Tax Evasion and Avoidance in UK

This report delves into the complex issues of tax evasion and avoidance, particularly within the context of the United Kingdom. It explores the legal and illegal aspects of these practices, examining how multinational corporations and wealthy individuals utilize loopholes and tax havens to minimize their tax liabilities. The report analyzes the differences between tax evasion and tax avoidance, the methods employed for profit shifting, and the role of tax havens in facilitating these activities. It also investigates the impact of these practices on government revenue and the inconsistencies between UK and EU tax laws. The research methodology employed is qualitative, relying on secondary data analysis to provide a comprehensive understanding of the topic. The report concludes by highlighting the thin line between legal tax avoidance and illegal tax evasion, emphasizing the need for further research and policy changes to address these issues.

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION......................................................................................................................1
1.1 Overview.....................................................................................................................................1
1.2 Structure of the Research.............................................................................................................2
1.3 Focus and Purpose of the Research..............................................................................................3
1.4 Framework and Analysis.............................................................................................................4
1.5 Potential Significance........................................................................................................................5
CHAPTER 2: LITERATURE REVIEW.............................................................................................................6
2.1 Introduction.......................................................................................................................................6
2.2 Tax Avoidance and Evasion..............................................................................................................6
2.3 Components of Tax Evasion and Avoidance.....................................................................................8
2.3.1 Dimensions of tax avoidance......................................................................................................8
2.3.2 Methods of Corporate Tax Avoidance........................................................................................9
2.4 Tax evasion and avoidance via global channels.................................................................................9
2.5 Tax evasion and Tax avoidance due to holding of assets overseas by private individuals...............12
2.6 The role of tax havens......................................................................................................................13
2.7 United Kingdom and Tax Evasion/Avoidance.................................................................................13
2.7.1European Union Savings Directive............................................................................................13
2.7.2 European Union and Tax Problems of UK...............................................................................14
2.8 Conclusion.......................................................................................................................................15
CHAPTER – 3 RESEARCH METHODOLOGY..................................................................................................16
3.1 Introduction.....................................................................................................................................16
3.2 Research Aims & Objectives...........................................................................................................16
3.3 Research Philosophy and Approach................................................................................................17
3.5 Research Approach..........................................................................................................................18
3.6 Research Type.................................................................................................................................18
3.7 Data Collection................................................................................................................................18
3.8 Data Analysis...................................................................................................................................19
3.9 Validity and Reliability....................................................................................................................19
3.10 Research Limitations.....................................................................................................................20
3.11 Ethical considerations....................................................................................................................20

All the information that has been collected has not been manipulated and present in its actual form....20
CHAPTER – 4 DATA ANALYSIS AND FINDINGS..........................................................................................21
CHAPTER – 5 CONCLUSION AND RECOMMENDATIONS..............................................................................22
CHAPTER – 6 REFLECTIVE STATEMENT.....................................................................................................23
REFERENCES..............................................................................................................................................24

