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The courts of most countries have long accepted that taxpayers have the right to arrange their financial affairs in such as manner as to use tax legislation to reduce the amount of tax that is payable by means that are within the law. For centuries the mantra “evasion is illegal but avoidance is not” has been accepted.

Unfortunately in recent years’ politicians have, by ignorance or design, muddied the water by talking about “legal tax avoidance” and “illegal tax avoidance”.

When it is pointed out that the second term was redundant as it was actually tax evasion, they moved on to use terms like “unacceptable tax avoidance” or “immoral tax avoidance”.  More recently the term “aggressive tax avoidance” is being used.

The fact is that governments often quite deliberately pass laws which set out to allow taxpayers to reduce their tax liability. For example the UK government allows individual taxpayers to invest in individual savings accounts (ISAs) so that income received is not taxed. They also give generous tax breaks to people who invest in Enterprise Investment Schemes. The US recently introduced a scheme allowing taxpayers to move up to $5 million into offshore trusts (since reduced to “just” $1 million). Both countries also give tax relief on payments into personal pension funds. Duty free allowances when you travel are just another tax avoidance opportunity. There are hundreds of others.

The problem is that a lot of these laws are poorly drafted and offer opportunities (they are not really “loopholes” though that is what they are often referred to) for taxpayers or their advisors to, for want of a better term “play the system” and use the laws in ways that they were not really meant to be used.

Often this leads to the “invention” of somewhat artificial tax schemes of dubious legality or effectiveness. This doesn’t make utilisation of such schemes illegal but if the courts say they are ineffective and disallow the tax saving there will be dire financial consequences for participants and it is these types of schemes that are getting “tax avoidance” a bad name.

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  1. What is Tax Avoidance? | greatbizinfo - February 27, 2014

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