IoD Big Picture

Summer 2013

Tax avoidance: remedies and collateral damage

SNAPSHOT
• The term ‘tax avoidance’ needs to be carefully defined and is not the same as ‘tax abuse’ or ‘tax evasion’. This article considers where avoidance becomes abuse and, in particular, the advantages and disadvantages of some measures to control it.

Tax avoidance: remedies and collateral damage
Richard Baron, former Head of Taxation at the IoD, and Stephen Herring, his successor, consider the proper use of the term ‘tax avoidance’, where avoidance becomes abuse, and the pros and cons of some measures to control it.

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The basics of UK tax law are simple, but difficulties arise from complex transactions that require specific rules – which in turn create opportunities for aggressive tax avoidance and abuse.

ax avoidance has rarely been out of the news over the past two years, although the term has also rarely been properly defined and has often been muddled both with tax abuse and, even more incorrectly, tax evasion. Commentary has focused on two separate assertions that tax avoidance is taking place. Firstly, claims that some multinational groups of companies, generally US-owned, have undertaken planning which might involve recognising profits in one country rather than another that has higher corporation tax rates. Secondly, introducing planning arrangements to secure better treatments of financing costs, intellectual property rights and undistributed profits by locating business activities in favourable jurisdictions. More understandably, the term ‘tax avoidance’ is also used to describe situations which occur where elaborate sequences of – typically purely financial – transactions are undertaken to exploit perceived technical loopholes in the law. These may be implemented both by individuals and companies that have most or all of their economic activity within