The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business
By Richard Brooks
When a tax system favours an elite over the majority it is fatally undermined.
One bizarre episode best illustrates the gap between the technocratic view of tax avoidance and the real world. In 2002 the chairman of the Inland Revenue repeatedly told a Parliamentary Select Committee that the sale of 650 tax offices to a Bermuda-resident company, Mapeley Steps Ltd, did not involve tax avoidance. But when the MPs came to question Mapeley’s chief executive some weeks later, he admitted the company had ‘structured its tax affairs to minimise exposure to capital gains tax’. The committee declined to enter the make-believe world in which going offshore to ‘minimise exposure’ to tax was not avoiding tax: ‘Tax avoidance was clearly one of Mapeley’s objectives in the way the deal was structured,’ it concluded. What independent MPs thought was clearly tax avoidance was, officially, nothing of the sort.
It is only against the limited band of ‘artificial avoidance’ that the government makes any meaningful move, but this is enough to sustain the Great Illusion at the heart of recent governments’ tax policies. Like any decent table magician, successive chancellors direct the audience’s attention to what they want it to see while away from the punters’ gaze the trick is played. Artificial avoidance meeting the official definition is very publicly tackled, while more quietly the opportunities for some, especially the biggest companies, to ‘structure’ their way out of a tax bill are expanded. As a result, the biggest corporate tax avoiders no longer need to design their own schemes; the government does it for them.
The central issue in British tax avoidance today is a political one; it is nothing less than the legal sanctioning of real world tax avoidance.
The gap widens in two ways. First, clear flaws in tax law are not corrected when they give undue tax advantages to business.
Second, the rules of the game are relaxed to render real world tax avoidance increasingly irresistible to the rich and large corporations.
In 2000, Chancellor Gordon Brown responded to the demands of his new friends in the world of private equity by reducing capital gains tax from 40% to 10%. The income that with some basic financial engineering they transformed into capital gains would famously be taxed at lower rates than their cleaners were paying.
The coalition government swiftly followed up with tax exemptions for companies’ tax haven branches and for profits parked in tax haven subsidiary companies in the most contrived manner. At the same time, the Treasury persists with allowing tax breaks for the costs of funding these offshore set-ups from the UK. In other words, income can be moved to tax havens and costs kept in the UK: a deliciously simple recipe for real world tax avoidance.
Between 1999 and 2011 British companies’ profits increased by 58%, while corporation tax payments went up by less than 5%.
This pervasive, expanding tax avoidance does more than just short-change government finances. Available almost exclusively to wealthy companies and individuals, it widens inequality. It also distorts the democratic process.
In the wake of a crisis that nearly collapsed the world economy, they’re still attacking tax revenues and distorting economies. They give tax advantages to economy-swamping levels of debt and bankers’ bonuses based on illusory profits that conceal sometimes cataclysmic risks. What’s more, they’re being sharpened by the British government.
As well as facing less than zealous policing of existing laws, big business can increasingly set its own new ones. The most infuriating aspect of this to those of us who like to report the furtive capture of the machinery of government by powerful vested interests is that there’s no secret about it. The Treasury’s mission is unashamedly to adjust the framework of tax legislation to suit large business. Thus ‘working groups’ set up to revise laws governing profits shifted into tax havens are run by the companies, such as Vodafone and Tesco, that seek to save fortunes by doing precisely this.
The current government nonetheless insists that ‘the consensus, among economists at least, is that it’s predominantly the employee who foots the bill’, and uses the misconception of a few academics funded by big corporations to justify ultra-low corporate tax rates and the introduction of a whole new world of tax avoidance opportunity. By 2014, it boasts, Britain will have ‘the lowest [corporate tax] rate [21%] of any major western economy, one of the most competitive rates in the G20, and the lowest rate this country has ever seen’. And by sending profits into the world’s tax havens with the government’s encouragement, British multinationals will shave further billions off already modest tax bills.
