The government is losing billions each year from tax avoidance. It is time to crack down on it, says Margaret Hodge
IN my two and a half years as chair of the public accounts committee, the issue that has most strongly captured the public mood has undoubtedly been that of tax avoidance. This is an issue for the left. We believe in the importance of public expenditure to transform people’s life chances. So ensuring that everybody pays their fair share is essential.
The subject is more important than ever in an age of austerity when our public services are under threat and the poorest in our society are facing deep cuts to their income. Every pound of tax we fail to get means less money for the services on which the most vulnerable depend.
The numbers are staggering. HMRC admits that the tax gap between what they collect and what they believe is due stands at £32.2bn. Other experts calculate the gap as being at least twice that amount. Last year the government wrote off £5bn of tax, and it admitted that a further £10bn was at risk of never being collected. Just think how many teachers and nurses that could pay for.
HMRC tell us that the amount lost to the Treasury through tax avoidance is around £5bn each year. I think the real figure is much higher, because this estimate does not take account of the many wheezes used by companies like Amazon and Starbucks.
The public accounts committee has been able to shine a light onto unacceptable practices that have been going on for years. I have been shocked by the sheer range and complexity of the devices used by corporations and wealthy individuals to avoid paying their fair share of tax.
Companies like Starbucks, Amazon and Google manipulate tax laws to move offshore profits that are clearly generated from economic activity in the UK. Starbucks buys its coffee beans through Switzerland and charges its UK business a 20 per cent mark-up as a way of getting money offshore. Amazon told us that the books we buy are from a company called Amazon EU Sarl, based in Luxembourg. Yet its UK customers buy from amazon.co.uk, we are invoiced from the UK, the book comes from a warehouse in the UK, and, mostly, it comes in a parcel with a UK stamp in a Post Office van.
We also looked at the so-called ‘boutique’ tax avoidance schemes used by rich individuals and celebrities, designed to exploit loopholes in legislation or abuse available tax reliefs – such as the film tax relief brought in by Labour to encourage investment in British cinema. By the time HMRC has closed the loopholes, the promoters of these schemes have moved on to the next wheeze while they have earned massive fees and their clients have saved money at the expense of the exchequer. One promoter shamelessly admitted to the committee that the main purpose of his business was tax avoidance and that every scheme he had come up with had been shut down by HMRC.
We have also questioned the ‘big four’ accountancy firms – PwC, KPMG, Ernst and Young and Deloitte. These firms both advise government on tax law and devise ways for companies and individuals to get around it. The Treasury recently brought in a ‘patent box’ tax relief designed to encourage innovation. A tax partner at KPMG was the lead adviser writing the rules for government, and immediately went back to KMPG and marketed the scheme to his wealthy clients as a way to avoid tax.
Often companies and individuals try to hide behind the concept of ‘tax efficiency’ to justify their behaviour. Of course everyone should only pay their fair share, but creating artificial structures to move profits offshore, exploit loopholes or abuse tax reliefs to gain a tax advantage that was never intended, is not about ‘efficiency’, it is about getting out of paying the taxes you owe.
The behaviour we have uncovered has offended the basic sense of fairness of the British people. People are furious that, while families who are struggling with the cost of living continue to pay their taxes unquestioningly, the rich get away with gaming the system. It was fear of what that outpouring of public anger would do to their bottom line that forced Starbucks to cave in and offer a £20m cheque to the taxman.
Barclays appears to have sensed the public mood and announced the closure of its tax avoidance division. The government, too, appears finally to be catching on. Last month the prime minister made a speech in which he rightly attacked ‘aggressive’ tax avoidance as morally equivalent to illegal tax evasion, while the chancellor announced plans to work with other G8 members in the run-up to the summit in July to come up with firm measures to tackle tax avoidance by multinational companies.
There appears to be a general recognition by all governments that they have been too slow to respond to the changing nature of the global economy and the dominance of large corporations that operate across tax jurisdictions. That failure is partly due to a lack of courage by governments to take on these companies for fear of a mass exodus of businesses and rich individuals. But I do not believe that companies like Starbucks will simply up sticks and go elsewhere. Online businesses like Amazon and Google are hardly likely to close down their UK operations. They need us as much as we need them.
We will have to wait and see whether the government delivers on its commitments at the G8. But while that international cooperation is vital, there are a number of things the government could and should do now.
First, transparency is crucial. It was public anger that forced Starbucks to change its ways. ‘Naming and shaming’ companies and individuals engaged in tax avoidance would both have a powerful deterrent effect and help to change the culture among those people who see tax avoidance as legitimate and desirable rather than the abrogation of civic duty that it really is.
We should also look at opening up the tax affairs of large quoted companies, starting with the FTSE 100, and require companies to be much more transparent about their businesses and profits in the accounts they file with Companies House. This government has made much of its commitment to transparency and it should put its money where its mouth is.
