of corporation tax relative to the revenues
they generate in the UK by treating their UK businesses as subsidiaries, which merely provide
services to the larger corporation, typically the low profit margin services such as
warehousing, delivery or marketing. They also reduce their bill by compensating
employees in shares as much as they can – the shares of course being in the profitable
HQ rather than the impoverished UK subsidiary. Effectively, they attribute as much of the
costs and as little of the revenue as they can to these subsidiaries meaning their accounts
show small profits in the UK. Meanwhile, their headquarters in low-tax jurisdictions like
Ireland or Luxembourg are made to appear to be the real money-spinners of the operation,
with the lion’s share of profits registered there.
To make things worse when HMRC takes action against big multinational corporations it
rarely cracks the whip. Instead the likes of Google can negotiate sweetheart deals and pay
back a fraction of what they really owe [link 32]. A study by Tax Watch UK estimated that just five
of the biggest tech companies avoided over £5 billion in UK corporation tax via profit-shifting
between 2012-2017 – more than HMRC estimated was avoided by all large companies over that period
[link 33].
How can we stop it?
Simplifying the tax code: the sheer length of complexity of the UK’s tax code may enable
avoidance; the more rules there are, the easier it is to find loopholes. The UK tax code is
estimated to be more than ten million words long – more than 20,000 pages – making it
the longest tax code in the world and it has been expanding rapidly in recent decades. In
2010, George Osborne set up the Office of Tax Simplification [link 34] to advise the government on
simplifying the UK tax system after the tax code had trebled in size under New Labour.
The code doubled again under Osborne’s tenure as Chancellor anyway [link 35]. Is it any wonder
that HMRC records billions in lost revenue every year due to “legal interpretation”?
The Confederation of British Industry (CBI) has argued that the complexity of the tax code
makes both compliance and enforcement more difficult, which leaves plenty of room for
both accidental and deliberate non-payment. According to the Federation of Small
Businesses (FSB), the average small business spends £5,000 and three working weeks
every year on tax compliance [link 36].
The CBI suggests that a simpler tax code would free up businesses to spend more time and money on productive
activities, would enable HMRC to concentrate their scarce resources more effectively on high risk rather than
highly complex areas, and increase public understanding of and confidence in the tax system [link 37].
Unfortunately, the process of simplifying the tax code would be anything but simple,
especially if it were done with the intention of closing loopholes and cracking down on
avoidance; plenty of people benefit from those loopholes and would contest the political
process in an effort to retain their advantages. Attempts to simplify the United States’ own
byzantine tax code have consistently run into roadblocks. Efforts to remove or simplify
away various deductions, credits and reliefs predictably run into opposition from politically
significant groups that benefit from their inclusion and end up being abandoned for
electoral expediency [link 38]. Plenty of tax advantages were deliberately created in order to
incentivise certain behaviour and so simplification could lead to unintended and unwanted
consequences [link 39].
Some attempts to simplify the tax code can even be self-defeating. For example, the Tax
Law Rewrite Project, which began in 1996, rewrote much of the UK’s direct tax legislation
with the intention of making it clearer and easier to use. This included simplifying much of
the language used with complicated jargon to be rewritten in plain English. Somewhat
ironically, this helped make the tax code even longer without resolving the underlying
legislative complexities [link 40]. While tax professionals, surveyed in 2011, were generally
positive about the rewrite and the improved formatting of legislation, they did not believe it
really made the legislation more accessible to anyone else. Lawyers and some
accountants suggested that the rewrite did not make their jobs any easier and that, in fact,
the use of “plain English” risked adding ambiguity as at least the technical jargon
previously used had definite, precise interpretations [link 41].
How might simplification really be achieved? Ultimately, it will require the government to be up front and bold about what exactly they are trying to achieve and prepared to accept that, while tax simplification in the abstract might be popular, actually
achieving it is likely to upset many different interests. That kind of honesty could both help actually to achieve
the removal of parts of the tax code as well as making it easier to understand the legislative
intentions behind the tax system, which would help taxpayers, HMRC, and the courts
distinguish between proper tax planning and improper tax avoidance.
A few other measures to consider include:
Strengthening enforcement: seriously tackling tax avoidance would inevitably require a
strong enforcement agency. However, since its establishment in 2005 HMRC has largely
seen its funding and staff numbers cut [link 42], despite the fact that the very nature of its work
makes it a profitable organisation from the perspective of public finances. According to HMRC it raises £1 in tax revenue for every 52p that is spent on funding it [link 43].
To illustrate the same point from an international perspective, the USA’s Internal
Revenue Service (IRS), their equivalent of HMRC, has had its annual budget cut by $2
billion since 2010 and, as a result, about $95 billion in government revenue has been lost
over that period as the agency has had to cut back on staff, audits and enforcement
efforts [link 44]. Cutting tax authorities’ budgets in order to save money is self-defeating while
restoring them is potentially a free lunch for the government.