CHAPTER 1: INTRODUCTION
1.1 Overview
Majority of the economic analyses of taxation presuppose that tax liability can be
determined and collected cost effectively. As a portrayal of reality this is blatantly incorrect. For
instance, the Internal Revenue Service in the US approximates that 17% of the income tax
liability is not paid. The statistics for countries like United Kingdom is even higher (Blankson,
2005). The tax frameworks get distorted due to the prevalence of tax avoidance, evasion and
administrative costs. Evasion and avoidance are considered to be the limiting factors of revenue
mobilization. Avoidance of tax is basically the legal exploitation of the tax rule for one’s own
advantage, in order to mitigate the amount of payable tax through ways which are within the
lawful boundaries whilst providing complete disclosure to the tax authorities regarding
substantial information (Braithwaite, 2003). Tax avoidance means comprise of tax deductions,
establishing a company overseas in low tax regions and changing the structure of business by
incorporation. On the contrary, tax evasion is considered as the efforts made by individual
people, trusts, companies and other institutions to escape the payment of taxes by resorting to
illegal methods. It normally entails deliberate misrepresentation or concealment by taxpayers of
material facts of their actual state of affairs (Chen, 2003).
Existing empirical researches on loss of tax revenue because of tax evasion and tax
avoidance in UK differentiate between a domestic element and a global element. Tax evasion is
included in the domestic element as it takes place because of national shadow economy. The
global component involves profit shifting by organizations and overseas holdings of assets that
are financial in nature by individuals (Christensen and Murphy, 2004). Tax avoidance might be
considered as the immoral escaping of an individual’s duty towards the community or simply the
right of every national to employ all the rightful ways of avoiding to pay too much tax. On the
other hand, tax evasion is referred to as a crime in every nation. Hence, the differentiating feature
of evasion is unlawfulness. In practicality there exist many grey areas wherein the line of
distinction is not very apparent (Cowell, 2007).
Avoidance and evasion of tax by multinational companies through trade mispricing and
the investments of people held overseas is also a raging issue. This issue of evasion and
avoidance entailing overseas financial centers and tax havens is presently very high on political
agenda in developed nations (Dyreng, Hanlon and Maydew, 2008). Attempts at quantifying the
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tax gaps caused by such offshore activities are however often overestimated. Majority of the
prevailing researches state that tax revenue losses of developed nations because of global
activities take place through two mediums: the first one is corporate profit shifting activities and
trade price distortions while the second medium is present because of overseas holdings of local
citizens (James, 2009). Both these activities cut down the tax collected by developed nations like
UK, USA and etc. Tax base for business taxation is reduced by the former one while tax base for
personal income is reduced by the latter one. The Federal government loses both corporate and
individual income tax revenue from the shifting of incomes and profits to tax havens (Orviska
and Hudson, 2003). It is quite difficult to make an approximation of such type of revenue losses
but some researchers have proposed that the yearly cost of overseas tax evasions might roughly
be about $100 billion. International avoidance of tax mainly arises from rich investors from big
multinational companies. It can reflect both illegal and legal actions (Parker, 2003).
Tax havens affect revenue mobilization of other nations in a number of ways. To be
specific, they are the receivers of income moved out of high tax controls in both developing and
developed countries. Furthermore, they may also induce other nations to curtail their taxes i.e.
they might increase the tax competition (Rego, 2010). It is claimed that 60% of the international
trade is routed through the tax havens. Studies have confirmed that when there are changes in tax
brackets or structures, individuals might change their spending basket. However, at the same
time, they might also ask their accountants to effect a series of actions which does not changes
their spending basket directly and apparently (Slemrod, 2002).
The current research report looks into the issue of tax evasion, tax avoidance and shifting
of profits by multinational corporations. The study delves into the legality and illegality of the
above mentioned issues. The research will seek to identify the reasons behind shifting of profits
and why it is not considered illegal. In addition to this, it also aims at determining the reasons
behind evasion of tax (Wenzel, 2007).
1.2 Structure of the Research
The present research progresses in a sequential pattern as all the sections are connected
and interdependent i.e. only on the completion of a particular chapter, can the next section be
addressed. The structure of the current research is as follows:
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Chapter 1: Introduction – This chapter gives a brief account of the topic under consideration.
Moreover, a short synopsis of the framework analysis, focus and purpose of the research and the
potential significance of the study is also contained in this chapter.
Chapter 2: Literature Review – The review of the literature section of the report includes the
already available pieces of work done by different authors on this subject or related to it. It
speaks in volume about the different literary works on tax avoidance, tax evasion, profit shifting
and tax havens. Various books, academic journals and online reference materials have been gone
through to compile this chapter. The significance of this section is very much as it assists the
researcher in comprehending the perspectives of other researcher and determining the gaps in
their work.
Chapter 3: Research Methodology – This chapter presents the various research methodologies
which have been deployed for the accumulation of information and its analysis. It includes the
research questions, aims and objectives, data collation method, technique of data analysis,
research approach, limitations of the study and the ethical issues.
Chapter 4: Data Analysis & Analysis – The data collected by either primary or secondary
sources is evaluated in this division of the study. This primarily involves the evaluation of
findings so that inferences can be obtained.
Chapter 5: Conclusions– This is the last and concluding chapter of the research. It includes the
conclusions drawn from the findings of the research.
1.3 Focus and Purpose of the Research
Focus
The main focus area of the study is tax evasion and tax avoidance in UK. Many
multinational corporations and wealthy individuals try to avoid paying too much tax by shifting
their profits to tax havens. Though evasion of tax is considered a crime yet, there are rules in the
UK legislation which allow this behavior (Slemrod, 2007). Avoidance of tax is legal yet there is
no clarity as to what comes under tax avoidance. Similarly, shifting of profits to low tax
jurisdictions is also not legally permitted in UK yet companies and wealthy investors are doing it
to avoid payment of too much tax. The current research thus focuses on identifying why evasion
and avoidance of tax is not illegal.
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Aim: To identify the key reasons behind why tax evasion and avoidance are not considered
illegal to escape from too much tax complication is the aim of the current research.
Objectives: To fulfill the above aim, the following objectives need to be fulfilled:
 To identify the reasons behind corporate profit shifting.
 To understand why such shifting is not considered illegal.
 To comprehend the reason behind tax evasion done by people.
 To determine why companies hide tax using illegal ways.
Purpose
Though a number of research works have been carried out in the field of tax evasion and
avoidance, yet there is very little literature trying to unearth the loopholes in the tax structure of
UK which are resulting in loss of tax revenue to the government. As the economy of UK mainly
consists of privately owned companies, the source of revenue for the government is tax.
However, in the midst of falling income tax revenue the government cannot continue its
proposed development ventures. Therefore the purpose of this study is to identify the issues
contributing to loss of tax revenue.
1.4 Framework and Analysis
The following framework has been utilized for carrying out the current research:
 Research Design – In the present research exploratory design has been made use of as
the topic in hand is quite new and this research design will help the researcher in
acquainting with the subject matter more closely (Bryman, 2012).
 Research Philosophy – Interpretivism philosophy will be applied as the nature of the
study is qualitative and the sample size is very small.
 Research Approach – The current examination has utilized inductive approach to
research as firstly observation of things was carried out, followed by construal of a
pattern, forming of concept and formulation of a theory. The current case did not involve
hypothesis testing (Chilisa, 2011).
 Research Type – The investigation is of qualitative nature.
 Data Collection method – Secondary data has been collected for the current research.
 Data Analysis – Qualitative analysis of the secondary data has been carried out which
includes a discussion (Kuada, 2012).
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1.5 Potential Significance
The current study holds great significance for both practical and theoretical reasons. As
not much research is contained on the legality and illegality of tax avoidance, evasion and profit
shifting, the current study will add to the existing literature and will prove to be beneficial for
both new researchers and theorists (Bowers, 2013).
The practical implication of the present study is also worthwhile as it can provide some
insights into the legal and illegal aspects of avoidance of tax. In addition to this, great addition to
understanding will also take place, as the case delves into the reasons people and corporations
shift their revenues from high jurisdiction to low jurisdictions (Fuest and Riedel, 2009).
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CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
The difference between tax evasion and tax avoidance is the thickness of a prison wall.
There is no universally acceptable definition of the above two terms. HMRC defines tax
avoidance as an activity that a person or a business may undertake to reduce their tax in a way
that runs counter to the spirit and the purpose of the law, without being strictly illegal (Azemar
and Corcos, 2009). Tax evasion, in contrast, is usually defined as a violation of the law. Tax
avoidance is the utilization of the loopholes in the country’s tax laws to one's own advantage,
while tax evasion is not paying the taxes all together. On the other hand, tax avoidance is within
the legal framework of the countries law and in contrast, tax evasion is illegal. Now, this section
will get into more detailed definitions of tax evasion and avoidance (Fuest and Weichenrieder,
2002).
2.2 Tax Avoidance and Evasion
Tax avoidance is the utilization of the legal loopholes or the legal privileges provided to
citizen or company of a country by its government. Tax avoidance is the legal right of an
individual being provided by the government to reduce the tax burden and decrease the level of
tax evasion. In the United Kingdom, no General Anti-Avoidance Rule is present, however, some
provision of the tax law known as “anti-avoidance” provisions are applicable to prevent
avoidance of tax (Acemoglu, Johnson and Robinson, 2001). The authorities of the UK
government employ the word tax mitigation for referring to the tax planning, which is acceptable
and reducing tax liabilities by means explicitly certified by the Parliament. Legal guidelines are
being developed for preventing tax avoidance including self and circular cancelling transactions,
or where activities having no commercial intention apart from tax avoidance are introduced into
the transaction (Rodrick, 2000). As per this view, avoidance of tax breaks the spirit of judicial
law and is hence believed by many to be objectionable, albeit not illegal or unlawful like
evasion. The distinction between avoidance and mitigation is based upon an intentional reading
of the law and commentators do not agree on the point to which this is allowable. Avoidance of
tax can be encapsulated as doing all that is plausible within the limits of law to decrease the tax
bill. Learned hand who is an American judge, said that nothing is wrong in arranging one’s
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financial affairs in order to maintain a low tax liability as no one owes any public duty to be paid
more than that demanded by the law (Schneider and Dominik 2000).
On the other hand, evasion of tax is defined as disbursing tax less than one is lawfully
indebted to. There is a clear cut yet thin line between evasion and avoidance. While, the former
one is an offense, the latter is acceptable legally. As former British Chancellor, Denis Healey
states, “the distinction between tax evasion and tax avoidance is the thickness of a prison wall”.
The federal law acknowledges the fact that no individual who comes in the tax bracket is liable
to organize his/her financial affairs in a manner that maximizes the tax received by the
government (Schott and Peter, 2008). Businesses and individuals are free to take all legal
measures for minimizing their taxes. Unfortunately several tax consultants do not completely
comprehend the distinction between tax evasion and avoidance. Maximum aspects of tax
planning as recommended by such consultants frequently fall into the category of tax evasion,
which is unlawful and hence, puts clients in a dicey situation in addition to diminishing tax
planning value (Slemrod, Blumenthal and Christian, 2001).
A taxpayer can legally organize his funds to reduce tax liability by deferring income of
one year to the following year. It is entirely legal to avail all the permissible deductions. It is also
allowed by law to avoid taxes by making contributions to charity. On the other hand, evading tax
is a criminal offence. This normally entails improper claim of unauthorized deductions and
failing to report actual income (Wei, 2000). Tax evasion has a negative impact on the tax system
of a country. Substantial revenue is which could have been used for the betterment of the society
is lost as a consequence of this. Evading tax enables certain businesses to attain undue advantage
in a competitive marketplace and certain individuals wander freely without having to pay their
tax liabilities. As a consequence of this, the tax burden shifts to law abiding citizens (Baldry, J.
1984).
Two common inferences can be made about evasion and avoidance. Firstly, both
avoidance and evasion take place within the spectrum of the tax system and are not specific for
any particular tax type like, income tax, service tax, import duty and etc. Secondly, the laws,
which address issues of tax avoidance and tax evasion, are surely imprecise. There is no precise
set of rules for identifying when a specific arrangement of funds amounts to evasion or
avoidance. This absence of exactness develops uncertainty and augments the compliance costs of
the taxpayers (Goolsbee, 2000).
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2.3 Components of Tax Evasion and Avoidance
Revenue losses on account of avoidance and evasion of taxes can take place due to
various reasons. Such losses of revenue differentiate between an international and a domestic
element. The domestic elements of tax avoidance and evasion entail under-reported or non-
declared incomes of individuals and businesses from domestic work or business operations
(Slemrod, 2001). On the other hand, the international element covers practices of transfer pricing
done by multinationals and holding financial assets in overseas banks with the intention of hiding
capital income. To draw a line between unlawful tax evasion and the lawful tax avoidance is
sometimes quite tricky. One method of differentiating the two activities is to argue on the basis
of their respective definition. Evading includes elements of camouflage and disguise (Slemrod
and Yitzhaki, 2001). From this viewpoint, under-reporting and non-declaration of income which
falls in the category of shadow income is characterized as evasion of tax. This is also applicable
to the income accruing from the assets held overseas and not informed to the national taxation
authorities. International shifting of income by companies might encompass both evasion and
avoidance of tax. For example, multinational corporations are required to establish transfer prices
for trades within the organization for separating the revenues generated in diverse nations
(Alkire, 2002). There is always some room for alternatives that companies can exploit for
reducing the tax liability. Making use of such alternatives is not essentially a violation of law and
hence is normally categorized as avoidance of tax. This is also applicable to the place of non
tangible assets such as employment of intra company debt and other instruments for shifting
profits from one nation to another or patents in a low tax jurisdiction. Nonetheless, practices
involving fake transaction or gross mispricing for reducing the amount of tax burden are
categorized as evasion of tax (Oxfam, 2000).
2.3.1 Dimensions of tax avoidance
There are three fundamental principles of avoidance of tax within income tax i.e. tax
arbitrage across individuals facing differential tax treatments, tax arbitrage across individuals
facing differential tax brackets and postponement of taxes. Several techniques of tax avoidance
entail a blend of these three principles (McLaren, 2008). In a simple example, the essential
characteristic of an Individual Retirement Account is the deferment of tax burden until
retirement; if the person faces a lesser tax rate at time of retirement as compared to that at the
time of earning, then the IRA also has tax arbitrage between diverse rates. Activities of tax
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arbitrage take benefit of the loopholes in taxation laws, incorporating economically
counterbalancing positions that have differential tax treatment. Examples of such activities
include engaging into tax deductible borrowings, purchasing of tax exempted bonds and
sophisticated financial instruments (Hanlon and Shevlin, 2002).
2.3.2 Methods of Corporate Tax Avoidance
Many multinational organizations do not have to pay taxes on income earned by their
subsidiaries in foreign land until and unless the earnings are repatriated to the UK parent
company in the form of dividends. Tax liability on income, which is repatriated, is given a credit
for foreign income taxes paid. Many companies resort to corporate profit by shifting their profits
from a high tax jurisdiction to a low tax one. By doing this, taxes are reduced and at the same
time other facets of the organization do not get affected (Huizinga and Laeven, 2008).
2.4 Tax evasion and avoidance via global channels
Many prevailing researches state that losses of tax revenue of countries because of global
activities take place via two channels i.e. distortion of trade prices plus other forms of corporate
revenue shifting activities; and holding of wealth in overseas bank accounts by domestic
residents as well as businesses. Both these activities decrease the amount of tax revenue received
by the government. The former channel decreases the taxation base for corporate tax while the
latter decreases the amount of personal income tax (Peralta, Wauthy and Ypersele, 2006).
Tax evasion and avoidance by corporate revenue shifting
To estimate the profit and revenue going out of the country, two approaches are generally
used. The first approach is to look at foreign direct investments stocks and compute a
hypothetical rate of return and gradually supposed tax revenues. Such tax revenues can then be
contrasted with the actually observed revenue. The second approach is to measure the revenue
transfer through what is seen as mispricing in the global trade (Weichenrieder, 2009).
a) FDI stocks and profit shifting – According to Oxfam (2000), the amount of corporate
revenues shifted out of countries are equivalent to £39.04billion per year. This figure is obtained
by multiplying the FDI stock in UK with the estimate of World Bank. Other methods employed
to determine the camouflaged movement of capital use unexplained residuals or inconsistencies
in data related to balance of payments (Sadka and Scherbina, 2007). Research works on profit
9

