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Tax Evasion and Tax Avoidance

Taxation system is primarily complex as it aims to ensure transparency and fairness in entire system. Despite of tax policies for each transaction will certain meaning various people abuse taxation provisions in order to save tax whether it is morally or immorally. By considering various cases of tax abuse of years, G8 leaders had announced new tax measures for UK Taxation system with the objective to clamp down individuals engaged in tax evasion or avoiding of corporate tax (Dowling, 2014). The present study is based on an evaluation of schemes which are considered to be “frankly and morally wrong” referred by Prime Minister, David Cameron in 2012 regarding tax avoidance.

The terms “tax avoidance” and “tax evasion” have been used interchangeably but both of them are having different meaning and concepts. The most important and basic difference between them is that tax evasion is not legal while tax avoidance is legal.  The present report deals with discussion relating to tax avoidance and tax evasion (Devereux, Liu and Loretz, 2014). A detail explanation regarding same has been provided below for better understanding. Further, an explanation regarding the manner in which UK government and government around the world are dealing with the issues relating to tax avoidance and tax evasion have also been provided (HM Treasury and HM Revenue & Customs, 2017). Business and organizations have to face many issues in case they intentionally evade taxes, but the same cannot be continued for a long time. For resolving such issues assistance can be taken by the tax preparer.

It can be referred as an illegal practice of not paying taxes through not reporting income or by taking a deduction of expenditures which are not allowed legally or through not paying taxes owed. It is usually believed that it is in relation to income taxes, but tax evasion can be practised by organizations on state sales taxes and on employment taxes (Nakajima, 2017). The truth is that it can be done all the taxes a business owes. It often necessitates individual or any organization for intentionally misrepresenting the actual picture of the affairs to the tax authorities for reducing the tax liability which comprises dishonest tax reporting also (Jones, 2016). Tax Evasion is an illegal act of not paying the tax which is owed, and it can relate to all the taxes such as local taxes, federal taxes, etc. Some examples of practices which are deemed as tax evasion have been specified below:

  • In case an individual or company knowingly fails to report income than the same is considered as tax evasion.
  • Deliberately underpaying liable taxes.
  • Intentionally understating the taxes ( providing a reduced amount on return n comparison to amount owed for the income being reported)

Tax Evasion

Tax avoidance is the legitimate reducing of taxes, by applying methods which have been approved by IRS (Internal Revenue Service). In layman terms it can be said as the practice of minimizing the payable tax through legal means. Tax planning is a collective term which is being used for tax avoidance with the purpose of minimizing the liability of tax (Szreter, Kriznik and Kelly, 2016). It is an advantage of reducing the bill by taking advantage of available opportunities; through a way which is being encouraged by Parliament. Some examples of practices which are deemed as tax avoidance have been specified below:

  • Applying justifiable tax deductionsto reducing business expenses and thus lower your business tax bill. 
  • Organizing a tax deferral plan such as an IRA, SEP-IRA, or 401(k) plan so that liable taxes can be delayed to a later date. 
  • Availing taxcredits for expending money for genuine purposes, like taking a Work Opportunity Tax Credit, etc.

David Cameron thoughts relating to tax arrangement are clear, and he believed that tax avoidance crop up from time to time. He has also stated that taxes should be paid not for moral compunction but should be paid because it is provided in the law (Toynbee and Walker, 2015). Thus, it should be the only reason for paying the same as there is punishment for not paying the same (Sims, 2016). He believes that the main problem with taxation is that a little input is provided due to the existing manner of available money expenditure (Ruane and Byrne, 2014). Some of the expenditure is appraised such as the National Health Service which is contributing towards urban regeneration projects and encouraging science and innovation (Farnsworth and Fooks, 2015). However, he is not satisfied with the money which is expended for Snoopers’ Charter, and he believes that it is morally wrong.

According to him, the government and manifestos which have been elected are not legally bounded to fulfil the promises. Unless a greater transparency is made available between public input and closure of loopholes to benefit massive corporations; appropriate benefits cannot be provided to the public (Fooks and Farnsworth, 2015). Cameron had various times criticized tax saving schemes on various occasions in previous years, but when the same emerged in 2012 regarding the case that comedian Jimmy Carr had made an investment of money in a legal tax shelter, he cited that these schemes are frankly and morally wrong (Hasseldine and Morris, 2013). With this statement, he aims that companies around the world must pay their fair portion of tax due to which he is not in favour of tax avoidance schemes as with these they get the opportunity to diversify their profits and to get tax shelter (Asthana, 2016).