Second, HMRC has got to get a grip and start policing the system much more aggressively and assertively. That includes challenging the tax arrangements of multinational companies to ensure that they are a true and fair reflection of their economic activity in this country. And it means getting tougher on tax avoiders by mounting more prosecutions.
The third step is to ensure HMRC has the right staff with the right skills. At the moment it is losing a ‘David and Goliath’ battle with large companies and their armies of highly paid lawyers and advisers. There needs to be the expertise within HMRC to keep up with those who devise and market these schemes.
Fourth, there should be a code of conduct to prevent conflicts of interest where the same individuals working for large accountancy firms who advise government on tax law go on to create new ways of getting round it. Government should also deny public sector contracts to any company engaged in aggressive tax avoidance.
Finally, those who point out that tax law is the responsibility of government are right. Tax legislation in this country is ridiculously complex and ripe for abuse. Yet the Office of Tax Simplification has just six civil servants working for it. It needs to be beefed up and have a much greater sense of urgency injected into the work it is doing.
Until the government delivers on its promises to tackle avoidance, people will not have confidence in the fairness of our tax system. This is a matter of morality as well as economics. Public anger at immoral behaviour by companies and individuals is a powerful tool for government in the fight against tax avoidance; it should also be a spur for it to get on and act.
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Margaret Hodge MP is chair of the public accounts committee
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Companies like Starbucks make a mockery of our system. They come here and deliberately obey the law, implementing transactions on an arms-length basis.
So they pretend that because they pay genuine independent arms-length businesses who operate the same licenses with the same royalties and pay the same market rate for coffee beans that Starbucks UK should be allowed this treatment. Wrong.
It might be what the law intends and says in clear and black and white, but it is not legal. In fact, it is alegal.
We should have the Courage to say that the law doesn’t mean what it says or was intended to say. It says something else. It says you must pay what I think is moral.
If anybody would like to know how much Starbucks really owe The State, I provide an answer here: http://justicefortaxesnetwork.wordpress.com/2012/12/17/how-much-do-starbucks-really-owe/
‘Amazon told us that the books we buy are from a company called Amazon EU
Sarl, based in Luxembourg. Yet its UK customers buy from Amazon.co.uk,
we are invoiced from the UK, the book comes from a warehouse in the UK,
and, mostly, it comes in a parcel with a UK stamp in a Post Office van.’
All of which is entirely not just complying with the EU single market legislation but is EXACTLY what the EU means ‘in spirit’. Also there is a treaty between the UK and Luxembourg which specifically states that warehouses are NOT business bases for tax purposes.
However, Mrs Hodge and people like Richard Murphy apparently know what ‘fair share’ means and will no doubt let us know. Meanwhile, over at Stemcor and family trusts with millions of shares in them….(all legal, of course)
That’s sophistry! Amazon have a permanent establishment wherever I happen to have my computer when looking at their website. I am in Norfolk right now, so they have a permanent establishment in Norfolk.
And what is more, their website is Amazon.co.uk. Note the UK bit. It’s in the UK, clearly. It must be, their website is as Mrs Hodge pointed out at one of her committee meetings.
That’s why all the profits from my online orders from Waitrose are entirely taxed in the US.
“Amazon have a permanent establishment wherever I happen to have my computer when looking at their website.”
If you view their website in Timbuctoo, does this mean they have a permanent establishment there?
That is correct.
In other words, Amazon has permanent establishments wherever Richard Murphy says they do?
Also you most surely do not understand how the allocation of webdomains work. UK companies and citizens do not have any type of exclusivity on .co.uk domains
You are obviously some sort of neoliberal tax avoidance apologist. I suggest you post this comment on my website so I can moderate it properly.
In other words, I can’t think of an answer, so post this on my website where I can delete it.
Neoliberal sophist
Dear Mr Murphy – Please tell me how you have come to the conclusion that I am a ‘neoliberal’? Or is it merely an all purpose insult?
That is sophistry!
PS Emil is quite right. You do not have to have any presence in the UK in order to purchase co.uk domain.
I have never said otherwise you pedant. It may be legal to purchase a .co.uk domain without any presence in the UK but it is clearly immoral.
Can you explain why you think it is ‘clearly immoral’?
Any man or woman on any omnibus anywhere would agree with me. QED!
All companies should be forced to pay full tax – or leave this country. The same for all Cabinet members – using Trust funds to avoid tax, being a partner in hedge funds with ‘offices’ in the Cayman Islands. Thew maxim should be ‘Pay Tax or leave’.
You’ll make an exception for Margaret Hodge, the Guardian and Ed Miliband won’t you?
Not sure that makes sense. Isn’t there also a requirement to make a profit on which you pay tax first.
Although since all transactions in the UK are liable to VAT, I think we can state that all companies doing business in the UK are paying tax.
Incidentally, how do you force a company to leave a country which has signed agreements to allow free trade and free mobility with other countries? Strikes me as a bit difficult…
Tax avoidance is not illegal. It is also not entirely immoral.