shifting in developed nations also consider debt as a device for profit shifting. This is a great
concern for the governments as mirrored by the extensive application of thin rules related to
capitalization. Some authors argue that the actual estimate for the FDI returns is even more as the
figures provided by the World Bank do not take into consideration profit shifting activities.
There is a huge possibility of tax gap in this computation. This approach gives rise to several
issues (Reuter, 2012). First and foremost, the most evident weakness of this computation is the
supposition that all incomes and revenues from FDIs will be taxed at a specific rate. The
prevalence of tax incentives for corporate investments is a major issue neglected by this
approach. Several developed nations make use of tax incentives such as free economic zones or
tax holidays that provide little or no corporate taxes (Haufler and Schjelderup, 2000). It might
happen that such incentives are at times not efficient from an economic point of view; however,
their revenue affect must be differentiated from the affect of tax evasion and avoidance. Not
taking this into consideration means that the losses of revenue because of avoidance and evasion
have been largely overestimated. Secondly, returns of FDI are not similar to the corporate tax
base. For example, if debt is used to finance FDIs then these investments cannot be expected to
contribute completely to the tax base as interest is a tax deductible item (Braithwaite, 2007).
b) Trade Mispricing – Other researches that compute losses of tax revenue because of offshore
activities of companies begin with illicit financial outflows and inflows. The most famous work
on such outflows and inflows via business channels is the book Capitalism’s Achilles Heel: Dirty
Money and How to renew the free market system by Raymond Baker. In the book the author
quantifies the annual illegal financial outflows from nations via the business industry at £390.04
billion (James, 2009). This book breaks down this figure into distinct activities. It states that
roughly about 60% of the financial outflows can be attributed to lawful commercial transactions
while the rest percentage accounts for the criminal activities. Since, illicit activities on detection
can be stopped; the focus of the work is legally obtained income which goes out of the nation.
Baker states that income earned through lawful trade activities leaves the nation via three main
channels: fake transactions, misrepresentation of transfer prices levied on goods traded inside a
multination company and mispricing of products traded between autonomous parties (Tooma,
2008).
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Mispricing of trade between unrelated parties
As far as mispricing of trade between two unrelated parties is concerned, Baker reports
from an interview he conducted on officials of companies in 11 developed nations, that there is
collusion between exporters and importers to extract money out of developing nations and it is a
regular practice (Lymer and Hasseldine, 2002). He also said that mispricing for the purpose of
generating kickbacks in overseas bank accounts was regarded as a regular norm of transactions
by companies. The approach of Baker to calculate mispricing in transaction between unrelated
parties is though quite strict in its execution, but is dependent on comparatively smaller sample
size. Nonetheless, the outcomes of his study are extensively congruent with the results of other
research papers in the existing literature on trade mispricing (Braithwaite, 2003).
Among such papers, that of Pak, Stelios and Zdanowicz (2003) is the commonly used
one. Pak found out peculiarly priced export and import transactions using a price filter matrix.
The author supported estimates given by Baker by telling that income is shifted to developed
countries like, UK and US by means of mispricing activities. He claims that the value of imports
of these countries from other nations of the world has been under-reported by 202 billion US $ in
the year 2005. On the other hand the value of exports to the other nations in the same financial
year has been over-reported (Musgrave, 2009).
Trade mispricing between related parties
Baker (2005) also investigated the misrepresentation of transfer prices among related
parties i.e. among the various affiliates of the same multinational corporation. As he did not
conduct any formal study on this hence, he bases his estimates on subjective evidences acquired
through different sources. His findings from observed transactions and intra company prices
reveal that on an international level, abusive transfer pricing between affiliates of an organization
largely surpasses the mispricing between unrelated parties. However, being based on empirical
evidences is the major shortcoming of Baker’s estimates. It is very important to know the extent
up to which taxation can have a negative impact on the mispricing of products in intra company
transactions. In addition to this, it is also critical to comprehend the reason behind movement of
capital out of the country (Pak, Stelios and Zdanowicz, 2003). The impact of corporate taxes on
the misrepresentation of intra company transfer prices has been studied by many experimental
literatures for US and Europe. However, these researches also do not account for the likely profit
11