Even giving some credence to the overblown notion of ‘tax competition’ among nations, quite why the world’s seventh largest economy should sell itself so cheaply looks like a mystery (but is in fact explained simply by the corporate capture of tax lawmaking).
The cost of this capitulation will of course be passed on to other taxpayers, both individuals and the small businesses that can't afford the lawyers and accountants to run offshore outposts. By massively reducing their tax bills, large companies will win yet another competitive advantage over the smaller enterprises that ought to be the engine of economic recovery.
They could of course constitute legitimate behaviour only in a country where the richest corporations are not just permitted to dodge their fair contributions but are positively encouraged to do so, leaving everybody else to pick up the tab. Such a nation might be called a tax haven. Or it might be called Britain.
As late as 1975 an appalled taxpayer reported to Chancellor Denis Healey that while his government was clamping down on tax dodging, at a tax conference in Jersey a Bank of England official ‘was giving advice on how to avoid tax. I wonder if this is really part of the Bank of England’s duties?’
The Rossminster affair has a special place in tax folklore as the genesis of artificial tax avoidance, in which tax laws are contorted beyond all recognition to produce results entirely at odds with their purpose.
Rossminster undermined the whole basis of taxation: that people and companies would be taxed on their real incomes and gains and that their personal and commercial dealings would determine what those were. In Rossminster’s world this reality was replaced with one in which tax liabilities vanished with the wave of a tax planner’s wand.
From 1979 Margaret Thatcher’s government began implementing the monetarism and financial deregulation advocated by the ‘Chicago school’ of economic theory and championed here by the new prime minister’s favoured think tanks such as the Institute for Economic Affairs. Her first and perhaps most significant move was the abolition of exchange controls, the system of currency regulation designed to prevent destabilizing inward and outward flows of finance. Soon followed by the removal of credit controls and the ‘Big Bang’ deregulation of the City, the reforms opened up the British economy in more than just the intended sense. They created a perfect freebooting environment for tax avoidance at a level to dwarf anything seen thus far.
So it was that by the early 2000s, an era littered with corporate scandals from Enron in the US to Equitable Life in Britain, outwardly respectable companies and their professional advisers had been propelled into the kind of scheming last seen by the tax inspectors who raided Rossminster’s offices over twenty years before. Neo-liberal ideology and a couple of extra noughts on the end of deals had seen off any lingering scruples.
But the big money at stake meant that tax avoidance was now practised not by a couple of maverick accountants who were rubbing the authorities up the wrong way but by firms who were hand in glove with the government.
Just as with corporate taxation in the 1990s, employment tax laws had been put at the service of free market capitalism.
By the late 1990s a rash of tax avoidance schemes had broken out, as billions of pounds’ worth of bonuses were channelled into shares in offshore companies and trusts.
In short, the banker would get his cash without paying full tax and national insurance on it, while the company would get its share scheme tax break when it had in fact paid instant bonuses never intended to be eligible for a tax concession.
By 2010 a multinational company that was avoiding tax on a breathtaking scale could sidestep the law, write its own tax bill and simultaneously shape the rules that will govern its tax avoidance in future.
A study from Oxford University, he noticed, described how most companies ‘believed that corporation tax issues seem to be too complex or obscure for the media and the public to understand. Accordingly, the issues are not covered in the media or they go unnoticed by the public.’
What a team of reporters eventually found was a corporate Britain that was doing more than just diverting its financing offshore for the tax breaks. It was tearing itself apart in pursuit of tax avoidance.
‘Tax-efficient supply chain management’ – as it has become known in one of those obfuscatory tax euphemisms – offers huge scope for tax dodging as established and newer tax havens bend over backwards to host the management, intellectual property, financing and other facets of a business that can be commoditized, moved and priced.
Strip away the jargon and this is corporate tax dodging on a global scale, increasingly sanctioned by the world’s tax authorities.
