Tax Evasion: The crime of confusion

This blog will discuss the difference between tax evasion and avoidance and the harmful effects that criminal tax evasion causes. Tax evasion is often associated with offshore accounts like the Cayman Islands and Switzerland. Although tax evasion is a well-known financial crime, it is often misconceived and misunderstood to be the same thing as tax avoidance.

What is Tax evasion?

To put it plainly, tax evasion is failing to declare, under declaration of income, assets or activities, despite being taxable under the tax laws of the relevant jurisdiction. This then encompasses any non-compliance with tax law. An example of this is a complete disregard for the tax laws. For example, some trades people getting paid in cash and not announcing how much they made.

Tax evasion can happen in two different ways; tax non-compliance or criminal tax evasion. Tax non-compliance is the non-criminal tax evasion, a mistake or error often causes it when paying taxes, because of this there would be potential civil penalties such as paying what they owe. Whereas criminal tax evasion is where the evader themselves possess the required mens rea, this is where the evader has purposefully been dishonest by omitting, concealing or misrepresenting information to reduce their tax liabilities.

How is tax evaded offshore?

A common way that tax is evaded is through offshore accounts. A good example of this is in the film The Wolf of Wall Street, where hundreds of millions of illicit dollars are funnelled through a Swiss bank to evade paying tax. Tax is evaded in several ways, for example;

• Taking advantage of overseas jurisdictions and legislation - The Swiss Federal Act on Banks and Savings Banks makes it criminal to reveal information about bank accounts, even revealing the name of the account. This allows accounts that are evading tax to conceal their proceeds of tax evasion. See HSBC taking advantage of this here…..

• Trusts and shell companies - These often only exist on paper for the transactions (the tax evasion money) which create anonymity, cover and a level of secrecy for the tax evader. It also makes the illicit transactions of the money seem legit on the surface, this is done through the use of nominees to seem legit to create an extra layer of protection from law enforcement.

The reason that tax is evaded offshore is to hide the illicit money and prevent accurate investigations from law enforcement. Offshore accounts also mean that the tax evaders can funnel their money through other jurisdictions that have low tax rates and more favourable legislation to pay less tax or none.

There are very famous examples of offshore tax evasion by well-known individuals in high-status positions, such as politicians and celebrities. The Panama Papers and Pandora Papers are very well-written papers that reveal the shocking statistics and examples of tax evasion by these high-status people, they are an interesting read and will leave you shocked at certain people's involvement. Even Barack Obama the former US President is aware of the extent of offshore tax evasion:

You’ve got a building in the Cayman Islands that supposedly houses 12000 corporations. That is the biggest building or biggest tax scam on record. (Barack Obama on Ugland House in the Cayman Islands)

As we can see, offshore tax evasion is an ongoing issue and results in billions avoiding tax. However, tax evasion is just as prevalent in the UK. A well-known example of this is 43 Bedford Street in London. This was home to over 1600 companies between 2011 and 2015. Even the manager of this establishment said that they did not know who is behind any of the companies and no one has any idea who they are. Although we can see that tax evasion has been prevalent in the UK there have been new rules introduced, so disclosure is required to see who is behind a company. However, this just means that people will revert to offshore accounts and go abroad.

What is the difference between tax evasion and avoidance?

The difference between tax evasion and avoidance is the legality of the two. Tax avoidance is the legal process of minimising tax liability. This can mean that individuals take advantage of loopholes in legislation which allow them to save money. This process although frowned upon has been upheld, for example in the case IRC v Duke of Westminster they stated that no one has the responsibility to pay more tax than the law states.

An example of just some of the UK celebrities caught avoiding tax:

• David Beckham

• Jimmy Carr

• Gary Barlow

• Guy Ritchie

• Sacha Baron Cohen

How harmful to the economy is tax evasion?

Tax evasion has severe knock-on effects on the economy. With tax not being paid, it means that there is less cash flow for the sectors that rely on the tax income. The National Bureau of Economic Research estimated that 10% of the world GDP is held in tax havens.

It is also estimated in the UK alone that tax evasion amounts to 5.5 Billion pounds. The harm caused by tax evasion can be drastic. Tax is such an important part of everyday society that without it or more and more evaded, this means that there is less financial support to improve and maintain the public infrastructure. What this means is important public services such as schools, emergency services and welfare programmes can lack the funding they require to run effectively.