Tax Avoidance is when companies and wealthy individuals reduce their tax bills by exploiting loopholes in legislation (not to be confused with Tax Evasion which is when people break the law to not pay tax). It is a massive problem and is estimated to cost the UK taxpayer £95bn per year. This figure is put in perspective when you consider interest on the National Debt is around £51bn per year, so all the government’s arguments about austerity being the only solution to the debt are completely false, and all they actually have to do is clamp down on Tax Avoidance. However although the government does attempt to stop some small-scale tax avoidance, they resolutely refuse to address most of the big aberrations, for the very simple reason that they, their donors, and their sponsors are all individuals and organizations that benefit from them and do not want the law changed in a way that might cost them. In other words the same people who benefit from Tax Avoidance are the ones who, if not in the government themselves, are bankrolling the government (see Party Funding), and use their enormous leverage to ensure these policies are not enacted.
By far the biggest amount of Tax Avoidance is carried out by companies, using various tricks and manipulation of the legislation. Three of the most common are Transfer Pricing, Interest Payments on foreign loans, and operating off-shore.
Multinationals using accounting tricks to ‘move’ their profits away from a country with high tax to a country with low tax. This often means that a company with extensive operations in a country claims to make no profits there, and so pays no tax. This patently ridiculous, but legal, technique is the way that Starbucks got away without paying tax in the UK for many years. Vodafone also allegedly avoided £4.8bn in tax using similar techniques.*
For a detailed description of how transfer pricing works click here.
Transfer Pricing is a massive problem, but also one that is easily solved. All that is necessary is for the government to tax companies on the amount of business they actually do in that country, rather than allowing companies to declare their profits in whichever country suits them best. The technique for doing this is called Unitary Taxation, and is already in use in America to calculate state taxation.
For a detailed description of how Unitary Taxation Works click here.
However although this technique has been suggested many times over the years the government always refuses to act, probably because of Party Funding and Lobbying. The Confederation of British Industry is, not surprisingly, against Unitary Taxation and its representative, Richard Woolhouse, when asked about forcing companies to report data which would enable Unitary Taxation, dismissed it, saying reporting such information would give people ‘ too much complex data which they wouldn’t understand.’
Interest Payments on Foreign Loans
There is a second tax avoidance scam by multinationals whereby they make interests payments on loans made to themselves, which they can use to cut their declared profits and so pay less tax.
The government, quite reasonably, lets companies offset any interest payments they make on debts against their taxable profits. In order to stop tax avoidance, in instances where UK companies are making interest payments to foreign companies, the government charges a withholding tax, but there is an exception to this if the debt is traded on a foreign exchange, and in this case no withholding tax is charged. So many multinationals lend money to themselves via a foreign subsidiary in a tax haven, and by making sure they charge themselves more in interest than they make in profit, they can legally claim to make no profit in this country, and so pay no tax.
This trick is used by some of Britain’s leading businesses and enormous amounts of tax are being avoided.
The Water Companies, most of which are now in foreign ownership, have been using this trick for years and have collectively avoided some £3.4bn in tax*. In fact it has been estimated that up to a ⅓ of our water bills go on interest and dividends to overseas companies and, given the size of our water bills and the huge profits generated, it is utterly disgraceful that they should then seek to squeeze even more out of the consumer by not paying tax either.
Several of our power distribution companies are also doing the same thing and are estimated to have avoided £140m in tax.*
Energy company Npower is estimated to have avoided £200m in tax by routing interest payments through Malta, and in the face of criticism over the soaring cost of bills to its consumers.*
Heathrow Airport, which after privatisation is now owned by Spanish multinational Ferrovial, has also been able to offset its profits against debt, enabling it to get away with paying a mere £24 milion in tax over the last 10 years, despite paying out over £2 billion in profits to its owners.*
The private equity outfit Cinven, which owns Pizza Express, Zizzi and Ask, has avoided £77m in tax since 2006 by using this technique. Last year they paid a mere £200,000 tax on an estimated £39m profit.*
Tragus, the owners of Café Rouge, Strada and Bella Italia, has avoided £13m the same way.*
Montague Private Equity, which owns Maplins, has avoided £10’s of millions tax this way but refuses to disclose detailed figures.*
Cafe Nero, despite making £21m profit per year, pays no tax by using foreign loans routed through the Isle of Man.*
High-street chemist Boots*, has avoided £1.1bn in tax since being bough out by a private equity firm in 2007 by loading itself with debt and routing its profits through tax havens.
