Finance Bill 2013: provides boost for tax dodgers
General Anti-Abuse Rule (GAAR)
GAAR forms a key part of the Finance Bill 2013. Tax avoiders need to be aware that any tax arrangements put in place prior to the legislation coming into force will go unchallenged - corporate dodgers need worry not, the new rules will not affect their tax aviodance schemes..
The GAAR was dreamed up by Vince Cable, before he became a Tory fellow traveller but that doesn't matter. The idea became central to coalition thinking and they made a pledge to tackle tax avoidance but we don't want to dwell on pledges, do we.
Legislation has obviously become more urgent with all the press coverage of tax avoidance by large companies and wealthy individuals.
So, should it be three cheers for the government, for finally dealing with the tax avoiders? Sorry, there's not much to cheer about. The man who put the whole thing together was leading tax QC, Graham Aaronson, who describes his watered down handy work as "narrowly focused", and applying only to the "most egregious tax avoidance schemes". In plain English that means the convoluted arrangements involving multiple transactions that circumvent the spirit of the law – think Jimmy Carr, it doesn't mean Starbucks, Amazon, or Vodaphone, the latter will continue to pay only 5%.
The Lords economic affairs committee tells us:
"There is a misconception that Gaar [general anti-abuse rules] will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong, and the government need to explain that to the public."
The tax inspectors' union don't think much of GRRA either but the big four accountancy firms love it, this is what KPMG is telling its potential customers:
"For every £1m of finance income received in the UK, the finance company regime could save cash tax of £165,000."
And even better:
"As the new rules have been designed and enacted by the government, this should represent a low-risk tax-saving opportunity." (from a KPMG pamphlet)
Confidence: that's the trick
Out of sight, behind the scenes Boy George has been busy rewriting the tax rules, but his anti-avoidance rules will not trouble the big boys, indeed they will be encouraged by the new rules.
In the dim and distant past Nigel Lawson put laws in place to stop the tax abuses of large multinationals but these have been 'relaxed' by Osborne, i.e. relaxed into retirement.
In Davos, David Cameron said that businesses are "setting up ever more complex tax arrangements abroad to squeeze their tax bills right down ... Well, they need to wake up and smell the coffee". Given low corporate tax rates, soon to be 20% and by far the lowest among G8 countries, the PM insists they "should pay that rate of tax rather than avoid it".
Note: PricewaterhouseCoopers apart from advising Vodaphone on maximising their income in the UK is also now advising Ed Miliband's One-Nation-Labour Party on corporate tax affairs.
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HMRC: not fit for purpose
When a large union like Unite tells you that it is estimated that somewhere between £25-£40 billion is lost to the tax man due to tax avoidance schemes it’s fair to conclude that no one knows how much is being lost.
Incompetent tax authorities annually inform tens of thousands of citizens that they have underpaid their taxes. Citizens on PAYE have their tax removed from their wage packets, large corporations please themselves how much tax they pay, i.e. if they don’t like the tax regime they move their tax affairs to other corners of the globe. Alternatively, the ‘big dogs’ sit down with the boss of HMRC for a cozy chat.
Large corporations are tax-dodgers, underpaying citizens are the victims of gross inefficiency, however, they will not be treated equally by the tax authorities. For the ordinary taxpayer, the penalty for filing your tax return late is an immediate £100 fine with no appeal, and a potential charge of £1,500, multi-national bosses are allowed to negotiate their taxes over a prolonged period, until they are happy with the outcome.
The inefficiency at HMRC might be partially explained by IT systems that don’t work, regulations that few comprehend, data loss, poor management, staff shortages (25,000 jobs went by the end of 2011, job losses have already seen a substantial rise of uncollected taxes, from 23% in 2006 to 40% in 2009.Sacking tax collectors is probably one the most bizarre aspects of the current cuts agenda when you consider that the average tax inspector generates up to 30 times the cost of his/her salary. However, encouraging tax-dodgers is a far greater cause of inefficiency at HMRC. And several large foreign companies don't have to worry about talking to anyone, they pay their tax elsewhere.
Meet the tax-dodgers best friend, the story of David Harnett
David Hartnett was the UK’s top tax man at HMRC and he liked to be indulged by the high rollers. Hartnett liked to enjoy the best food and wine while negotiating with Goldman Sachs and Vodafone, letting them walk away with millions of pounds that should be in the tax coffers.
He has accepted corporate hospitality on 107 occasions in the past three years. Some 27 times he dined at the tables of the ‘big four’ accounting firms, i.e. Ernst & Young, KPMG, PriceWaterhouse Coopers, and Deloitte. It’s these companies that do battle with the HMRC over the tax affairs of the big companies and corporate fat cats they represent.
