In: Business and Management

Submitted By ericsonmaa
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Difference between Tax avoidance and tax evasion
First, it is necessary to pin down the difference between tax avoidance and tax evasion. Tax evasion is illegal; tax avoidance is not. So how do we distinguish the two? One definition of evasion - or abusively excessive avoidance - is “exploiting a tax advantage that Parliament never intended”.
A classic example of entirely benign tax avoidance is when ordinary people put their savings in an Individual Savings Account (ISA) to avoid paying income tax on the interest earned by their cash savings. ISAs were established by the Government to encourage regular people to save. So when people avoid tax in this way they are doing precisely what Parliament intended.
But there’s a big grey area in relation to a host of other tax avoidance schemes devised by accountants and generally marketed to wealthy people. Sometimes HMRC will argue that rich people are extracting a tax saving benefit that MPs never intended them to have. The rich people’s lawyers will argue that it is not clear what Parliament intended. Often the only way to resolve this question is in the courts.
An example of this kind of contested scheme in recent years are the film investment funds, established after the government introduced a tax break to encourage people to invest in films made in the UK. HMRC has challenged and shut down a host of these funds after concluding that they amounted to evasion.

The principal of thin capitalization and the common thin capitalization rules. company is said to be thinly capitalized when its capital is made up of a much greater proportion of debt than equity, i.e. its gearing, or leverage, is too high. This is perceived to create problems for two classes of people:

creditors bear the solvency risk of the company, which has to repay the bulk of its capital with interest; and revenue authorities, who are…...

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