A lot of people confuse tax avoidance and tax evasion. It can be a dangerous mistake to make!
As the former British Chancellor of the Exchequer Denis Healey said:
“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
What can’t be stressed enough is that the two terms – and the actions each entails – are definitely not the same thing.
- Tax avoidance involves using whatever legal means you choose to reduce your current or future tax liabilities.
- Tax evasion means doing illegal things to avoid paying taxes. It’s the Al Capone path to financial freedom.
Unfortunately for any criminals who Googled ‘tax evasion’, I’m not about to give you a masterclass in laundering cash or doctoring a passport.
I’ve never evaded taxes, I don’t condone it, and I couldn’t tell you how it’s done.
Tax avoidance is another matter. With taxes likely to rise in the West to pay down public debt regardless of what party in power, it makes sense for investors to do what we can to reduce our tax burden without overly compromising other aspects of our lives.
Note that according to the bastion of all knowledge good and true – *cough* Wikipedia *cough* — the term ‘tax avoidance’ is currently in some dispute in the UK, with ‘tax mitigation’ being suggested as a better term for legal tax reduction:
The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed.
There is, however, a further distinction drawn between tax avoidance and tax mitigation. Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament.
Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.
I suspect this is largely a courtroom debate, caused by the Revenue looking to close down schemes of dubious legality created by planners for wealthy individuals.
But I’m no legal expert nor a tax planner – just an everyday bloke who enjoys investing. So to be absolutely clear, what I’m talking about is reducing the taxes you pay, mainly on investments, by using legal and above board means.
I’ll outline a few such measures in part two. (Subscribe to ensure you see it!)
Be prepared to do some research about the tax regime in your country, though, and potentially to take professional advice.
Tax laws can be complicated, and you don’t want to end up on the wrong side of that prison wall.
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Aren’t many tax avoidance/mitigation measures really a means to DEFER tax? (in the UK)
e.g. Much is made of the benefits of pension schemes such as the tax relief on contributions, etc. However, when you eventually retire, other than the 25% tax free lump sum, the pension payable is subject to income tax. It’s possible to receive tax relief at up to 40% on contributions now and pay tax at 20% on your pension in the future, but that assumes no change in income tax rates and all the other rules that impact pensions. Many people will just get 20% relief now and pay 20% tax on their pension when they retire (their investments grow tax free too, but
I think pensions, ISAs etc are great, but people often get carried away by the tax “advantages”. Anyway, no doubt you’ll cover this in your series, which I look forward to reading.
I agree Tony and actually slightly favour ISAs all things considered, though if you’re wealthy and can do both, so much the better.
It’s only going to be a one off article, rather than a series – just a beginner’s guide really.
Being thwarted regarding all things Monevation by work commitments at present, hence slight delay.
I tell ya the more you make, the more you feel like not paying taxes.
We’ve got 7 tax free income tax states in America. You’ll be seeing me in Nevada or Washington in 10 years when I’m retired! Saving 10% every year is a lot!
FS
As one of my colleagues commented recently, the good book exhorts us to “Render unto Caesar what is due to Caesar” – but, it didn’t say anything about rendering more than what is due !
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