Most people do not want to be involved in disputes with the tax authorities, and merely wish to make sure that they comply with their obligations without paying more than is legally due. It is necessary, however, to understand the difference between tax avoidance and tax evasion. Tax avoidance means using the tax rules to best advantage, whereas tax evasion means illegally reducing tax bills, for example by understating income, over claiming expenses or deliberately disguising the true nature of transactions. It seems reasonable to distinguish tax avoidance from more straightforward tax planning or mitigation, with some avoidance being regarded as unacceptable by HMRC — some 'structured avoidance' schemes might be regarded, for example, as setting out to defeat the purpose of the legislation — and planning or mitigation being regarded as acceptable. However, there are no firm definitions in this area.
Some ministers and HMRC officials have been accused of blurring the distinction between evasion and avoidance in an effort to highlight what they have regarded as unethical practice on the part of some taxpayers and professional advisers engaged in 'aggressive' or 'artificial' avoidance schemes.
There is an increased public awareness of the issue of tax avoidance following the widespread publicity given to the practice of some MPs, already under media scrutiny over their parliamentary expenses claims, who 'flipped' the designation of their main homes to save capital gains tax.
A further indication of the Government's determination to tackle tax avoidance came with the publication of a code of practice on tax for the UK's banks. The voluntary code, which was finalised in late 2009, requires a bank to undertake not to promote arrangements that 'will give a result contrary to the intentions of parliament'.
Where tax has been illegally evaded, it can result in criminal prosecution as well as payment of the relevant tax plus interest and penalties. The tax authorities collect billions of pounds from their investigation, audit and review work, and undertake a number of major criminal prosecutions.
The UK also has wide-ranging international arrangements to help combat tax evasion, and information is exchanged with countries with whom the UK has double taxation agreements or tax information exchange agreements. A country with which the UK has a double taxation or tax information exchange agreement may also ask HMRC to require a UK taxpayer to provide information relating to tax liabilities with the overseas country.