Tax Avoidance

In this aspect, he had clarified the fact that he does not have any issue with National Health Service, contributions towards support science, urban regeneration of projects, and innovation, etc. but not all tax money can be invested in these factor as these are morally wrong (Farnsworth, 2015). Further, a collection of taxes is invested in things which are not ethical as it provides creation of loopholes. This approach is creating a threat that UK is becoming an offshore tax haven for big businesses.

To the some extent, I agree with the viewpoint of David Cameron as it is morally wrong to get engaged in tax avoidance. Further, providing cushion of tax saving schemes is not justifiable aspects to corporate entities as it will make payment of tax completely optional which is not in benefit of country as corporations will get ability to avoid billions. However, same provisions must not be applicable on small firms as it is already complex for them cope up the rigorous taxation provisions. In order to restrict them from tax evasion there must be severe penalty charge so efforts of small firms or individuals can be demoralised regarding tax evasion or tax avoidance.

Multinational entities are willing to shift their profits in order to avoid payment of fair value of tax. To prevent this, an announcement was made by the Chancellor George Osborne that a meeting will be held with G20 finance Ministers to be in agreement regarding international rules of tax and summarize steps to prove it difficult to avoid tax (Sikka and Willmott, 2013). Recommendations are the final result of an unparalleled and chief international attempt to deal with avoidance of tax by multinationals. This is inclusive of

  • Becoming the first country to take initiatives to establishing reporting templates for multinationals. It states that multinational companies must offer HM Revenue and Customs along with details on where to pay tax and make profits all around the world.
  • Becoming the first country to take initiatives to prevent multinational companies from developing the variation of countries rules of tax in order to make payment tax by new rules of hybrid mismatch (Sweeney, 2015).
  • Making it tough for multinational companies to switch their earnings out of the United Kingdom through setting up of Diverted Profits Tax, which makes sure that multinationals taxpaying in the UK during the occurrence of economic activity in the UK.
  • Assist in developing countries, such as Ghana; deal with avoidance of tax by operating with them in order to develop infrastructure and tax rules.

Government of UK is also functioning with the European Union to agree with the procedure for authorities of tax to swap details on affairs of tax of MNC to advance transparency. This has been introduced in Budget 2016, as this session intends new penalty or charge for those who allow tax avoidance and current penalty legislation changes which are being applied to the ones who exploit avoidance that is defeated.  It gives a total overview of the decision chain, consumer face avoidance as they try tax avoidance and consider manipulating these decisions (Phua, 2015). With this approach, the government is clear-cut that it will have an effect on tax enablers and users of avoidance, thus making sure an efficient array of deterrents along with suitable downsides. The government has taken measures in order to create avoidance more hazardous and expensive for the ones who continue to prevent their tax liabilities and has also initiated POTAS (Promoters of Tax Avoidance Schemes) legislation to make a change in behaviour of minor and persistent alternatives of promoters that display this kind of behaviour (Spies and Petruzzi eds., 2014).

Appraisal of David Cameron’s Comments, “Frankly and Morally Wrong”

Further, penalty is imposed by Finance Bill 2016 of maximum of 100% tax avoided, or £3,000 for the ones whose actions might allow an individual to persist offshore avoidance or non-compliance (in which the avoider is penalized or criminally accused) which are as follows

  • Schedule 38 of the Finance Act 2012 offers for a penalty  in of £5,000 and £50,000 in which a person “involves in unfair conduct” in terms course of acting as a tax agent and
  • Other approached is inclusive of those penalties which are on the basis of economic or financial benefit of the enabler or services be offered to any of the users, taking account of the level of knowledge about the avoidance they could reasonably be expected to have had when providing those services (HM Treasury, Cabinet Office, and The Rt Hon George Osborne, 2015).

In this aspect, it has been stated by George Osborne (Chancellor of the Exchequer) the UK has led the campaign to make an alteration in the global taxation system and consequently other countries had supported this initiative by developing better laws for prevention of avoidance of corporate tax.  

This part of the study shows the commitment of UK government regarding tackling BEPS, and in this aspect, they had taken first-hand steps for introduction of new international rules in their domestic taxation provisions (HM Treasury, Cabinet Office, and The Rt Hon George Osborne, 2015). They have clarified the fact the United Kingdom is one of the most competitive supported by lowest businesses taxes provisions in the world, but companies and individuals are mandatory  to pay these taxes without any attempt of evasion or avoidance.

