DAVID MILLS, an international lawyer and now the estranged husband of culture secretary Tessa Jowell, has been caught up in the tangled business of deciding whether a gift is a gift, or simply taxable income sprinkled with a smattering of generosity.

Mills appears to have spun a complex financial web to shelter from the tax authorities as much of his own and his clients’ money as possible.

However, he slipped up when he failed to pay income tax on a $600,000 (£344,000) “gift” he apparently received from the media magnate and Italian prime minister, Silvio Berlusconi. It is alleged that the payment was a bribe, made in return for evidence Mills gave in two corruption trials against Berlusconi in 1997 and 1998. Mills claimed he thought the money was a gift, which would be tax-free. But if a “gift” is a form of payment for services, it is taxable.

Tax avoidance is not illegal; there are legitimate ways of minimising your bill. However, if you are not careful tax avoidance can become tax evasion — which is illegal.

Mike Warburton at accountancy firm Grant Thornton said: “There is always a reason for making a gift, and the nature of the relationship is key. Is it friendship or business? If it is made by a business associate, then it is taxable.”

Suppose a lawyer or accountant does some work for a client. He or she will expect to be paid for it, and that money will be liable for income tax. If the client is particularly pleased with the performance, he or she may give a bit extra as a thank you. But such a payment is also liable for income tax. It is still a payment for services; the fact that it is made as a “thank you” cuts no ice with the tax people.

The size of the gift also gives important clues as to its true purpose. If someone gives you £20, that is okay. But if the same person gives you £10,000, unless he is an eccentric millionaire, questions will be asked. It is up to you, as the recipient, to explain the context.

You will also have to pay tax if you are given a bonus or receive a prize related to work. So if you win a holiday on the back of strong sales figures, the value of the trip is taxable.

Even if you win an award through work and receive a cheque, the money should be disclosed.

But if you enter a competition on the television or in a magazine and win, that prize would not be taxable because it is not related to your job.

John Whiting at Price Waterhouse Coopers, an accountant, said: “If you are wondering about whether or not something is taxable, the question you have to ask yourself is, ‘What is my job?’. If you receive something for doing your job, then you must pay tax on it.”

If you receive a financial gift, it is up to you to disclose it on your tax return.

Should you fail to disclose a taxable gift, and Revenue and Customs finds out, you will be fined. The amount depends on whether the Revenue believes you were just negligent and forgot or didn’t realise you had to declare it, or whether it was fraud and you were trying to evade tax.