shifting activities in the developed world. Nonetheless, there are two main exceptions to this.
The works of Mutti and Grubert (2004) and Azemar and Corcos (2008), provide evidences,
which are extensively in tune with the distorting attitudes of multinational companies related to
transfer pricing.
c) Other forms of profit shifting – In addition to the mispricing activities, considerable portion
of capital surge across the national boundaries is in form of false transactions. This includes
making bills and getting payments for products, which have never been delivered. Such
estimates have also been done on the basis of subjective evidences (Baker, 2005). Hence, it is
again tricky to interpret the amount of tax revenue lost as a consequence of this activity. In
addition to this, it is also worth noting here that in the estimates made it is presumed that the
capital flowing across the national boundaries effectively leaves the nation (Azemar and Corcos,
2009). Tax incentives such as, free of cost enterprise zones or tax holidays have not been taken
into consideration. As a result of this, the approximated revenue losses might be overstated.
Provided this, along with strong suppositions beneath these figures and the issues pertaining to
quality, the construal of approximations of corporate revenue transfer is difficult (Sullivan,
2013).
2.5 Tax evasion and Tax avoidance due to holding of assets overseas by private individuals
Many researchers claim that countries lose substantial amount of tax as financially sound
individuals hold assets in other nations, plausibly tax havens, and do not disclose revenues from
such investments to the taxation authorities of the land (Kumarasingam, 2010). Such non-
disclosure of income is from offshore holdings is regarded as a breach of law and therefore
amounts of evasion of tax. At times, the income tax laws of the land provide loopholes in its tax
system so that some types of foreign wealth holdings can be regarded as a type of tax avoidance
instead of evasion. For instance, if the nation exempts the overseas income of companies from
tax, without merging this with suitable anti avoidance laws, individuals can hold assets in foreign
lands and thereby avoid paying domestic tax without infringing upon the law (Tax Avoidance Is
Legal; Tax Evasion Is Criminal, 2013).
Making an estimation of the revenue loss because of overseas wealth holdings is even
harder than guesstimating loss of revenue through corporate profit shifting by firms as
transactions of individuals greatly getaway from statistical registration (Fuest and
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Weichenrieder, 2002). Hence, it can be said that overall it is hard to construe the prevailing
estimates for losses of tax revenues by overseas holding of wealth, not simply because they
clearly under or over-estimate the losses but also because they are dependent on a number of
suppositions. Such suppositions entail ad hoc postulations on the division of the assets holding
across the developing and developed nations in addition to the taxable and average rates of return
(Bowers, 2013).
2.6 The role of tax havens
As special role has been assigned to tax havens by many authors in elucidating the
revenue losses undergone by non tax haven nations, this section encapsulates the experimental
work done on the effect of tax havens on the tax revenues (Oxfam, 2000). Tax havens are
capable of affecting the revenue mobilization of other nations in a number of ways. To be
particular they are the receivers of income transferred out of high tax countries of the developed
world. Furthermore, they might induce other nations to curtail their tax rates, which can
exaggerate tax competition. It has been identified that 60% of the international trade is routed via
tax havens. However, the origin of this figure is ambiguous (Braithwaite, 2007).
2.7 United Kingdom and Tax Evasion/Avoidance
Though the terms tax avoidance and tax evasion were coined in the United States of
America in 1920s, the United Kingdom made no distinction between the two terms until 1950.
Up to that period evasion was used in the same sense as tax avoidance. The distinction and
formal terminology of evasion and avoidance was instituted after the case of Craven vs. White in
1970 (Acemoglu, Johnson and Robinson, 2001). Moreover, the term tax mitigation was also
coined during that time. Tax mitigation in simple terms is the process by which tax burden of
individuals is reduced without avoiding tax. Tax mitigation was designed to encompass activities
such as donations, gifts to charities and making investments in goods designed for tax benefits.
Such activities are considered in the spirit of legislation (Schneider and Dominik, 2000).
2.7.1European Union Savings Directive
The EU has developed an option among its members in its savings directive of either
withholding tax or information reporting. This option is available for all member nations as well
as for some other nations as well. The alternative that is likely to recuperate majority of the
revenues is requiring information disclosure on all income rewarded to overseas units by US
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banks and other establishments. If the beneficiary cannot be located, withholding of tax can be
imposed (Alkire, 2002).
2.7.2 European Union and Tax Problems of UK
United Kingdom has off late been attracting great amounts of foreign direct investments.
This is chiefly because of its financial stability and low corporate tax policy. Meanwhile, this has
also caught the attention of other member nations of EU. The only alternative with the EU
countries is to achieve tax parity with United Kingdom or to attain tax harmonization (McLaren,
2008). European Union’s policy of a single marketplace gives it a means to eliminate the
autonomy of UK in corporate taxation. A member nation of the Ruling Committee that explored
corporate taxation in EU in the year 1992 stated that there were qualms in the committee that a
single currency necessitates at least bare minimum synchronization of direct tax policies (Reuter,
2012). The consequence is that other member nations will be in a position to decide the taxation
strategies of Britain, principally if UK becomes a member of EU. Any type of economic benefits
of EU such as low interest rates, no exchange rates and etc. would be rescinded by the substantial
upsurge in corporate tax of UK to meet the average of 43.8%. While the recent taxation policy of
UK has lessened the burden and promoted investments, there has been an increase in the
continental taxes (James, 2009). Synchronization of the tax rates of European Union’s member
nations implies higher taxes for United Kingdom too. This is because the member countries are
either no willing to or are unable in reducing the tax liabilities of their citizens. In addition to this
the institutional developments taking place in EU would eliminate the need for agreement among
the member states over taxation matters (Lymer and Hasseldine, 2002). In the recent past, there
have been disagreements related to taxation between UK and EU in a case regarding stamp duty
reserve tax. The concerned case involves HSBC bank which, subsequent to the ruling of
European Court of Justice that tax collected by HMRC since 1986 is illicit, won what is expected
to be the right to a tax reimbursement of £27m (Tooma, 2008). It appears that the components of
the law related to SDRT have been inconsistent with laws of EU such that repayment will be
obtainable dating back to the time when tax was initiated. Taking this decision as the base, the
legal authorities scrapped tax on certain share trading after the verdict of European Court of
Justice that it disobeys EU law. The Telegraph reported that a taxpayer in UK can be compelled
to reimburse up to £20bn to organizations as a consequence of this decree (Musgrave, 2009).
Among the arguments deployed in the conflict against abusive tax evasion and tax avoidance is
14

