Tax Avoidance


Concern about “tax avoidance” is nothing new. Over the years, tax avoidance has been the frequent subject of parliamentary and media attention, although this ebbs and flows. In recent years, it has once again come under the political and public spotlight. The question is how to tackle the various problems that arise. This requires a clear analysis of their cause and differentiation between different causes. Labelling a whole range of varying behaviours as “avoidance” without further differentiation will not help us to develop appropriate tools to deal with each separate type of behaviour

In summer 2012 the UK National Audit Office commissioned the Oxford University Centre for Business Taxation (OUCBT) to draw up an academic review of the tax avoidance landscape. This paper on tax avoidance resulted from that work.

The OUCBT is an independent academic organisation that has no collective view. The academic review represents the view of the individual authors only: Professor Michael P. Devereux, Professor Judith Freedman and Dr. John Vella. Nothing stated here should be taken to represent the views of the NAO. 

Since this paper was written in 2012, the term ’avoidance’ has come to be used even more widely. Recent developments in the international tax debate are not reflected in this paper. However, given that it has been cited widely, the authors are publishing it here now to make it more accessible.

Research Highlights 2013

What is tax avoidance?

This research proposes a classification of a variety of activities labelled “tax avoidance” in the current popular debate. It does so to bring some clarity to the debate and as a necessary first step in fashioning well-targeted actions in response. We propose the following classification.

A. Ineffective avoidance. This can be combated under existing laws provided the activity is discovered and action is taken. The appropriate actions will lie in the area of adequate disclosure provisions and a properly resourced revenue authority.

B. Effective avoidance. This is activity which reduces tax payable due to use of a defect in the legislation or other failure in the way that the legislation is written, that cannot be corrected by purposive interpretation. The appropriate actions will be revision of the law, a General Anti-Avoidance Rule, and, better still, improved tax policy-making translating into a more principles based approach to legislation.

C. Using legislation or the international tax system to one’s advantage. These cases do not involve the type of exploitation under category B. Supporting taxpayers’ rights to rely on national and international tax rules does not mean that there is no problem with the outcome. There is a growing consensus that the only way to tackle the way the international tax system works is through reform of that system. Possible radical responses include unitary taxation or a destination based cash flow taxes.

The paper discusses this classification in detail, as well as phrases such as “intention of Parliament” and “spirit of the law”. The avoidance debate has often been framed in terms of “fairness” and “morality”. The paper argues that the proper place for these discussions is alongside other considerations, to inform the policy process. In this way the widespread view of morality can be embodied in the law through proper democratic and parliamentary processes.

Michael Devereux, Judith Freedman and John Vella, Tax avoidance, CBT Report


What is the tax gap?

The “tax gap” has become an important issue in the public debate on avoidance. HMRC provide an estimate of the tax gap, which they define as “the difference between tax collected and the tax that should be collected”. This research analyses a limited part of the tax gap as measured by HMRC, namely that for corporation tax.

The paper identifies a number of problems with the behaviour being measured by HMRC in its tax gap estimates. In particular, HMRC’s measure of the tax gap includes transactions which courts find to be compliant with the law. Whilst they comply with the courts’ interpretation of the intention of Parliament, these transactions do not comply with HMRC’s interpretation of the intention of Parliament, and are thus included in the tax gap. This exercise might be useful for HMRC’s internal purposes; however, it is deeply misleading to suggest that this behaviour represents non-compliance or a failure to pay tax which is due.

The paper also identifies a number of technical issues about the methods employed in the estimation exercise undertaken by HMRC.

The paper also considers a completely different approach to measuring the tax gap of corporations. This approach compares the difference between accounting profit declared in financial statements with taxable profit [the “book-tax gap”]. However, there is a major and fundamental problem with this approach, that the tax base for corporation tax differs from measures of profit in financial accounts. Even setting aside the general conceptual issues with the book-tax gap method highlighted in the paper, this particular estimate is extremely problematic as the methodology used makes unreasonable assumptions.

Michael Devereux, Judith Freedman and John Vella, The Tax Gap for Corporation Tax, CBT Report