Tax Avoidance Flashcards
(21 cards)
What is the difference between tax avoidance and tax evasion?
Tax evasion is illegal and involves lying or fraud to reduce tax (e.g., false tax returns). Tax avoidance is legally exploiting loopholes to reduce tax, but not in the way lawmakers intended.
What is an example of lawful tax planning that is not considered tax avoidance?
Using government-intended tax incentives (e.g., ISAs, pension relief)
What was the ruling in IRC v Westminster (Duke of) [1936]?
Courts allowed tax avoidance if schemes complied with the letter of the law.
How did governments initially respond to tax avoidance?
They introduced Targeted Anti-Avoidance Rules (TAARs) to block specific schemes.
What were the drawbacks of TAARs?
- Tax had already been lost.
- Each reform added complexity.
- New schemes kept emerging.
What case established the “new approach” to tax avoidance?
Ramsay (WT) v IRC [1982]—schemes with artificial steps could be disregarded.
What was the rule from Furniss v Dawson [1984]?
Steps inserted only for tax avoidance in a pre-ordained series of transactions should be disregarded.
How was the new approach revised in Tower MCashback LLP 1 v R&C Comrs [2011]?
The Furniss v Dawson test was replaced with a realistic interpretation of facts and a purposive approach to legislation.
What are the main criticisms of the new approach?
- Unpredictability – Case outcomes depend on judges’ views.
- Constitutional concerns – Some argue judges are making tax law.
- Justice concerns – Judges may not understand financial realities.
Which case shows a rejection of the new approach in another jurisdiction?
McGrath v McDermott [1988] (Ireland) – The Irish Supreme Court found the approach unconstitutional.
What does DOTAS stand for, and what does it do?
Disclosure of Tax Avoidance Schemes (2004) – Requires promoters to disclose tax avoidance schemes to HMRC.
What are the criticisms of DOTAS?
High compliance costs, HMRC resource strain, and lack of effectiveness (NAO report, 2012).
What is the General Anti-Abuse Rule (GAAR), and when was it introduced?
Introduced in Finance Act 2013, it counters only abusive tax avoidance via a “double reasonableness test”.
What is the penalty for schemes caught under GAAR?
60% of the counteracted tax advantage.
Why has the GAAR had limited impact?
Courts still prefer the “new approach”, and governments continue introducing new anti-avoidance laws.
Name three major post-GAAR legislative actions against tax avoidance.
- 2014 – Naming and shaming promoters; forcing disputed tax upfront.
- 2015 – Diverted Profits Tax to stop profit shifting.
- 2017 – Penalties for “enablers” of tax avoidance schemes.
How does Finance Act 2022 allow HMRC to act against promoters of tax avoidance?
HMRC can petition to wind up companies promoting avoidance schemes.
What does Finance Act 2024 allow HMRC to do?
Disqualify promoters of tax avoidance from acting as company directors.
What is the key problem with distinguishing tax avoidance from legitimate tax planning?
“Double reasonableness test” in GAAR is vague and subjective.
Why do some argue that tax avoidance is a symptom of a bigger issue?
The UK tax system is overly complex – Gammie (2013) and the Mirrlees Review (2011) argue for fundamental reform instead of piecemeal fixes.
What international challenge makes tackling tax avoidance difficult?
Global capital mobility – Companies can shift profits to low-tax jurisdictions.