the ruling of law. All individuals and businesses are required to abide by it. The same applies for
the government. However, there are a number of cases reaching the European Court frequently
because of Government’s non-compliance with the EU law while drafting or modifying tax laws
of UK (Braithwaite, 2003). When such charges are imposed, HMRC unfalteringly defends the
cases on Government’s behalf. Most of these cases are the matters of Group Litigation Orders,
wherein several taxpayers both individuals and businesses claim that the United Kingdom’s law
is inconsistent with the European law and hence, the tax should be reimbursed to them or they
should be exempt from paying tax. This conflict between EU and UK will keep on going chiefly
because when the UK law was drafted, the European Union law was not considered properly. In
addition to this, after full contemplation, the UK law was framed for avoiding the constraints
levied by the EU legislation (Sullivan, 2013).
2.8 Conclusion
The above literature review aimed at providing insights into the phenomenon of tax
avoidance and tax evasion in the context of their legality and the tax revenue lost as a result of
them. Prevailing literature differentiates between the global and domestic components of tax
avoidance and evasion (Schott and Peter, 2008). The national component mainly covers evasion
of tax taking place due to the shadow economy. While the global component entails loss of
revenue because of corporate profit shifting and overseas wealth holdings of individuals. In
addition to this, trade mispricing has also been identified as a major way of avoiding and evading
tax (Baldry, 1984).
In fact, mispricing of trade between related entities has been found to be graver than the
mispricing taking place between unrelated entities. Tax havens play an instrumental role in
attracting companies and individuals to shift their profits to them. In United Kingdom, there exist
some major inconsistencies between the EU law and the UK law (Goolsbee, 2000). Due to the
loopholes, individuals and businesses find ways of evading and avoiding taxes. Tax mitigation
term has been coined by the government to provide ways to the individuals to legally avoid
paying taxes. Hence, after reading the different studies, it can be concluded that there is a thin
line between the legal nature of tax avoidance and tax evasion.
15