The effect of tax-efficient supply chain management on UK tax payments hit the headlines in 2012 when Reuters analysed a series of US companies’ contributions and found that Starbucks had paid just £8.3m tax on several billions of pounds’ worth of sales since 1998 and nothing for several years. At the same time it had been telling investors – as anybody strolling along a high street would agree – that its British operations were prospering.
The recent takeover of another British company with honourable origins, Quaker-founded Cadbury, by US food company Kraft, had devastating consequences for the company’s UK tax payments, not to mention the jobs of some its British employees. What’s more, the process demonstrated how the UK’s generous tax breaks for interest payments act as a public subsidy to foreign takeovers that can distort Britain’s industrial base.
The most successful of them is the Australian-born, British-based ‘arbitrage’ specialist behind Caymans-based hedge fund CQS, Michael Hintze, who has given £1.25m to the Tories.
A similar set-up is found at the hedge fund chaired by current Tory treasurer and multimillion-pound donor Stanley Fink, International Standard Asset Management, which boasts ‘offices in London and New York’
Football is one more business that has been distorted by tax avoidance. But at least the Premier League now has a fitting sponsor: Barclays. *
As with football players, the competitive advantage for non-doms in the hedge fund business is overwhelming. By 2008 one senior hedge fund lawyer estimated that half of London’s hedge funds were run by non-domiciled individuals, several hundred times the proportion of the UK population claiming non-domicile status.
Non-domicile tax status works so well for the international jet set by turning UK tax residence, which might be thought a fiscal handicap, into a major asset. Under the UK’s network of international tax agreements, residence here automatically converts an individual into a non-resident back home and thus no longer taxable there. The UK then privileges its new resident with non-dom status and thus tax exemption for income that he manages to keep offshore (but with plenty of wrinkles to allow it back in if, for example, he wants to snaffle up some prime UK property). The non-domicile tax break thus becomes not just a UK tax avoidance tool but a global one.
This is a business that has played a major part in inflating international finance to a level that dwarfs productive industry, creating the conditions for the 2008 financial crisis.
‘Any commonsense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid workers can't be right,’ admitted chairman of the SVG private equity group, Nicholas Ferguson, in June 2007.
When Cadbury was taken over by US food giant Kraft in 2010, shutting down a factory despite promises not to do so, business secretary Vince Cable promised to rein in overseas takeovers that erode the British industrial base (although nothing would come of that commitment). The non-dom tax break in the hands of private equity is in fact a far greater source of the influence he feared. It acts as a kind of reverse protectionism in which overseas control is favoured over home control and can only militate against a sustainable domestic economy.
Tax relief for millionaires using tax havens was, however, exactly what Gordon Brown permitted and extended over thirteen years at nos 10 and 11 Downing Street. His imperviousness to his own previous convictions was, for some reason, strongly correlated to the generosity of a group of non-dom Labour Party donors, including Ronald Cohen and industrialists Lakshmi Mittal and Lord Paul, who had rallied to the New Labour cause. Between 2001 – when party donations were first published – and 2010, the non-doms donated around £10m, more than the cost of a typical general election campaign.
In 2006 accountants Grant Thornton estimated that in the previous year Britain’s fifty-four billionaires, mostly non-doms, paid tax of £15m on combined fortunes of £126bn.
Non-dom businessmen, footballers, bankers, hedge fund managers and entrepreneurs all have a competitive advantage over their home-grown rivals. Highly geared private equity-owned businesses generating high but risky returns for their owners and less security for their employees can exploit the non-dom advantage to gain an edge over more traditionally owned companies.
As one tax commentator put it, ‘We might as well go the whole hog and apply to become the 27th Canton of Switzerland.’
The war on tax avoidance had already been slipping through the Inland Revenue’s fingers since the early 1990s, as Conservative governments all but froze the recruitment of tax inspectors and left the department hopelessly outgunned.
