What is tax avoidance?

Tax avoidance refers to any legal method of reducing your tax bill.  It is not the same as tax evasion, which is illegal.  The legality of tax avoidance is founded in a legal ruling which strictly speaking applies only in Scotland.

The ruling of Lord Clyde in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] included the following quote:

No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.

This ruling is known as Lord Clyde's shovel.

We often hear people assert that tax avoidance is immoral, but the law - as enshrined in Lord Clyde's ruling - clearly states otherwise.  Also, morality is largely subjective, and one man's immoral may well be another man's perfectly acceptable.

It is fair to point out however that there have been numerous examples of tax avoidance being practised by people who have condemned it in other people, which could be seen as hypocritical.

There have also been numerous cases over the years of tax avoidance being practised by celebrities who publicly support high levels of public spending.  I feel entitled to wonder why anyone would call for higher public spending when they themselves are unwilling to contribute what might be seen as their fair share. 

It is also reasonable to ask why tax avoidance measures even exist.  There are three forms of tax avoidance.  The first kind is those which the government deliberately creates, and the Individual Savings Account (ISA for short) is an example of the this.

The second kind of avoidance is the kind which arises by accident, when the government makes a mistake when writing its tax laws.  The tax avoidance which was practised by the Ayrshire Pullman Motor Services company in 1929 was presumably an example of this.

The third kind involves foreign tax havens - which the British government can do little about.

The ISA exists presumably as a way of encouraging ordinary people to save money.  It is of no use to people who cannot afford to save, but at the same time it is also of little use to the super-rich.

By contrast, other forms of tax avoidance tend to favour the rich.  Rich people can afford to employ the services of accountants who can maybe detect loopholes in tax legislation.  They also have access to offshore tax havens.

As a final point, it is currently being reported that the government is planning to award a peerage to a company director who has previously engaged in tax avoidance on a large scale.  I merely observe the fact.