CHAPTER – 3 RESEARCH METHODOLOGY
3.1 Introduction
Research can be described as a process undertaken by the research with the intention of
determining the relationships and outcomes in an organized way, thereby enhancing the horizons
of knowledge and comprehension. The methodology of research offers a proper outline so that
the investigation can be carried out easily. Complete guidelines and protocols are provided
instead of a complete explanation about the ways in which the study must be proceeded with
(McBurney and White, 2009). A researcher is shown the right path which he must follow so that
fair research outcomes are accomplished. This section of the dissertation speaks in detail about
the different research methods deployed for effectually conducting the study (Daniel and Sam,
2011). In addition to this, the rationale for using the several research methods has also been
provided. To facilitate superior quality along with logical flow of information, proper attention to
suitability, applicability and authenticity of the approaches has to be paid. The aims and
objectives of the study get fulfilled by espousing the different research methodologies. It is
imperative for the researcher to be well versed with all the tools and techniques of the research
(Mcneill, 2005).
For the current case, this section of the report will provide a detailed account of the
various techniques and approaches deployed for identifying why are tax evasion and avoidance
both not illegal to escape from too many tax complications.
3.2 Research Aims & Objectives
Aim: To identify the key reasons behind why tax evasion and avoidance are not considered
illegal to escape from too much tax complication is the aim of the current research.
Objectives: To fulfill the above aim, the following objectives need to be fulfilled:
 To identify the reasons behind corporate profit shifting.
 To understand why such shifting is not considered illegal.
 To comprehend the reason behind tax evasion done by people.
 To determine why companies hide tax using illegal ways.
3.3 Research Philosophy and Approach
Significant insights into the various research methods pertaining to data collection, use
and analysis are provided by the research philosophy. A proper investigation pattern which
16