The latter of those two declarations may appear controversial to many in the Labour Party, and to many in the general public as well, but it needs to be stated otherwise our elected representatives will continue to mislead us over both the root causes of the problem and the necessary solutions required to remedy it. The question of morality depends on your standpoint.
For example, a tax accountant or lawyer is not behaving in an immoral manner when he advises his clients on how they can minimize their tax bills. His primary duty is to his client. It is when he fails to provide the best advice that he is acting immorally, and possibly illegally as well. The same applies to the finance director of a company, or the company’s auditor. Their duty is to the shareholders and the maximization of profit, not to the Government and the maximization of its tax revenues.
If tax avoidance is to be tackled it should be done via the enactment of legislation that cannot be circumvented: not by the constant grandstanding of politicians who protest moral outrage while flipping their second homes to avoid capital gains tax, or taking on lucrative directorships on the boards to some of the very firms that are abusing the system the most.
Nor will the problem be solved by “international agreement” when there is always competitive advantage to be had. If a country is truly sovereign then it should be able to act unilaterally without regard to what other countries are doing. This includes its tax policy. We need a new approach. That means changing how we tax multinational companies of which country-by-country reporting is just the first step.
Transfer pricing can be tackled quite easily by taxing each company on the basis of its turnover in each country pro rata. Forget about what it says its UK profit is (it probably doesn’t know anyway). If its UK operation represents 20% of its global turnover then tax it on the basis that 20% of its global profits are in the UK as well.
If it tries to shift its profit overseas by the use of royalty payments, then tax the royalty payments at the same rate as corporation tax or higher. In fact the taxation of all royalties needs to be far higher up the political agenda than it currently is. They are monopolistic rights granted by the State to the holder for which the State (or taxpayer) receives nothing in return (other than higher prices). That needs to change.
If it uses interest on loans from its own parent or subsidiary to reduce its UK profit, e.g. GSK (see http://www.bbc.co.uk/news/business-17993945 ), then change the rules on which types of loan interest qualify for tax relief. Then disqualify any loan that isn’t from a UK financial institution, or isn’t regulated by the FSA, or is from any company or institution that shares any significant commonality of ownership with the borrower.
Between them these three policies alone should eradicate most of the significant abuses. None require international consensus. All could be implemented tomorrow with the requisite political will, of which there is clearly none!
Of course, if you wish to tax on an apportionment basis, you have no need for country by country reporting for tax purposes.
Nonsense. We need county-by-county reporting in order to make more different sets of numbers creating more ambiguity over a business’s financial performance. I can then write a book about how the business has lied to HMRC.
The Government is already by far the richest organisation in the UK. This disgusting concentration of wealth is a moral outrage, and the Government’s income should be reduced to the level of the most successful corporation in the country. We should no longer allow the bloated government fat cats to rest their blubbery arses on the free people of the United Kingdom.
Watchman says that as VAT is paid by all all companies therefore all corporates pay tax. Well – OK, technically. But do they pay their fair share of tax? Clearly they don’t
This is correct. What we need is some sort of set of rules which define what the correct amount of tax is and then apply these rules to all taxpayers.
We could perhaps also have a government agency to enforce these rules because taxpayers will probably have to self assess these rules. We’ll therefore need some sort of independent judiciary to decide when there is some sort of disagreement. And this ought to be binding on other taxpayers because we want the rules to apply to everyone.
Then and only then will we be able to say that anybody has paid the fair amount of tax.
Oh and business rates, and employers NI, and they collect their employees PAYE, and what’s left is corporation tax. If their fair share is until their profits are 0, I’ll suspect they’ll leave on their own accord. Problem is they won’t be taking UK employees with them will they?
All this focus on corporation tax does rather mean that other equally damaging forms of tax avoidance are being overlooked.
National Insurance for example. Why should major multinational corporations be able to benefit from the secondary threshold so that they don’t pay NI on any employees earning less than £144 per week? All this does is encourage a growth in part-time jobs while massively reducing the overall tax take. The supermarkets alone probably benefit to the tune of at least £1bn a year collectively because of it.
Capital gains tax. This is not, or should not be, a revenue generating tax. It should be deterrent tax that is designed to reduce speculative short-term behaviour and increase investment and long-term ownership of assets. This will only happen if the CGT rate is set at a higher level than income tax and/or corporation tax. Instead our ignorant politicians are duped into setting it at a level that is lower than both income tax and corporation tax on the premise that such a policy will stimulate entrepreneurial activity. It won’t! All it does is stimulate short-term profit taking and tax avoidance (substituting income tax for CGT).
None of this stuff is new, in the 1970’s I worked for an American Bank in London where false markets were created by dealing in eurodollars when the daily position was already square.
We processed in our dealing room deals done on behalf branches in places like Jersey, and all the headed paper and decisions were produced in London.