Tax Avoidance Examples

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Philip Green: Notorious tax avoidance didn’t stop David Cameron appointing him as an adviser on government spending.
Picture © Katie Prior

Non-Resident (non Res) Many rich people spend over half the year out of the UK in order to claim they are ‘non-resident’ and so reduce their tax bill. Often they play the rules. For example Philip Green* who owns the Top Shop empire paid himself a £1.2bn dividend in 2005. However he managed to avoid paying any tax on this as he claimed Top Shop was actually owned by his wife Tina, and she is not liable for tax as she lives in Monaco. It is estimated this saved him £285m he should have paid in income tax.

Non-Domiciled (non Dom) Many wealthy people who live in this country claim to not be domiciled here (ie this is not their home and at some undefined point in the future they will move away). Although they live and spend all their time here (and in some cases were born here), and enjoy all the benefits that residency brings, their ‘non-Dom’ status means they are not liable for tax on any foreign earnings, which is an incentive for them to hold all their investments (bank accounts, shareholdings etc) abroad. Being declared a non-Dom can be based on any tenuous ancestral link to another country, and doesn’t mean they ever do have to actually move abroad. There are over 100,000 people in the UK claiming non-Dom status, including incidentally, David Cameron’s personal adviser Lynton Crosby (see Lobbying).

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Eton College – its charitable status means it’s subsidised by the taxpayer. Picture © Kaihsu

Public Schools such as Eton and Harrow are designated by the government as charities. As people can get tax relief on charitable donations, many rich people make ‘donations’ to the public school where their children are being educated. They then get money back as ‘tax relief’ so they are, in effect, getting the general public to subsidise their children’s privileged education.

Cosy Deals The Inland Revenue sometimes ‘negotiates’ with people or companies over how much tax they should pay. In 2010 Goldman Sachs lost a long-running court case over unpaid tax, and owed the government £30m tax plus a further £10m in interest payments. Goldman Sachs* said they shouldn’t be liable for the interest, and after several expensive dinners David Hartnett, the then head of the Inland Revenue, agreed. In a so-called ‘sweetheart deal’ he let them off the £10m, though when the matter became public he admitted he was wrong and was forced to resign (the £10m will not be repaid as it has been signed off). The Parliamentary Select Committee estimated that over £25bn tax goes uncollected each year because of situations like this. Similarly there has been a recent scandal involving Google, where after secret negotiations the Inland Revenue has allowed them to get away with a 10-year tax bill of £130 million, which from their accounts seems to be only a 10th of what they should have been liable for.*

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Hazel Blears: Caught playing the rules on allowances for MP’s second homes.
Picture © Steve Punter

Flipping In the last parliament many MP’s indulged in the technique of ‘Flipping’. As they were not required to pay capital gains tax on their primary residence, many MP’s with two homes constantly changed the house they defined as their primary residence (sometimes several times a year) in order to avoid paying capital gains tax completely. Hazel Blears* for example ‘flipped’ her home 3 times in one year, and when she made a £45000 profit on the sale of her second property was able to avoid the £13332 in tax that should have been paid.

Stamp Duty on House Purchases is payable at a rate of up to 5%. Until recently many rich people would register their house in the name of a company (the company itself often being registered in an off-shore tax haven), so that when they moved home they would sell the company not the house, thus avoiding the stamp duty. On a central London property with a value of £5m (not unusually high for many areas) that avoided £250,000 in tax every time the property was sold. Chancellor George Osborne finally closed this loophole in the recent budget, but not before Tory Transport Minister Stephen Hammond* had purchased his property through a company registered in Gibraltar in order to avoid tax. When the rules changed he moved the registration to Delaware in the USA, to make sure he stayed one-step ahead of the taxman.

Charitable Donations – As donations to charity get tax relief, some rich people set up ‘charities’ abroad, which are in fact private investment schemes, and are then able to claim back tax on all the money they pay into those schemes. As the charities are based abroad it can be very difficult for the Inland Revenue to ascertain whether they are legitimate or not.

Being Paid Through Personal Companies – High earners can significantly reduce their Income Tax by being paid through a private company rather than directly as most ordinary people are. Several high profile politicians do this, and it has recently come to light that at least 2000 highly-paid civil servants are also being paid through private companies so that they can avoid as much tax as possible.

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Barclays Bank – so adept at tax avoidance it even set up a business unit to help other people do it too! Picture © Nadia Isakova

Barclays Bank was recently caught out by the Inland Revenue trying to avoid £500m in tax by buying back their own debt at a discount through a series of front companies*. This created profits which would have been taxable if the debt was bought by Barclays directly, but was avoided because Barclays used separate companies, which were in fact proven to be part of the Barclays group. This was a rare failure for Barclays, who are so good at tax avoidance they used to make £1bn/year telling other people how to do it too*. It is also worth noting that Barclays has got 280 subsidiary companies registered in tax havens, so is clearly going flat-out to do all it can to avoid paying tax. It needs the money as it’s paying £2.4bn in bonuses to its staff this year.

The Cup Trust This obnoxious company set itself up as a charity, which meant that any donations paid to it were entitled to tax relief. Over a 2 year period it took in £176m in donations from rich individuals, on which those individuals were able to claim back £46m in tax relief from the government. After deducting its fees the company then proceeded to refund all the money back to those same individuals who had paid in, meaning they got tax relief for nothing. It donated a mere £55,000 to good causes in order to maintain its charitable status. Strictly speaking no laws had been broken, though it was clearly a gross abuse of legislation and the Inland Revenue did eventually close it down. The Charities commission got a lot of criticism for allowing it to continue as long as it did.

* References:

Philip Green: http://www.ukuncut.org.uk/targets/3

Goldman Sachs: http://www.theguardian.com/business/2011/oct/11/goldman-sachs-interest-tax-avoidance

Google: http://www.theguardian.com/politics/2016/jan/24/cheap-google-deal-sets-bad-precedent-says-tax-expert-richard-murphy

Hazel Blears: http://www.telegraph.co.uk/news/newstopics/mps-expenses/5310568/Hazel-Blears-should-be-sacked-for-avoiding-capital-gains-tax-MPs-expenses.html

Stephen Hammond: http://www.telegraph.co.uk/news/politics/conservative/10427970/Stephen-Hammond-Labour-attacks-Conservative-ministers-offshore-deal.html

Barclays Bank: http://www.bbc.co.uk/news/business-17181213 and http://www.theguardian.com/business/2013/feb/11/barclays-investment-banking-tax-avoidance

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One thought on “Tax Avoidance Examples

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