allows effective espousal of the research process needs to be identified. Research philosophy
facilitates this thing (McNabb, 2010). Two main types of philosophies exist. They are positivism
and Interpretivism. The interpretivist perspective asserts that generalized premises and rules
cannot be deduced by completely understanding the intricate environment. Perspectives and
behaviors are formed on the basis of interpretation of things (Punch, 2009). It does not advocate
real conjectures and facts. This philosophy relies on qualitative data and is applicable when the
sample size is limited. On the other hand, positivist philosophy is a relatively conventional
opinion. Its supporters opine that all theories can be proved. It essentially relies on testing of
hypothesis and asserts that dependable information can be acquired only when things are
examined. Quantitative data is collected and a large sample size is needed (Lodico, Spaulding
and Voegtle, 2010).
In the present case, Interpretivism philosophy has been employed. This is because the
nature of the research is qualitative and the information that will be collected is also qualitative.
3.4 Research design
Research design is the orderly and proper assessment of the topic in hand and requires
discretion as well as carefulness in understanding. Research design primarily mitigates the
chances of wrong interpretation of information. This component of the overall research permits a
scholar to follow the right track throughout the investigation (Mitchell, 2012). Its main intention
is to make sure that the data so collated is pertinent for testing of hypothesis and answering the
research questions. Research design intends to sum up all the main elements of the research
process like accumulation of data, sampling, data evaluation and etc. Experimental, exploratory,
case study and descriptive are the four main types of research designs (Bynner and Stribley,
2010).
In the present report, exploratory design of research has been utilized as the subject
matter is relatively new and therefore this design will assist the scholar in gaining more
familiarity with the topic. This type of research design is particularly helpful when profound
understanding of a matter is to be developed.
3.5 Research Approach
An exploratory study depends on either of the two approaches of research which are
inductive and deductive. Inductive approach is bottom up method as it embarks with collecting
17