The Bureau of Investigative Journalism puts Hartnett at the top of corporate hospitality table. A survey of 172 senior civil servants by City University shows Hartnett to be well ahead of the field. They found that top civil servants were entertained on 3,151 separate occasions between 2007 and 2009, including trips to the tennis at Wimbledon, football matches at Chelsea and Manchester United, opera performances and fashion shows.
Calling Hartnett to account
Hartnett was quizzed over his dealing with Goldman Sachs by the Commons Public Accounts Committee and stated: ‘I do not deal with Goldman’s tax affairs.’ He then admitted intervening, which resulted in Goldman’s not paying up to £8 million in unpaid taxes.
The case against Goldman’s goes back to the 1990s. And current PAC investigation is not the first that has tried to dig into the fog of Whitehall secrecy and corporate deception. Goldman’s set up a company in the British Virgin Islands. This entity, called Goldman Sachs Services Ltd, supposedly employed all of Goldman's London bankers, who were then "seconded" to work there. Quite simply this was done to disguise bonus payments and thereby avoid paying tax.
The company, along with 21 investment banks and other firms, purchased blueprints for an avoidance scheme called an employee benefit trust (EBT). The bonuses were indirectly invested into elaborate share option schemes.
It took the Revenue until 2005 to demonstrate in court that these EBTs were merely illegitimate tax avoidance devices. The 21 other firms surrendered, and handed over what they owed.Goldman Sachs refused to pay its £30.81m bill. Instead the city firm Freshfields and the tax QC David Goldberg fought tooth and nail on Goldman's behalf through the courts. By 2010, according to a public judgment, the unpaid bill with accumulated interest had mounted to £40m. And while HMRC were battling in the courts to get this full amount out of Goldman’s, Hartnett did a private deal with them and waived the interest element. In doing so he contradicted his own evidence in which he claimed that "the Revenue never charged less than the tax owing".
Hartnett misled an earlier Committee by claiming that his dealings with Goldman’s couldn’t be revealed for legal reasons. This was rubbish and disclosure was in fact at his discretion. He still refuses to be upfront about his relationship with Goldman’s. This is not just rubbish from Hartnett, it's also very odd, given that when questioned about his splendid performance for Vodafone he was more than forthcoming. Vodafone owed the Exchequer £6 billion in unpaid taxes, Hartnett, after a series of private meetings, settled on a £1.25 billion payment.
ThisisMoney.co.uk pointed out, the man who negotiated on behalf of Vodafone for its tax settlement – John Connors – had worked at HMRC until April 2007. When Vodafone hired him, he simply moved to the other side of the negotiating table on this matter. In fact, the Board of HMRC seems to have a number of people in charge with a foot in more than one camp - in terms of their loyalties.Stephen Barclay, Tory MP and member of the PAC, had accused Mr Hartnett of misusing confidentiality rules to "cover up his own mistakes". We understand that two further very large deals have been done that Hartnett is keeping to himself.
The situation was a mess. HMRC is not properly accountable either to Ministers or to Parliament and there's never been a genuine attempt to assess its performance, except via the National Audit Office, indirectly and long after the event.
It very much looked like confidentiality is being used as a shield to hide bad decisions and incompetence by officials and in particular by Dave Hartnett. Update: Jan, 2012, Hartnett announced his plan to resign, he went in September 2012.
Tax Dodging and Morality
Britain's rich and famous, from comedians to pop celebrities and footballers are all finding ways to avoid paying to reduce their tax liabilities. They can afford smart accountants to handle their tax affairs, good luck to them - what makes this behaviour wrong is that it's a game that only the rich man can play. The average wage earner on PAYE has no opportunity to participate in the scams of the wealthy.
A favourite tax dodge involves transferring ownership of a property to an off-shore company so that when it comes to be sold the buyer purchases the company as a whole assuming de-facto ownership of the property. Because the deal is classed as a corporate transaction as opposed to a property sale there are no stamp duty obligations involved.
This means that while a family buying a home costing £400,000 would pay £12,000 to the Government, a multi-millionaire buying a luxury pad could pay little or nothing.
The most popular spot for home registration is the Isle of Man, with 23,147 properties registered since January 1999. Every single home in Cornwall Terrace, North London, average house price £35 million, has been transferred to a company on the Isle of Man.
Apart from the Isle of Man, the Channel Islands is the place to go to avoid your tax, these islands wouldn't have a livelihood without their shadow banking activities. They are like a clearing house for a whole raft of dodgy transactions. After the press's mock outrage over comedian Jimmy Carr's tax dodging, the Jersey government (yes, they have their own government) said it was considering becoming independent from the UK. (Who do they think they are, the City of London Corporation?)