With the completion of BEPS procedure, the UK government will make a continuation to operate with the G20 and their other international partners to initiate and implement further recommendations (de la Feria and Tanawong, 2015). This factor will be supported by the publishing of draft legislation of tax provisions and the introduction of same through reporting in country-by-country.

Conclusion

By considering present study, it can be said that strict actions have been taken by UK government and other international treaties in order to tackle tax avoidance and tax evasion in an effective manner. Further, severe penalties and remedies in tax provisions will influence tax payers to discharge their obligations in a fair manner. This improvement will be continuous in order to develop effective taxation system for individuals as well as corporate entities in terms of domestic and international commercial transactions. 

References

Books and Journals

de la Feria, R. and Tanawong, P., 2015. Surcharges and penalties in UK tax law.

Devereux, M.P., Liu, L. and Loretz, S., 2014. The elasticity of corporate taxable income: New evidence from UK tax records.  Economic Journal: Economic Policy, 6(2), pp.19-53.

Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.

Farnsworth, K. and Fooks, G., 2015. Corporate taxation, corporate power, and corporate harm. The Howard Journal of Crime and Justice, 54(1), pp.25-41.

Farnsworth, K., 2015. The British corporate welfare state: Public provision for private businesses. SPERI Paper, (24).

Fooks, G.J. and Farnsworth, K., 2015. Corporate Taxation, Corporate Power, and Corporate Harm.

Hasseldine, J. and Morris, G., 2013, March. Corporate social responsibility and tax avoidance: A comment and reflection. In Accounting Forum (Vol. 37, No. 1, pp. 1-14). Elsevier.

Jones, C.M., 2016. The UK sugar tax–a healthy start?. British dental journal, 221(2), pp.59-60.

Nakajima, C., 2017. Politics: offshore centres, transparency and integrity: the case of the UK territories. Global Financial Crime: Terrorism, Money Laundering and Offshore Centres, p.219.

Phua, S., 2015. Convergence in global tax compliance. Sing. J. Legal Stud., p.77.

Ruane, S. and Byrne, D., 2014. The political economy of taxation in the 21st-century UK. Social Policy Review 26: Analysis and Debate in Social Policy 2014, 26, p.65.

Sikka, P. and Willmott, H., 2013. The tax avoidance industry: accountancy firms on the make. Critical perspectives on international business, 9(4), pp.415-443.

Spies, K. and Petruzzi, R. eds., 2014. Tax Policy Challenges in the 21st Century: Schriftenreihe IStR Band 86. Linde Verlag GmbH.

Sweeney, P., 2015. Tackling tax evasion, avoidance and tax havens. ETUI, Brussels. https://www. google. ie/# q= etui+ Tackling+ tax+ evasion% 2C+ avoidance% 2C+ and+ tax+ havens.

Szreter, S., Kriznik, N.M. and Kelly, M.P., 2016. Health, welfare, and the state--the dangers of forgetting history. The Lancet, 388(10061), p.2734.

Toynbee, P. and Walker, D., 2015. Cameron's Coup: How the Tories took Britain to the brink. Guardian Faber Publishing.

 Online

Asthana, A., 2016. David Cameron faces growing clamour for a full account of his tax affairs. [Online]. Available through < https://www.theguardian.com/politics/2016/apr/08/mps-demand-david-cameron-statement-about-his-tax-affairs>. [Accessed on 28th July 2017].

HM Treasury and HM Revenue & Customs. 2017. Tax evasion and avoidance. [Online]. Available through < https://www.gov.uk/government/policies/tax-evasion-and-avoidance>. [Accessed on 28th July 2017].

HM Treasury, Cabinet Office, and The Rt Hon George Osborne. 2015. UK leads international efforts to clampdown on tax avoidance. [Online]. Available through < https://www.gov.uk/government/news/uk-leads-international-efforts-to-clampdown-on-tax-avoidance>. [Accessed on 28th July 2017].

Sims, A., 2016. Frankly and morally wrong': David Cameron's past attacks on tax evasion. [Online]. Available through < https://www.independent.co.uk/news/uk/politics/david-camerons-past-attacks-on-tax-evasion-after-admitting-to-profiting-offshore-trust-following-a6974001.html>. [Accessed on 28th July 2017].

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