information followed by observing the accumulated data and materials from a bird’s eye view
and reviewing the prevalent trends as well as patterns (Penzhorn, 2002). Subsequent to this,
theory is conjectured by the researcher for the concerned subject matter. In short, inductive
approach entails a movement from something definite to a relatively generalized view. On the
contrary, deductive approach is more of a top down method. It involves breaking down a general
premise into a more particular one. A hypothesis is generated from the specific premise which is
succeeded by studying the distinct phenomenon and ultimately confirming the hypothesis
(Adcroft and Willis, 2008).
In the present case, inductive approach has been followed as it does not comprise testing
of hypothesis and information will first be collected after which inferences will be obtained.
3.6 Research Type
A research study is essentially of two types – quantitative and qualitative. Cases wherein
theories are devised on the basis of assessment of the accumulated data, qualitative research is
applicable. If the aims and objectives of the study summarize the state of affairs and research
problems then the nature of the research is qualitative. Furthermore, this research type does not
espouse an organized approach and therefore all the research components are elastic (Martin and
Guerin, 2006). Qualitative research forms a linkage between the premises that have been
deployed and the ones which require examination. Quantitative research on the other hand makes
use of models, concepts and hypothesis checking. It primarily revolves around the use of
numbers and values. The information collection and assessment techniques might differ under
quantitative research (Jonas, 2007).
The present research adopts qualitative research type because the data has been collected
through secondary sources and its analysis will be done in form of detailed discussion.
3.7 Data Collection
There are two main data collection sources i.e. primary and secondary. Primary data is
the one which demands collation of first hand and fresh information. It is typical to the research
being carried out. However, collection of secondary data also holds significant importance.
Substantial amount of time of the scholar is saved if germane secondary information can be
easily availed and accessed (Secker, 2005). An outline of the different elements which the
research must take into consideration plus those which he should avoid can be determined
18

through this method. Secondary data helps in the identification of the gaps in the prevailing
literatures. For the current dissertation, only secondary material has been collected and discussed
as collecting primary information in this case will be a very tedious task (Penzhorn, 2002). The
sample size will be considerably large if primary research will be conducted. Hence, it has been
decided to carry out only the secondary research. Information has been collected by means of
government publications, trade journals, books, articles and online materials.
3.8 Data Analysis
Collection of relevant data is followed by the evaluation and assessment of the
information so gathered. This is the most significant part of the entire research as it produces the
research outcomes and provides answers to the research questions. Under this segment, the data
is evaluated systematically. A suitable conclusion is arrived at with help of data analysis. This
analysis can be carried out in two main ways i.e. quantitative and qualitative (Mcneill, 2005).
Under quantitative analysis graphical and statistical presentation of data is facilitated. The results
obtained through this are statistically accurate and exact. The different methods used under this
are SPSS, regression, MS Excel and correlation. On the other hand, qualitative technique
analyzes the data by formulation of themes. This can also be done through discussing about the
different findings and testing their relevance (McNabb, 2010).
In the current research, as there is no primary research, therefore the secondary
information will analyzed through qualitative technique. A discussion of the different findings
will be done.
3.9 Validity and Reliability
The most vital aspect of a good research is its validity. Validity is defined as the degree
of preciseness, exactness and accuracy of the data furnished by the scholar. This is very
important to be maintained as through this information, it is identified that the final outcomes of
the research mirror its objectives (Daniel and Sam, 2011).
The data provided for all types of researches must necessarily be reliable. Hence,
meticulous thoughtfulness must be given to all facets of the investigation and it should be
ascertained that the outcomes are reliable and dependable. Reliability in simple terms refers to
the elimination of irregularities and inconsistencies in the ultimate output. These two aspects
have been duly accounted for in the current case (McBurney and White, 2009).
19

3.10 Research Limitations
The following limitations were faced in the current research:
 As the sample size for primary research was turning out to be very big, hence, it has not
been done, which might have affected the reliability of results.
 The process was very lengthy and extracting relevant information turned out to be
lengthy process.
 Secondary information was not easily accessible.
3.11 Ethical considerations
All the information that has been collected has not been manipulated and present in its
actual form.
20

CHAPTER – 4 DATA ANALYSIS AND FINDINGS
21

CHAPTER – 5 CONCLUSION AND RECOMMENDATIONS
22

CHAPTER – 6 REFLECTIVE STATEMENT
23

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