The Thickness of a Prison Wall - When Does Tax Avoidance Become a Criminal Offence?

Tax avoidance and tax evasion cause major problems to the assessment and collection of tax and invariably attack the integrity of any tax system. Denis Healey, former UK Chancellor of the Exchequer once said “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” His quote graphically illustrates that tax avoiders, generally, remain on the outside of the prison wall, while some tax evaders are detained inside. This quote from Denis Healey implies that there is a significant difference between the technical legal positions of tax evasion and tax avoidance, in the sense that one is a criminal action and the other is not. But it also implies that tax avoidance is rather close, perhaps ten centimetres away, from tax evasion. The writer’s hypothesis is that while most taxation experts believe it is abundantly clear what constitutes tax evasion rather than tax avoidance, they are oversimplifying the position. The difference between the two legal concepts may be obvious in the vast majority of circumstances. But in fact, consistent with the implication from Healey's quote, on occasions tax avoidance and tax evasion may be so closely interrelated so as to have common features. If this fusion occurs a frightening outcome for taxpayers, and also potentially tax advisers, may ensue.The question this article seeks to answer is: when, if ever, does participation in a tax avoidance scheme become a criminal offence? When do tax avoidance schemes not only cross the line of acceptable tax planning and become void for tax purposes, but go further and cross the line of legality? When might the tax administrators, in battling an egregious tax avoidance dispute, send in the heavy artillery of criminal prosecution?The conclusion reached is that, rather surprisingly, there are many common features shared by tax avoidance schemes and behaviour that may offend against a criminal provision. Although any case would be highly fact specific, behaviour by a taxpayer involving deceit may have the requisite mental element to constitute a crime.Taxpayers and their advisers need to be aware of the rules and case law in this area in order to ensure their compliance. In contrast awareness of the possibility of criminal charges may be an important addition to the arsenal of the tax administrator.