Just as Northern Rock could gear up its perpetual mortgage machine undisturbed by irksome regulators, so multinational companies must be allowed to structure their tax affairs without too much hassle from prying tax inspectors.
As one former tax inspector told me: ‘HMRC began to change from impartial policeman of the tax regime enacted by parliament, smoothing its rough edges in exceptional cases through negotiation and compromise, into a self-appointed adjudicator, policing the law only to the extent that it did not interfere with the global ambitions of multinational enterprises.’
The multinationals that had captured the CBI – which should have spoken for business big and small but on tax at least was the mouthpiece of its larger members – wanted more than just a friendly tax administration, welcome though that was. They demanded nothing less than a rewrite of corporate tax law governing multinational businesses.
By the spring 2009 budget a crucial pillar of Britain’s international tax rules had been knocked down.
Right at the top, the Revenue began to see taxation issues affecting large companies in the way that the tax avoidance industry did, not in the way that tax inspectors seeking to apply the law might be expected to. What started out a decade before as an attempt to tax big business through ‘a relationship of mutual trust’ became one that involved, in the words of the Varney review, ‘taking the business perspective into consideration in … implementing policy decisions’ and then strayed alarmingly into applying tax laws as companies wanted them applied, not as parliament had decided they should be.
It doesn't take a degree in constitutional theory to appreciate that parliament makes laws and the executive arms of government, such as HM Revenue and Customs, implement them. But this centuries-old principle came under severe strain towards the end of the twenty-first century’s first decade through the corporate capture of the tax authorities.
By 2011, HMRC never tired of pointing out, the six-year-old ‘high-risk corporates’ programme had raised over £9bn from settling tax disputes.18 It gave the impression of an aggressive tax authority bearing down on tax avoidance. But it was a charade.
Vodafone’s deal, for example, would count as a £1.25bn success, the billions relinquished simply ignored.
Without impressive leaks, nobody would even have known that Barclays was avoiding tax on an economy-shifting scale.
The broom that should have been cleaning up large-scale corporate tax avoidance was sweeping it under the carpet instead.
At the same time, designing financing schemes to funnel interest into tax havens and ‘tax-efficient supply chain management’ – i.e. transfer pricing schemes – for the biggest companies to siphon profits out of the UK into lower tax areas remain among the major accountancy firms most profitable lines of tax work.
Even when large businesses do face a tax inspector across a desk, they encounter nothing like the suspicion faced by smaller ones, their conduct considered all but beyond reproach. By 2010 penalties for fraudulent or negligent understatements of income charged on all 770 companies dealt with by the Revenue’s Large Business Service had dropped to £0.4m, or around 0.01% of the tax they had under-declared on their tax returns.27 This was around 200 times lower than the rate applying to other businesses.
By 2011 not a single corporation tax avoidance scheme unearthed by the 2004 disclosure rules – of which there were hundreds, at least – had been taken by the Revenue even to the first tax tribunal.
The government and the country’s most senior tax inspector had become salesmen, and what they were selling was Britain’s tax system.
The legislation in question would effect the comprehensive relaxation of the taxation of British multinationals’ overseas profits under the ‘controlled foreign companies’ laws that George Osborne had announced in the previous day’s budget. *
Not only did Osborne accelerate corporation tax cuts to the lowest rate of any major Western economy – 23% by 2014 (since cut to 21%) – he also took an axe to the offshore anti-tax avoidance ‘controlled foreign companies’ laws and announced a tax emption for companies’ tax haven branches. The package would slash the largest companies’ tax bills by around £7bn over four years, the Treasury estimated.
It would now be straightforward for a company to fund its overseas operations by borrowing in the UK, generating tax-deductible interest expenses to reduce its taxable profits here, while ensuring that the profits from using this money aren't taxed here – or anywhere else for that matter. *
One well-informed tax specialist blogged, under the heading ‘Corporate tax reform and the death of UK corporation tax for large multinationals’, that the changes ‘will likely lead to most large multinationals paying significantly reduced or no UK corporate tax’. It is a prophecy of doom – or joy for the tax-dodgers – that is shared by Britain’s leading tax advisers.