International cooperation: the complexity and loopholes contained within our domestic tax
code are not the only problem. Avoidance methods which utilise tax havens and profit-
shifting exploit the differences between various nations’ tax codes and, unless
governments are willing to limit international transactions and movement with measures
such as capital controls, the only way to tackle them is through greater international
cooperation and transparency. Countries working together to coordinate rules and share
information makes it harder for multinational corporations to artificially shift profits or for
wealthy individuals to conceal their gains [link 45].
Increasing automation: as discussed above, most of the taxes that ordinary people pay as
employees and consumers are levied more or less automatically, with little agency
regarding how to pay allowed and therefore little opportunity to bend the rules. Reforms
could be made to other taxes to make them more “automatic” and less avoidable in this
vein. For example, in their 2019 manifesto the Labour Party published plans to effectively
treat capital gains and dividends like employment income, abolishing the separate tax-free
allowances and levying the same rates on all sources of income, therefore removing much
of the incentive for owners and shareholders to structure how they are paid for a tax
advantage [link 46]. The Liberal Democrats also announced similar plans [link 47].
1 https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
2 https://www.gov.uk/expenses-if-youre-self-employed
4 http://www.oecd.org/tax/beps/
5 https://www.gov.uk/guidance/tax-avoidance-an-introduction
6 https://researchbriefings.files.parliament.uk/documents/CBP7948/CBP7948.pdf
Measuring_tax_gaps_2020_edition.pdf esp. pg 13
8 https://www.taxresearch.org.uk/Blog/2019/06/19/the-uk-tax-gap-is-90-billion-a-year/
10 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/
500203/Exploring_public_attitude_to_tax_avoidance_in_2015.pdf
11 https://yougov.co.uk/topics/politics/trackers/is-it-acceptable-to-legally-avoid-tax
12 https://yougov.co.uk/topics/politics/articles-reports/2017/04/07/one-five-consumers-have-boycotted-brand
13 https://yougov.co.uk/topics/consumer/trackers/will-brits-purchase-from-a-brand-even-if-they-do-not-pay-
their-taxes
14 https://www.taxjustice.net/2020/09/17/polling-shows-near-total-public-support-for-measures-to-end-
corporate-tax-haven-use/
15 https://www.ifs.org.uk/uploads/BN259-How-high-are-our-taxes-and-where-does-the-money-come-
from.pdf pg. 2,11
16 https://www.ifs.org.uk/uploads/BN254-Characteristics-and-Incomes-Of-The-Top-1%25.pdf
17 https://researchbriefings.files.parliament.uk/documents/CBP-8513/CBP-8513.pdf esp, pg. 18
18 https://www.gov.uk/company-tax-returns
20 https://www.moneyadviceservice.org.uk/en/articles/using-a-trust-to-cut-your-inheritance-tax
21 https://www.icij.org/investigations/panama-papers/what-is-a-tax-haven-offshore-finance-explained/
22 https://www.gov.uk/tax-foreign-income/non-domiciled-residents
24 https://www.ifs.org.uk/uploads/BN254-Characteristics-and-Incomes-Of-The-Top-1%25.pdf pg. 15-16
26 https://www.ft.com/content/27adbef0-4966-11e8-8ee8-cae73aab7ccb
27 https://www.gov.uk/government/collections/tax-avoidance-disguised-remuneration
28 http://www.oecd.org/tax/beps/about/
30 https://www.ft.com/content/4d85c99c-bb44-11e8-8274-55b72926558f
31 https://www.taxjustice.net/2018/08/10/why-is-amazon-still-paying-little-tax-in-the-uk/
32 https://www.bbc.co.uk/news/uk-35390692
33 https://www.taxwatchuk.org/corporate-tax-and-tech-companies-in-the-uk-2/
34 https://www.gov.uk/government/organisations/office-of-tax-simplification/about
35 https://www.taxation.co.uk/articles/new-approach-to-the-uk-s-tax-system
37 https://www.cbi.org.uk/media/1305/tax-simplification-from-policy-inception-to-implementation.pdf
38 https://fivethirtyeight.com/features/the-republican-tax-bill-doesnt-actually-simplify-the-tax-code/
39 https://review.chicagobooth.edu/public-policy/2018/article/why-it-s-so-hard-simplify-tax-code
40 https://www.ifs.org.uk/budgets/gb2008/08chap13.pdf
42 https://www.instituteforgovernment.org.uk/explainers/civil-service-staff-numbers
43 https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2018-to-2019/overview-
of-hmrcs-annual-report-and-accounts-2018-to-2019
44 https://www.thenation.com/article/archive/internal-revenue-service-irs-budget-cuts/
45 https://www.oecd.org/about/impact/combatinginternationaltaxavoidance.htm
46 https://www.tax.org.uk/media-centre/blog/media-and-politics/labour-set-out-radical-changes-taxation-
capital-gains-dividends
47 https://www.tax.org.uk/media-centre/blog/media-and-politics/stop-brexit-and-start-tax-reform-say-lib-
dems