Question

Question 1 The firm of ICAEW Chartered Accountants where you work acts for Isaac. When completing Isaac's self-assessment tax return for 2019/20, you discover that during the tax year, Isaac gave 100 shares in Catta Ltd, an investment company, to his daughter. You have explained to him that this will give rise to a capital gains tax liability based on the market value of the shares at the date of the gift and needs to be disclosed on his tax return. Isaac has asked you to use a lower figure than market value on his tax return as he does not want to pay large amounts of capital gains tax. Isaac has also participated in a scheme which was recommended to him by another firm of accountants. The scheme involved a number of different steps, which created a loss, sufficient to cover Isaac's income from renting out various investment properties. Isaac says the scheme should not cause any problems because all the steps in it are legal. Requirements 1.1 Briefly explain the difference between tax evasion and tax avoidance/planning. State whether Isaac's suggestion to use a lower value than market value on his tax return is tax evasion and the possible implications for Isaac if it is considered to be tax evasion. (5 marks) 1.2 Explain why, even if all the steps are legal, the scheme recommended by the accountants may not be successful in reducing Isaac's income tax liability. (2 marks) Total: 7 marks 2

Question 1 The firm of ICAEW Chartered Accountants where you work acts for Isaac. When completing Isaac's self assessment tax return for 2019/20, you discover that during the tax year, Isaac gave 100 shares in Catta Ltd, an investment company, to his daughter. You have explained to him that this will give rise to a capital gains tax liability based on the market value of the shares at the date of the gift and needs to be disclosed on his tax return. Isaac has asked you to use a lower figure than market value on his tax return as he does not want to pay large amounts of capital gains tax. Isaac has also participated in a scheme which was recommended to him by another firm of accountants. The scheme involved a number of different steps, which created a loss, sufficient to cover Isaac's income from renting out various investment properties. Isaac says the scheme should not cause any problems because all the steps in it are legal. Requirements 1.1 Briefly explain the difference between tax evasion and tax avoidance/planning. State whether Isaac's suggestion to use a lower value than market value on his tax return is tax evasion and the possible implications for Isaac if it is considered to be tax evasion. (5 marks) 1.2 Explain why, even if all the steps are legal, the scheme recommended by the accountants may not be successful in reducing Isaac's income tax liability. (2 marks) Total: 7 marks

Answer 1

1.1 Yes,Isaac's suggestion is TAX EVASION .

Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as business expenses. Tax evasion is a crime for which the assesse could be punished under the law.

Features and differences between Tax evasion, Tax avoidance and Tax Planning:

1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal

2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and objectionable.

3. Motive: Tax planning is the method of saving tax .However tax avoidance is dodging of tax. Tax evasion is an act of concealing tax.

4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to penalty or imprisonment.

5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of tax by applying the provision and moral of law.

6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not permissible.

• Tax liability of an individual can be reduced through 3 different methods- Tax Planning, Tax avoidance and Tax evasion. All the methods are different and interchangeable.
• Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax avoidance is not advisable as it manipulates the law for one’s own benefit. Whereas tax planning is an ideal method.

1.2

Tax Avoidance Is Legal; Tax Evasion Is Criminal

The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of tax by applying the provision and moral of law. Here are some of the most common criminal activities in violations of the tax law:

• Deliberately under-reporting or omitting income.
• Keeping two sets of books and making false entries in books and records.
• Claiming false or overstated deductions on a return.
• Claiming personal expenses as business expenses.
• Hiding or transferring assets or income
• Engaging in a "sham transaction.

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