Tax avoidance is not tax evasionPosted on: 26 June 2012 by Andrew Stallard
Jimmy Carr hit the headlines last week for his tax affairs. Here, Andrew Stallard explains the difference between managing your tax bill efficiently and illegal tax evasion.
One of our jobs as financial advisers is to identify tax planning opportunities for clients. When it comes to tax, one thorny issue that often comes up is the issue of tax avoidance and tax evasion. The two things are often confused, but it's crucial to be clear of the difference!
As Dennis Healey, the former Chancellor of the Exchequer, said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
Tax avoidance means using whatever legal means you choose to reduce your current or future tax liabilities. For example, using your Individual Savings Account (ISA) allowance is a perfectly legal way of avoiding tax.
Tax evasion, on the other hand, means doing illegal things to avoid paying taxes and is not something we condone.
As financial advisers we will do everything to help you legally avoid unnecessary tax; what we will never do is help you to evade it.
Tax can be a taxing matter, and the last budget produced another complication; the loss of child benefit from clients with families with a higher rate tax payer. Child benefit has been a tax-free benefit, paid irrespective of income and described as a universal benefit.
From January 2013 this will change and the benefit will be means tested and incrementally withdrawn from families who have a single parent with earnings in excess of £50,000 (1). The benefit will be withdrawn in the form of a child benefit income tax charge of 1% of the child benefit paid for every £100 over the £50,000 threshold. Once the parent’s income reaches £60,000 the child benefit will be completely wiped out as the tax charge will equal the amount of child benefit paid.
It can also lead to a situation where one partner may receive the benefit tax-free, while the other partner is taxed on that benefit. This may produce interesting conversations in some households as George Osborne robs Peter to pay Paul.
The change represents a chipping away at the principle of independent taxation and taxpayer confidentiality. At present it is a criminal offence for HMRC to reveal someone’s tax records. With the new child benefit tax charge, HMRC will now release information on income and receipt of child benefit to each partner. This may be fine in stable relationships and HMRC say that they “expect” (2) couples to discuss their tax and benefits with each other, but what about relationships that break up midyear? Or couples who wish to keep their tax affairs separate?
So we have another complication in an already less than simple taxation system which is likely to affect 1.2 million families receiving child benefit, that's an awful lot of us. Of these, 70% will effectively lose all their benefit and the remaining 30% will lose a portion. Affected families will lose £1,300 a year on average.
What can be done legally to avoid yet another tax charge? The charge only applies when your adjusted net income exceeds £50,000. So you can reduce your net income by making gift aid donations and extra pension contributions. For some people, professional subscriptions will also reduce net income. So can negotiating salary sacrifice schemes with employers in exchange for things like childcare and nursery vouchers.
You can also use income tax shelters like ISA allowances, investment bonds or with independent advice, you could consider moving any income producing assets you have to a lower-income partner. It's worth remembering, too, that everyone has an annual capital gains allowance which is seldom used. By selecting investments that are taxed against this allowance rather than income tax, your tax bill can be reduced and child benefit possibly retained.
When George Osborne launched the Office for Tax Simplification in 2010 he described the current tax system as “a spaghetti bowl of tax exemptions and reliefs” (3) But it seems that the impending changes to the taxation of child benefit will just add more strands to the mix!
3. Daily Mail
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