Tax cheating vs avoiding - the difference is jail

PUBLISHED : Sunday, 25 October, 2009, 12:00am
UPDATED : Sunday, 25 October, 2009, 12:00am

Denis Healey, former British finance minister, once remarked that, 'the difference between tax evasion and tax avoidance is the thickness of a prison wall'.

He was suggesting that there isn't much difference. But there is. One is legal. Avoidance (which these days everyone seems to prefer to refer to as tax mitigation, tax planning, tax minimisation or whatever) is arranging your affairs in a legitimate manner to reduce the amount of tax that would otherwise be payable.

That is a perfectly legal activity even though increasingly we are being told it is anti-social and unacceptable, and many governments are encouraging us to arrange our affairs so the maximum amount of tax is payable.

As Lord Tomlin said in the 1936 Duke of Westminster's case: 'Every man is entitled to arrange his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be.' That principle still holds good. Evasion is avoiding tax illegally. Normally this is achieved by incorrectly filling out your tax return or misrepresenting what you have done to gain a tax advantage. Put it this way: it's perfectly legal to get married to lessen your tax burden, but it is illegal to pretend you are married if you are not, for the same result.

Governments are becoming desperate to collect taxes to reduce national deficits. So they are increasingly trying to convince citizens that they have a public duty not to try to reduce the tax owed even in legal ways.

They are also imposing increasingly severe sentences on those who indulge in tax evasion. The most frequent offence is simply failing to declare income. With that in mind my attention was caught by a recent article in Time magazine naming their top 10 tax evaders. Here are the first of my list, in no particular order:

Lester Piggott was probably the greatest jockey of all time. He rode 4,493 winners around the world and recorded 29 victories in English classic races including nine Derbies.

In 1987 he was jailed for three years for evading tax on GBP3.25 million of undeclared income.

His normal practice when riding abroad was to bank the receipts in offshore accounts in Switzerland, Bahamas, Singapore and the Cayman Islands. Regrettably, he forgot to mention these amounts on his tax forms.

As is frequently the case when the local tax authority starts to investigate, the taxpayer is given a chance to make a full declaration of any previously undeclared amounts. If he does so then the penalties are normally confined to paying the tax plus interest and a nice big fine. If the final declaration is revealed to be incomplete, the matter is treated as criminal and custodial sentences normally follow.

In Lester's case he had received three previous inquiries into his tax affairs. Rumour has it that on this final occasion he again claimed to have fully declared. The Inland Revenue calculated the amount due and he wrote them a cheque on a bank account he had omitted to mention in his confessional statement. Lester was not the sharpest tool in the box and his defence lawyer even went so far as to suggest that he might have a degree of brain damage from frequent falls.

Despite its low taxes it seems Hong Kong has its own celebrity tax evader. In 2001 socialite and radio agony aunt Pamela Pak Wan-kam fainted in court when she was convicted of four counts of tax evasion and sentenced to three months in jail. She had apparently, among other things, been signing fraudulent tax returns and had invented 43 meal receipts and altered 55 more. Clearly the cuisine in Tai Lam Correctional Institute was not up to the same standard as on being released after two months she re-emerged 13kg lighter.

Leona Helmsley was a billionaire New York hotelier and property investor with a reputation as a tyrant. The 'Queen of Mean', despite being worth an estimated US$1 billion, would try most ways of avoiding paying contractors and vendors. In 1983 the Helmsleys bought a 20-room mansion in Connecticut for US$11 million and then spent a further US$8 million refurbishing the property.

She demanded that contractors sign illegal invoices billing expenses relating to the house to one of her hotels. This fact came out when the contractor got into a dispute with her over payment of his bill.

He took his revenge by sending the illegal invoices and receipts to the New York Post and in 1988 the Helmsleys were indicted on tax-evasion charges. During the trial it was revealed the lovely Mrs H had stated in front of one of her staff that 'We don't pay taxes. Only the little people pay taxes.' In 1989 the jury convicted her of a variety of tax offences and she received a 16-year prison sentence.

Mobster Al Capone was first investigated by Eliot Ness in 1929. In 1931 he was indicted for tax evasion, found guilty and given an 11-year sentence, having tried to intimidate and bribe the jury. He spent most of his sentence in Alcatraz, including a year in hospital fighting syphilis contracted as a youth.

In 1939, he emerged to a new order where the repeal of prohibition had fatally weakened his organisation as had his time in jail. He died in 1947.

More famous tax evaders next time.