Stargooglazon.com – the tax scandal

hidden-tax-money-300x180The recent press coverage of the tax rates paid by large international businesses might lead one to believe that HM Revenue & Customs (“HMRC”) are either:

(a) Powerless to fight back against large international businesses who pay little or no tax in the UK or
(b) Witless and incompetent.

The balanced reality is somewhat different.

HMRC have a very complex and detailed set of rules laid down by parliament to apply to businesses in the UK and especially those businesses which have cross border transactions which might take profits away from the UK.  A common fallacy is that big corporates can employ clever and expensive accountants and lawyers to run rings around HMRC – implying that its really easy and just a matter of who can afford the best.
My experience of HMRC is that they are fully aware of the rules and able to defend their position with tenacity.  But, are they being blamed for their application of the tax rules or are they suffering from inherent weaknesses in said rules?

UK tax rules are designed to encourage inbound investment and business.  Sometimes, in isolation, such rules can seem imbalanced and unfair, especially when the tabloid press (and I include some broadsheet newspapers who should know better in this this down-market description) sum up the rules in four large words in three inch high type (hardly a rounded assessment of the position methinks…).  Press coverage has been woefully ill-informed and anyone who thinks that any media coverage tells them the whole story needs to get out a bit more.  This is not helped by politicians who cannot risk defending the status quo when faced with the onslaught of (perceived, but ill informed) overwhelming public opinion.  I would remind all that such weakness to engage in proper debate has resulted in ridiculous and weak tax laws and knee-jerk reactions which leave us with tax rules which are complex and, in turn, lead to next year’s headlines when it turns out they don’t work as intended.

For example, who can forget the one-dimensional and wholly ill-informed attacks on non-domiciled individuals who, once upon a time, were encouraged, by tax reliefs on non-UK income and gains left outside the UK, to come to the UK and bring wealth and entrepreneurship with them?  I suppose some might think that from my tone I’m too much on the side of such cads and charlatans, but consider this:  the original announcement from the Conservatives (in opposition) was that they would tax these dreadful people £25,000 for such a privileged tax status and that HMRC statistics showed there were 120,000 such people declaring non dom status on their tax returns.  This lead to the then opposition claiming that an estimated £3bn or more raised would be used to reduce inheritance tax.  The then Labour government reacted in a knee-jerk way and introduced their own rules at £30,000 to show just how much tougher on this they would be.

And guess what?  2008/09 statistics show that somewhere between £120m and £160m was raised from this measure.  As predicted by people who actually paused to think about the plan, the vast majority of people claiming non dom status were avoiding tax of hundreds, but not thousands, and certainly not tens of thousands of pounds and it was not worth paying the £30,000 levy and cheaper to pay the small amounts of UK tax on their worldwide income.  Just to confuse the public debate, several major broadsheet newspapers reported this miniscule amount of tax raised , in a triumphant tone, as a major blow against such dastardly non doms and a massive windfall for UK tax receipts.  The more detailed statistics estimated that at least £880m of tax was lost by non dom individuals removing themselves from the UK – although it was conceded that it was not possible for the statistics to determine if the loss of this tax was related to the new £30,000 levy or to the natural mobility of such taxpayers.  Nobody mentioned the £3bn expected receipts….

So what might we conclude from this example?
(a) Predicted tax receipts, based on poor assumptions are rubbish, and
(b) Media outlets, including some who should know better, have no talent in analysing the figures and merely reprint the press cuttings which they think will sell the most newspapers.

So what’s new and what is the point of this article?

Let’s get back to large international businesses.  The common theme in the tax planning of such businesses is the use of internet based sales from non-UK hubs; or the payment of royalties for the use of brands to non-UK parts of their worldwide group; or the payment of interest on loans from other parts of their worldwide group.  All of these plans route profits into lower tax jurisdictions, because – guess what – the non-UK locations happen to be in low tax parts of the globe.  Are HMRC ignoring this?  No.  The UK rules (and to some extent the EU rules and international tax treaty rules) allow such behaviour.

So what can the UK government do about this?  What might be a proportionate response to the problem?  After all, to taking one example, it might be argued that profits might be earned in the UK from the use of the royalty rights, so the royalty rights should be subject to UK tax on their payment to the non-UK jurisdiction (a withholding tax).

Well in Europe the Council Directive 2003/49/EC of 3 June 2003 (I almost feel ashamed I can quote this) seeks to apply a common system of taxation for interest and royalty payments between associated companies and seeks to abolish wherever possible withholding taxes on interest and royalties between member states of the EU.  So, it seems that the UK government cannot act alone in quashing this mobility in tax revenues.  The EU contains several “low tax” jurisdictions which can be used as the intermediaries in this regard to “warehouse” tax revenues at low rates.

So what can we do in the UK?

Possibly we might see the government look towards a business reality overview.  If a payment of a royalty makes a business model unsustainable then surely the royalty is too great.  Businesses should be asked to pay tax on a sustainable level of profits, perhaps looking to the worldwide level of global profits in the trading group to ascertain the correct net profit margin.

This will be very difficult.  Large international business is very complex by definition, but HMRC needs to regain the confidence of the man on the street and, to that extent, so does large business need to show it is part of society.

There’s no easy answer.  If I knew a better solution I’d be a clever chap.  I suppose we need to balance the three dimensional impact of tax.  In other words, corporation tax isn’t everything.  VAT, PAYE/NIC is raised from these businesses, plus rent is paid to landlords, and orders placed with a supply chain etc, who in turn pay tax.  Wealth and employment is generated and this spending goes into the economy and recycles, generating more income for other businesses, and so on.  So the tax contribution by a business cannot be measured by looking at just the one layer of tax taken in only part of the total tax revenue generated.  For example, take a property rental company which pays a larger relative proportion of corporation tax, but collects no VAT and pays little or no wages on which PAYE and NIC is applied.  Who’s to say which has the more socially acceptable tax profile – them or Starbucks?

In short, we need a more proportional argument, with less polarised and more informed debate.  Then and only then will we get the government and legislation we deserve.

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