Course:
Introduction
Governments in the world today loose much revenue through tax evasion and tax avoidance practise by individuals and business enterprises (Innes 2005). The paper shall discuss the difference between tax evasion and tax avoidance using recent relevant examples and give their implications. The paper shall also evaluate the how the taxation policies result to distribution of income in UK and the failure involved. The paper shall also examine the influence of international laws and EU policies on UK taxation policies.
Differences between tax avoidance and tax evasion
The term tax evasion refers to use of illegal mean to avoid paying taxes. Tax evasion comprises of the efforts made by trust, firms, individuals and other entities to avoid the payment of taxes through unfair and illegal means. Tax evasion scheme typically involves business corporations and individuals misrepresenting their income reports to the internal revenue service. In tax evasion, individuals, as well as corporation engage in different methods of misrepresentation with the aim of evading taxes.
Tax avoidance refers to the use of the existing tax regime to one’s advantage. It involves the reduction of the amount that is taxable by means that are within the law. To accomplish this, individuals, as well as business firms claim deductions that are permissible and credit (International Bar Association 2012). The difference between tax avoidance and the tax evasion is that tax avoidance uses legal means while tax evasion is illegal.
Some of the most common and current forms of misrepresentation as a form of tax evasion are; inflating the deductions such that the net taxable income is reduced. Underreporting net income is another form of misrepresentation that individuals, as well as companies, engage in. Another current form of misrepresentation that corporation and individuals are engaging in to evade tax are hiding money and the interest it earns in account with offshore banks. The taxpayers hide their actual incomes from tax authorities to avoid tax liability. Another form of tax avoidance that most individuals, firms, corporations, and companies are using is the use of their tax lawyers and chartered accountants who help them in avoiding paying the taxes (Gutkin 2008).
Tax evasion also takes place through trust system that is abusive. The trust plans contend that they will transfer money into other possessions but in the long run, they do not. The rest schemes create ladders where money transfer takes place one after the other, though the money remains in the control of its owner. As such, the transfer negates personal income taxes.
Smuggling is another form of tax evasion where people and business enterprises export and import goods to and from other countries through routes that are authorised. People engage in smuggling of goods because they do not want to all the custom duties chargeable on their goods, as well as when they are importing or exporting goods that are contraband.
Tax evasion also involves custom duty evasion where corporate and individuals importing goods from other countries evade paying the custom duties (Gutkin 2011). Importers make false description and declaration of their goods in terms of the products and their quantities. To avoid custom duty tax, importers under invoice their products.
Another current form of tax evasion is value added tax evasion. Producers who collect value added tax from their consumers through receipts from their sale end up showing sales amount that are less to the tax authorities and evade being taxed. People, as well as business activities, engage in business activities that are illegal, where they earn their money. Some of the illegal business activities people engage in include; theft, drug trafficking, and gambling where they do not pay any taxes from the money they earn. This form of tax evasion is referred to as illegal income tax evasion.
On the other hand, the most current form of tax avoidance among business organisations, as well as individuals includes the use of retirement plans. Through the retirement plans, taxpayers are given the opportunity to pay the taxes sometime later in the future. As such, their savings get to grow at a faster rate. Another example of tax avoidance that is common in the recent day occurs among individuals who make contributions to employer sponsored retirement plans. Where the plan allows pre-tax funding, it is therefore a form of tax avoidance. This is because the amount of money required to be remitted to the tax authorities is usually less than the amount of income that an individual would be owed by the tax authorities.
Tax avoidance, as well as tax evasion, has different effects on the country, the individual as well as the company itself. Tax evasion and avoidance has detrimental impacts on the country in that they limit the countries sources of revenue. As a result, the government are not able to provide services to the citizens (Berube 2010). In addition to that, the government is not able to engage in development activities for the good of the county. Individuals, who engage in tax avoidance, deny the country money to help in giving quality services to the citizens. Individuals who engage in tax evasion commit criminal acts, and they risk jail terms. It is also a criminal activity for companies to engage in tax evasion since it is a criminal act that may attract severe penalties including their delisting.
Equal distribution of income
The policies involved in taxation aims at resulting in equitable redistribution of income. Records have it that United Kingdom has the best taxation system that is the most generous. The tax system is generous in that it is friendly to the citizens who are paid low in the economy. In the United Kingdom, the tax system has been reviewed such that the number of people being exempted from taxes has now increased. Most of the workers in the UK have been given an exemption from paying taxes to the government especially those on the minimum wage.
