Difference between money laundering and Tax avoidance?

kimberleybevan

Hi Just wondering what aat definition of Tax avoidance and money laundering? As I have been a little confused over some synoptic test questions which makes this area appear very grey therefore I would appreciate a clear definition. Some financial websites seem to say current thinking links the two terms. Any help would be great.
I can also see that aat did a webinar 2010 on money laundering do you have a link to where it is on the website as I can't seem to find it?

payrollpro

I'm not surprised your confused, the rest of us have the same problem and I am a statutory reporting officer for a practice!

There is actually a third term, tax evasion to understand as well and the three are completely different.

Tax evasion is where someone deliberately understates their income, or overstates allowable costs in order to artificially depress the tax liability. They usually do it with the express intention of escaping the tax they are rightfully liable to pay and that is why it is a criminal offence.

Tax avoidance is where a taxpayer uses theirs, or someone else's knowledge of the law to alter their behaviour in such a way as to reduce the tax they might normally be axpected to pay. As long as this uses lawful means it is perfectly legal to do it. Salary sacrifice, for example, where you reduce your salary and your employer replaces it with, say additional pension contributions is, technically, tax avoidance. You alter your behaviour, i.e. reduce your pay and hence the tax and NIC lawfully due, and instead get extra tax free benefits, such as pension contributions and so you avoid those normal tax liabilities.

The complication here is that over the past decade or so the media, and government, has whipped up a storm about certain forms of legal avoidance, off-shore tax havens for example, and created a popular view that they are wrong. This led to certain famous people, Take That are a classic example, making huge voluntary payments to HMRC, of tax they didn't actually owe, in order to dampen down the media storm. We now have the difference between ordinary avoidance, which is legal, and aggressive avoidance, which is also legal but so frowned upon that the publicity usually persuades people to pay up.

Money laundering is, technically, where criminally generated funds are processed through legitimate businesses in order to create clean funds, or where transactions are used to finance criminal or terrorist activities. Difficult to detect, however AAT members are expected to know their clients very well in order to detect activities which don't fit the business and report them if they do.

Here again there is a complication because HMRC, and other countries tax authorities have made any and all unlawful manipulations of the tax system a money laundering offence. This is because the money generated by the manipulation of the tax system has been criminally obtained and hence has to be money laundering. Very clever manilpulation of the law really because a taxpayer convicted of tax evasion, could also be pursued for money laundering offences.

I'm afraid I can't find the webinar either, however since that one, in 2010 predated the new money laundering legislation it's worth seeking out another one. AAT has a whole micro site dedicated to the subject but I'm not sure if it is restricted to members in practice.

Hope that helps in some way, though it may just confuse things even more, it's difficult to tell.

reader

I guess the difference is that tax avoidance is legal (e.g. using an ISA is legal) and money laundering is illegal (e.g. to artificially legitimise the proceeds of crime).

If you are really interested in this topic there is some practical/useful information in the 'professional conduct in relation to taxation" documents (PCRT).

kimberleybevan

Hi the both of you - v.helpful especially Payroll pro, thank you.
I thought that may be the case, as in the TV series 'Breaking Bad' - whereby the family uses a car washing business to put through the cash ascertained from the manufacturing and selling of crystal meths (all illegal stuff) to make the money appear as if it was ascertained through legal business practices. Thus money laundering, whereby Tesco's who allegedly used off-shore accounts to divert profits were being investigated for tax evasion.
Some have said that Tesco is avoidance - which would mean it is more of a 'moral' grey area rather than illegal issue and therefore nobody could in the long term be prosecuted. Hope that's right? Big thanks Kim