The trashing of the corporate tax system was a stunning and artfully executed victory for big business and its champions in the Treasury in the face of what, before the 2010 general election, was already growing public disquiet over tax avoidance.
Chancellor Osborne and his junior minister David Gauke could ease the offshore tax rules to the point that Britain would become a corporate tax haven where contrived avoidance schemes aren't needed anyway.
And when it came to piloting their new rules through parliament in the 2011 and 2012 Finance Bills, there was never going to be any meaningful scrutiny as the Labour opposition team were briefed (free of charge) by PricewaterhouseCoopers – the accountancy firm probably standing to gain most from advising on the offshore opportunities opened up.
The implications go beyond immediate tax loss. Tax breaks available only to the largest multinationals hamper the competiveness of smaller ones that can't cut their tax bills with an offshore finance company or by shifting their brand names into a tax haven. What’s more, tax concessions for diverting profits into tax havens will take jobs out of the country.
The companies that George Osborne now wants to call Britain home will come not to do real productive business employing real people, although they may create some work for the accountants and tax lawyers needed to exploit the new rules.
By 2012, the richest multinational corporations had put themselves beyond what was officially considered tax avoidance. Writing their own laws, they had created the offshore opportunities to reduce their tax bills way below headline rates, but now with a parliamentary seal of approval. And if parliament approves, on the official definition it can't be tax avoidance.
Big business, tax avoidance advisers, and the government they had captured had got what they wanted: Britain, the premier twenty-first-century tax haven for the world’s multinationals.
In the same August 2011 week that Prime Minister David Cameron promised Britain’s rioting feral underclass ‘we will track you down, we will find you and we will punish you’ and magistrates jailed a youth for stealing £3 worth of water, it was with a special kind of upper-class insensitivity that the Prime Minister’s fellow Bullingdonian George Osborne granted immunity from prosecution to the feral financial classes who were looting the economy of billions.
The British government remains content to feed the PFI industry contracts that will cost public service budgets over £250bn on the understanding that it would make a commensurate tax contribution. When it was shown that this simply doesn't happen, the government looked the other way. It accepted public services as tax avoidance schemes.
British state was fiscally eating itself. *
The looting of developing countries by corrupt elites has long captured the headlines. The more subtle and generally legal tax avoidance methods deployed by some of the biggest corporate players in these economies, by contrast, went largely overlooked until recent efforts by campaigners led by the Tax Justice Network and Christian Aid brought the issue right up the political agenda.
When the charity ActionAid and I teamed up to take a closer look at one of Britain’s largest operators in the developing world, SABMiller, we discovered the shocking reality of tax avoidance there.
Piecing together a multinational’s faraway tax affairs is not, however, a straightforward matter, so we focused on the group’s operations in just one country, Ghana, where per capita daily income is less than £3.
SABMiller has bought into all the standard tax-planning techniques.
Once it had paid its finance costs, Accra Breweries was left with a £3m loss. In three of the four years it thus paid no corporate income tax, and in the other sent a cheque to the Ghanaian government for just £0.2m.
The pattern appeared to be repeated for SABMiller’s operations elsewhere in the developing world:
The result is a serious dent in developing countries’ revenues and their efforts to move out of aid dependency. Ghana takes 22% of its gross domestic product in taxation, far more than its neighbours but still a long way behind the 40% typically raised in the rich world when its citizens need public services every bit as much.
While it is impossible to quantify the economic benefits that eradicating tax avoidance would have, if SABMiller is anything to go by it would be very significant.
Like many others, Shell was happy to fill my inbox with claims of corporate social responsibility, but not hard facts and figures about tax arrangements. And I couldn't help feeling that, by paying no corporate tax but doing some good deeds, the world’s second biggest company was saying politely but firmly: ‘We’ll decide how we contribute to the societies we operate in, thank you very much, not their elected governments.