Apologists for the money grubbers say straightforwardly, well, if you had the opportunity, you'd dodge paying as much tax as possible. Implying that it's only human nature to find a loophole and exploit it. And if you say no, I wouldn't do that, you're not believed. What you can believe is that billions of pounds are lost to the nation every year. No one knows how much is being lost, if they did, it wouldn't be called tax avoidance. The loss of this money has induced an untold number of moral debates - which are all beside the point and pointless, when the answer to this problem is simple: in the USA Obama has introduced the Foreign Account Tax Compliance Act which will force financial institutions outside the US to report to Washington on income and interest paid to the accounts of American clients; time for Boy George Osborne to do the same.
The multinationas who pay next to no tax
The scale of tax avoidance by high-street brand multinationals; Asda, Google, Apple, eBay, Ikea, Starbucks, Vodafone: all pay minimal tax on massive UK revenues, mostly by diverting profits earned in Britain to their parent companies, or lower tax jurisdictions via royalty and service payments or transfer pricing.
Four US companies – Amazon, Facebook, Google and Starbucks – have paid just £30m tax on sales of £3.1bn over the last four years, according to a Guardian analysis. Apple is estimated to have avoided over £550m in tax on more than £2bn worth of underlying profits in Britain by channelling business through Ireland, according to a Sunday Times analysis, while Starbucks has paid no corporation tax in Britain for the last three years.
The Tory MP and tax lawyer Charlie Elphicke estimates 19 US-owned multinationals are paying an effective tax rate of 3% on British profits, instead of the standard rate of 26%. It's all entirely legal, of course.
Following the disclosure that these big names were not paying their fair share of tax, consumers decided to buoycott Starbucks; the company issued a press release saying they would pay £10m in tax this next year and £10m the year after, even if they made no profit - which was very nice of them but left the populace wondering if this was the new way of the world, where companies decided for themselves how much tax they would pay.
The Premier League of tax dodgers
Premier League clubs made more than £150m profit yet paid less than £3m in corporation tax, according to analysis of their most recent accounts. This is an effective tax rate of 2 per cent. Equally startling is that a profit of £150m made by eight clubs is all that the Premier League has to show for a turnover of about £2.2bn a year.
Five clubs, including Manchester United, Newcastle United and Tottenham Hotspur, paid no tax at all, despite a combined surplus of more than £70m. Blackpool, relegated from the Premier League last year, paid just over £100,000 on profits of £21m – a rate of 0.5 per cent. The club was able to pay minimal tax on its substantial profits because of the effects of a £6.7m loss the year before. The club also donated just over £5,000 to charities.
Of the other profitable elite clubs, Arsenal had the biggest potential tax bill – £7m on group profits of £36.6m – but paid less than half a million pounds while deferring more than £6m. West Bromwich Albion topped the company tax table, paying £1.8m on £18.9m profits.
Simon Hughes, deputy leader of the Liberal Democrats, assessed this situation with blinding insight:
"Whatever the accounts of these clubs say, everyone knows that the Premier League is awash with money. This and many other examples that have emerged over recent months demonstrate that the Government should conduct a serious review of our corporate tax regime."
More usefully, someone from the Tax Justice Network observed:
"Football enjoys an incredibly generous tax regime. First, because the UK asks very few questions about the interest that can be offset by companies against their profits. HM Revenue & Customs has been giving massive tax subsidies to foreigners to buy UK football clubs. Second, the tax treatment of transfer fees means that tax relief is given on these when paid.
"Since most Premier clubs pay out more than they get in transfer fees, the result is that they get up-front tax relief on payments that may not be reflected in their accounts for some time to come, meaning that many have considerable tax losses available to them not reflected in their reported financial performance, and pay little or no tax as a result. This needs review."
Conclusion
At the poor end of the social spectrum, benefits are being cut and parents are queuing at the food banks to feed their children. At the other end of the spectrum, the richest 1,000 people in Britain have seen their wealth increase by £155bn since the crisis began. Anyone earning over £1m a year can look forward to a £42,000 tax cut in the spring 2013, while firms have been rewarded with a 2% cut in corporation tax to 24%. That's the real story of Mr Cameron's Britain, two nations, the haves and the have nots, the tax system favours the former over the latter, making social divisions worse.
However, Britain's economic malaize is not helped by its shambolic tax system, that allows wealthy individuals and large corporations to evade and avoid their tax liabilities. The liberal minded may dream that the money grubbers like Starbucks will be shamed by bad publicity into paying their fair share, this is unlikely, only change to the tax system that makes their tax dodging antics impossible will do. Cameron and Osborne have no plans to deal with this problem. Fundamentally, the tax avoidance industry and the tax authorities are in bed together and that's what needs to change.
The Bottom Line
It's estimated by Tax Research UK the total tax gap between what's owed and collected is £120bn a year: £25bn in legal tax avoidance, £70bn in fraudulent tax evasion and £25bn in late payments. In truth, this is all guess work, no one knows what the true figures are.