The tax that worker have been exempted from is the income tax for the low paid workers. Bearing in mind that the one of the policies of a tax system is to reduce income imbalance and redistribution of income, the tax system in the UK achieves this objective. The objective is achieved in that the tax cut on income for lowly paid workers enable them to have much disposable income in the same way as the highly paid workers. Research shows that the tax cut on the lowly paid workers help them create more jobs and grow existing jobs which increases the average income.
The tax cut therefore achieves the objective of income redistribution. However, the tax system in the United Kingdom has had several failures failing to achieve the policy of redistribution of income. The tax system used in the United Kingdom allows free tax allowance such that at very low income, the tax band will not apply, but at high income levels, the tax and applies (Campbell 2007). The tax system helps in achieving horizontal equality since all people in the same level pays equal taxes. The failure of the tax system in achieving redistribution of income occurs where through horizontal equality, individual get the same tax allowance for both the high paid and the low paid. Failure in the tax system occur because people end up paying the same rate of tax as all other people in the other bands of income.
International policies influence on UK taxation system and how the EU policies affect the UK
The United Kingdom has the responsibility to oblige with international policies on taxation, as well as EU taxation policies. EU has adopted a plan to add some of taxation to its members, and the policies have influenced the United Kingdom taxation system. EU policies push for transaction tax also known as Tobin tax which influences the taxation system in the UK. However, UK has been opposing the EU taxation measures due to their impact (Miller 2009).
Recent research on the influence EU policies has had on the UK taxation system has it that it have helped in safeguarding the interests of the United Kingdom (Mumford 2010). Different stakeholders who responded to the question of EU influence on the taxation system of the UK included representatives from banking, charity, legal and cultural sectors. The different stakeholders were of a similar opinion that the EU policies were essential in safeguarding the United Kingdom interests. Despite the fact that the EU policies influence on the taxation system in the UK was to a large extent positive, research shows that some of them have negative consequences (Aaron 2008). This was with reference to the agreement terms, as well as the agreements time frame. Some of the stake holders also questioned the utility and appropriateness of the transaction tax that had been proposed.
The taxation system in the UK is influenced by the international policies of domicile and residence. The tax liability in UK applies to those who are resident and those who are not residents (Nehring 2007). The tax policies apply on income tax on trade or other professions carried out in the UK. For individuals who are resident in the UK and their domicile is in the UK, they are liable on worldwide gains and incomes. For individuals who are resident of the UK but are not domiciled there, their foreign incomes, as well as their gains are taxed on the basis of remittance.
In conclusion, the paper has discussed the differences between tax avoidance and tax evasion and shown that tax avoidance occurs within the law but tax evasion is illegal. Recent forms of tax evasion and avoidance have been discussed in the paper, as well as the effect on the company, individual and the country. In addition to that, the paper has discussed how taxation policies should result to redistribution of income basing the arguments on the UK tax system. The failure of the tax system has also been discussed in the paper. Finally, the paper discussed how the taxation policies in the UK are influenced by international policies, as well as the impact of EU policies on the UKs tax system.
Reference List
Aaron, H. J., & Boskin, M. J. 2008. The Economics of taxation. Washington, D.C: Brookings Institution.
Beck, D and Gutkin, S. A. 2011. Tax avoidance vs. tax evasion. New York: Ronald Press Co.
Berube, W. J., & Pinto, C. N. 2010. Taxation, tax policies and income taxes. New York: Nova Science Publishers.
Campbell, C. D., American Enterprise Institute for Public Policy Research., & Hoover Institution on War, Revolution, and Peace. 2007. Income redistribution. Washington: American Enterprise Institute for Public Policy Research.
Gutkin, S. A., & Beck, D. 2008. Tax avoidance vs. tax evasion. New York: Ronald Press Co.
Innes, W. I. 2005. Tax evasion. Scarborough, Ont: Carswell.
International Bar Association. 2012. Tax avoidance, tax evasion: A survey of the treatment of tax avoidance and tax evasion in the main industrialized countries of the world. London: International Bar Association in co-operation with Sweet & Maxwell.
Miller, A., & Oats, L. 2009. Principles of international taxation. Haywards Heath, West Sussex: Tottel.
Mumford, A. 2010. Tax policy, women and the law: UK and comparative perspectives. Cambridge: Cambridge University Press.
Nehring, H., & Schui, F. 2007. Global debates about taxation. Basingstoke [England: Palgrave Macmillan.
