Is tax avoidance legal? How is it different from tax evasion?

No, tax avoidance cannot be called “legal” because a lot of what gets called “tax avoidance” falls in a legal grey area. “Tax avoidance” is often incorrectly assumed to refer to “legal” means of underpaying tax (such as using loopholes), while “tax evasion” is understood to refer to illegal means. In the real world, however, this legal-illegal distinction often falls apart.

Whether an activity is legal or not often does not become clear until it has been challenged in court, and much of what gets called “avoidance” turns out to be more like evasion. In 2013, a senior official at a Big Four accounting firm testified to the UK’s Public Accounts Committee, a government watchdog, that they would sell tax schemes, ie tax “avoidance” structures, to clients even if they thought there was only a 25 per cent chance they would survive a court challenge. Ultimately, both tax avoidance and tax evasion result in countries being short-changed out of billions in tax with public services, local industries and ordinary people suffering for it.

For this reason, the term “tax abuse” is sometimes used by NGOs and experts instead of “tax avoidance” and “tax evasion” in order to put the focus on the cost of the activity to society instead of on the legality of the activity.

For a more detailed explanation, read our short guide on tax avoidance and tax evasion here.