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Tax avoidance: is the tide turning?
HMRC is clamping down on tax cheats and MPs are set to grill big businesses over their tax affairs.
by Michelle McGagh on Nov 12, 2012 at 13:04
A pair of eyes peer out from a hole in a piece of card above an ominous warning: ‘We’re closing in on undeclared income.’ HM Revenue & Customs (HMRC) wants us to know it’s getting serious about tax avoidance.
This latest campaign is part of a £917 million evasion and avoidance programme that the government hopes will raise £7 billion by 2014/15.
Secretary to the treasury David Gauke said of the campaign: ‘Most people play by the rules and pay what they owe, but HMRC is cracking down on those who don’t. Using the £917 million the government has made available to tackle avoidance, evasion and fraud, HMRC is closing in on tax cheats.’
He urged taxpayers to ‘declare all your income’ as ‘tax dodgers are simply storing up trouble for the future’.
As part of the campaign, those who wish to declare income not previously declared can do so on this government website.
Shop a cheater
HMRC is also encouraging people to shop anyone cheating the taxman. It will have been particularly pleased last week when a whistleblower at HSBC gave HMRC the details of every British client of the bank’s Jersey branch.
Jersey has long been regarded as a tax haven. It has a standard rate of income tax of 20% and no inheritance tax or capital gains tax for residents and for non-residents there are certain incomes and gains that are exempt from tax, although they have to pay tax in their home country. It's no surprise that there are more than 4,000 Britain-based customers with £6.9 billion in offshore accounts.
However, the most serious issue for HSBC is not tax avoidance, it’s the nature of their customers, who reportedly include a drug dealer, three bankers charged with fraud and a man who possesses 300 weapons.
The bank could face money-laundering charges, and the customers are now being investigated to see whether they have avoided tax.
What about all these companies avoiding tax?
HMRC is homing in on individuals who are avoiding tax, but there is plenty of avoidance happening in the corporate world too, which it could be argued is of much greater consequence.
There are many companies taking advantage of loopholes in the UK's tax system to engineer a loss and minimise their tax liability.
It must be noted that tax avoidance is legal and individuals and businesses are allowed to arrange their tax affairs to minimise their tax bill, but tax evasion is illegal.
Although the schemes used by companies are legal, there is a bigger question how moral it is to avoid tax on such large scales.
How much tax do companies pay?
Companies pay corporation tax, which currently sits at 24% but is due to fall to 22% by 2014. This tax is payable on profits and capital gains a company makes.
However, there are lots of expenses that companies can offset against their profits in order to bring their tax bills down. Here are just some ways companies are side-stepping tax:
The coffee chain is due to get a grilling from the House of Commons Public Accounts Committee over its tax avoidance measures. It has paid zero corporation tax in the UK over the past three years and tax totalling just £8.6 million in the 14 years since it opened in the UK, despite sales hitting £3 billion in that time.
Starbucks has reduced the reduced the profits it can be taxed on by paying a 6% royalty payment to its regional headquarters in the Netherlands to pay for the use of Starbucks’ intellectual property and logos.
The online retailer was investigated earlier this year over its tax arrangements. HMRC was not happy with the fact that it avoided paying tax by officially allocating its UK sales to a company based in Luxembourg, despite one in four books bought in the UK being bought from Amazon.
In 2011 Amazon generated sales of £3 billion in the UK but paid no corporation tax. In 2010 the Luxembourg office of Amazon had sales of £6.5 billion and employed 134 people compared with 2,265 employees in the UK with just £147 million of sales.
The social networking site, which is worth $100 billion, channels its UK revenue through Ireland and has paid just £238,000 in corporation tax in the last tax year on an estimated £175 million revenue. When a UK advertiser buys ad space on Facebook, the order is simply processed in Ireland, meaning the sale falls under Ireland’s less stringent tax rules, even though UK users of Facebook will see the ads.
Facebook generated £20 million of sales in the UK in the last tax year but it also operated at a £14 million loss.
It’s not just big multi-nationals avoiding tax, Thames Water and Anglian Water are believed to have paid no corporation tax on profits, and Yorkshire Water is believed to have tax in ‘the low millions’, despite all three making hundreds of millions in profits and paying out huge bonuses.
Anglian Water’s turnover in the last tax year was £1.1 billion, Yorkshire Water was £820 million, and Thames Water’s turnover was £1.6 billion.
What is the government doing about it?
The House of Commons Public Accounts Committee is set to grill executives from Starbucks, Amazon and Google today over their lack of tax payments. MPs aren’t happy that companies are exploiting loopholes when the rest of the country is struggling.
Conservative MP Charlie Elphicke has been particularly vocal on the issue and on 5 November told the Commons that Amazon had paid an effective tax rate of 2.5% on its 2011 earnings, Google paid 0.4% and Starbucks paid nothing.
While the government investigation will be welcomed, it has already been beset by problems. It emerged at the weekend that chairman of the Public Accounts Committee, Labour MP Margaret Hodge, has a stake in a family business Stemcor that paid just 0.01% tax on its revenue last year.
Stemcor’s accounts show that it paid just £163,000 on revenue of £2.1 billion in 2011. The steel trading company was set up by Hodge’s father and is now run by her brother. She has shares in the company.
Hodge has defended the tax arrangements of Stemcor, stating that ‘they have always promised that they do absolutely nothing to avoid tax. I would be very mad if I found out differently.'
Can we stop companies avoiding tax?
Closing down all the loopholes in the tax regime would require a huge overhaul that would take years, and no doubt it would be met by fierce lobbying from business groups.
The fact is companies have the funds to employ accountants and tax experts in order to help them minimise their tax as much as possible.
Former City minister Lord Myners has been outspoken about tax avoidance, slating companies that are headquartered offshore to avoid tax. He said they were creating unfair competition for British-based businesses.
Myners has floated the idea of a sales tax to ensure big corporations pay their fair share. He said: ‘The current system for collecting corporation tax from multi-national companies is flawed. Corporation tax for a multi-national company operating in the UK is close to being a voluntary payment.’
He said that the government had to decide whether it was happy with the tax-take from other ‘secondary effects’.
‘You either shrug your shoulders and say you get benefits from secondary effects through employment taxes, VAT, the multiplier effect and so on. Or alternatively you look for some other form of taxation,’ Myners said. ‘If that were to be the case, some form of sales tax has attractions.’
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