The industry in restructuring major conglomerates in order to slash tax bills – which grew rapidly in the rich world in the 1990s – has now reached developing countries that have far weaker defences against the onslaught. *
Tax planning, in other words, sends economic control over one of Ghana’s more important local businesses out of the country and into one at least fifteen times wealthier.
This trend would be serious enough without the encouragement of the British government. But the changes to laws governing the tax haven subsidiary companies of British multinationals, outlined in chapter 7, will make the avoidance of tax in developing countries far easier.
One partner from PwC summed up the tax industry’s reaction: ‘The ability to finance overseas operations in a tax efficient way that is mandated by government is a very welcome change.’
It will be left to under-resourced and inexpert tax authorities in developing countries to mount any kind of challenge to the schemes, and it’s obvious who will win that battle.
British taxation policy really had been so comprehensively captured by the world’s biggest corporations that screw-the-poor policies like these could be written into the statute book at their whim, without a pang of conscience being felt anywhere in Whitehall.
With some straightforward offshore planning the biggest multinationals can now take their tax rates way below any headline rate the government announces. The club’s members have rewritten the rulebook so that they will no longer need tax avoidance as the government chooses to define it. They can shave billions of pounds off their tax bill without finding a loophole or even getting a cosy deal. They just follow the very laws they themselves drafted.
The capture of tax administration by the tax avoidance industry has been exposed, too. But it certainly hasn't been remedied. Too much tax law remains at the service of tax avoidance. If the British tax system is ever to be fair, if we really are all to be in it together, the scandals of recent years must translate into radical action.
A commitment from George Osborne in the wake of the Starbucks scandal to work within the OECD to ‘strengthen international standards’ appears likely to fall woefully short of this.
Britain could isolate and if necessary close down the tax havens within its direct sphere of influence and through domestic tax law make it far harder to get money into other recalcitrant tax havens in the first place.
One specific and immediate measure against offshore tax evasion should be to tear up the British tax agreement with Switzerland that enshrines tax haven secrecy and decriminalizes offshore tax fraud.
Over the last few years the British government has ripped the guts out of laws that protect the country’s corporate tax base. It has adopted a ‘worst of all worlds’ system that exempts British multinationals’ foreign profits but allows tax relief for the costs of funding them. In doing so it has turned Britain into a corporate tax haven, inviting multinationals to shelter income offshore and encouraging them to place real business overseas. These developments need to be reversed at the first opportunity in order to restore some integrity to the UK corporate tax system.
Tax avoidance needs to become a two-way bet in which the avoider can lose as well as gain. Most carefully planned schemes involve neither the fraud nor negligence required to trigger penalties (and where they do the authorities generally turn a blind eye), so tax avoidance goes unpenalized and there is no deterrent to avoiding tax.
When it comes to tax administration, there are two crucial tasks. One is to disengage the corporate elite and HMRC’s upper echelons from * the warm embrace in which they have been locked for too long.
The second task is to reverse the jobs cull of recent years. In April 2005 HMRC employed 105,000 people; five years later this was 68,000 – a fall of 35% with more cuts to come. The budget for chasing up tax avoidance and evasion has almost halved, from £3.6bn to £1.9bn, in five years. *
Yet this is among the most economically productive activity in the country. With qualified tax inspectors recovering many times their costs (the multiple for someone dealing with the biggest cases running into three figures), a major recruitment and training drive would pay for itself several times over in the short run.
Taxation needs to be reclaimed from the vested interests by public and parliament. That MPs were unable to scrutinize major tax avoidance scandals involving Vodafone and Goldman Sachs was itself scandalous.
Tax belongs to us and, although it is often complicated, we have to get to grips with it. Campaigners need to educate themselves and take on those who would abuse the system and remain unaccountable. Non-governmental organizations need to step up their impressive work to date, acquiring more expertise with which to confront tax avoidance.