Vodafone (again) uses this technique to channel profits through Luxembourg and avoid tax.*
Pret a Manger is also alleged to do similar practices though no figures are available.
Some companies with a strong internet presence are able to avoid tax by claiming they don’t actually operate in this country at all.
Amazon* for example says that all the sales it makes to UK customers actually take place on its Luxembourg computers and are therefore not happening in the UK. This despite the fact that last year it shipped £4.3bn of goods to UK customers, generating an estimated £160m profit which should have yielded £40m tax. In fact it paid £2.4m tax and to add insult to injury qualified for £2.5m of government business grants!
Google* makes £3.5bn of sales in the UK, but claims most of those sales actually take place through its Irish office and so aren’t liable for UK tax. Last year it paid £21m tax when in fact £230m would have been a more realistic figure.
Facebook*, which has 24 million UK users each day, and declared UK revenue of £105m, similarly claims that all its sales actually take place offshore, and so last year paid a pitiful £4,327 in corporation tax. Strangely, for a company that claims its UK operations are so unprofitable, it paid £35m in bonuses to its UK staff last year.
Recently Apple declared UK sales of £10.5bn, but was able to get away with paying a mere £11.4m in tax by routing all its sales through Ireland and Luxembourg. It has since transpired that with the collusion of the Irish government, it has set up a legal structure which means most of its sales are directed to a head office which has no legal residence in any country at all (not even a tax haven). Consequently it gets away with paying almost no tax whatsoever. *
In all the above instances there are several simple things the government could do to address the issues, but repeatedly refuses to do so. They hide behind the excuse that it requires international co-operation (not true) and come up with the even lamer suggestion that the way to deal with it is through consumer boycotts, as if it’s somehow the consumers job to do this and not the government that we consumers have elected. Even if that can work with a High Street name like Starbucks, how are consumers expected to put pressure on the water companies for example. Are we supposed to stop drinking water? The reality is the government had no interest in changing the legislation because it suits them very well the way it is. They are very happy for companies to avoid tax, as is evidenced by them continuing to give government contracts to serial tax avoiders like Capita and Sodexo. (In 2011, ten IT companies got £1.8bn of government business, but only paid 10th of the tax that was due on those contracts through clever use of tax avoidance schemes, at a huge cost to the taxpayer.) Again the influence of Lobbying and Party Funding can only be conjectured at.
As further proof of the government’s support of corporate tax avoidance, ex-Chancellor George Osborne made changes to the Controlled Foreign Companies Act* that actually made it easier for businesses to avoid tax by moving their investments into tax havens. Vodafone for example has made full use of this by transferring much of its finances to the notorious tax haven of Luxembourg, even though it doesn’t actually operate a mobile phone network there. Additionally, by allowing Private Equity outfits to utilise ‘carried interest’, and by keeping the top rate of Capital Gains tax at 28%, the government is helping Private Equity bosses (many of whom are also Tory Donors, surprise surprise) get away with paying less tax than the rest of us – the so-called Mayfair Loophole*.
Tax Avoidance takes many other forms and for yet more outrageous examples click here.
As a footnote it’s probably worth highlighting that George Osborne is himself the beneficiary of a £4m tax-free family trust*. Lucky him!
Pizza Express/Zizzi/Ask/Cafe Rouge/Strada/Bella Italia/Maplins: http://www.independent.co.uk/news/uk/politics/eurobonds-scandal-the-high-street-giants-avoiding-millions-in-tax-8897591.html
Apple: http://www.bbc.co.uk/news/business-22607349 and http://money.cnn.com/2016/08/30/technology/apple-tax-ruling-numbers/index.html?sr=twCNN083016apple-tax-ruling-numbers0819PMVODtopLink&linkId=28223690
Controlled Foreign Companies Act: http://www.theguardian.com/global-development/2012/mar/06/uk-tax-concessions-cost-developing-countries