These are my links for May 30th:
Tesco’s claim that it doesn’t avoid tax has been blown clean out of the water by Private Eye. In this week’s edition the Eye notes that, as it puts it, Tesco has been avoiding corporation tax through a complex web of offshore operations. That is, of course, exactly the allegation the Guardian also made a couple of months ago, over which Tescos sued.
On this occasion, as the Eye recounts, Tescos has set up a finance operation in the Canton of Zug in Switzerland. The structure is as fantastic as that used in the joint ventures used for its so called sale and lease back deals on which the Guardian reported in February and on which I commented in March. The arrangement revolves around a UK LLP (whose accounts are available here) with partners comprising Hungarian and Irish subsidiaries of Tesco. The LLP has a branch in Zug. It is this branch which appears to be used to loan funds to non-UK based members of the Tesco group. As the Eye notes, the result is that Tesco is running an offshore finance operation on which tax is being paid at an effective rate of 6%. In just over two years some £66 million of income had been earned by this structure, saving Tesco some £16 in tax when comparison is made with the reasonable UK rate that one would expect Tescos to pay.
So significant is the activity that Tescos has committed more than £1 billion to it.
Full marks to the Eye for first rate reporting. I have little doubt that this story will stick since it is based on public data.
But let’s be clear what this means. First, the Eye has shown that Tesco is a tax avoider whatever reasonable definition of that term is used. The wholly artificial structure that Tesco’s has created in Zug can only be for the purposes of tax avoidance. The Eye has shown it has achieved this objective. This of course confirms something I have also consistently argued. Indeed, I have shown that Tescos has underpaid tax to the tune of £1 billion over the last nine years when its cash payments of tax are compared with the UK statutory tax rate.
Second, Tesco’s absurd claims of moral indignation when countering claims that the Guardian suggested it avoided tax are shown to be hypocritical. Which means the party is over for Tescos. As is the usual case when someone sues the Guardian, they have been shown to be making baseless claims. So, whilst I accept that the Guardian did get its article on the sale and lease back deal wrong in detail, it was true, as I suggested in my blog on that issue, that corporate tax avoidance was a key component in that deal, just as it is central to the arrangement that the Eye has now discovered.
All of which says that Tesco’s claim that the Guardian launched a ‘devastating attack on its integrity and ethics’ when suggesting Tesco avoided tax was, to put it nicely, bunkum (and that’s being as polite as it is possible to be).
This suggests that it’s time for Tesco’s to say ‘fair cop’ and to withdraw from its case against the Guardian. It should accept that even if the Guardian made a technical mistake in the way it presented its story, that:
- it was avoiding corporation tax when locating its sale and lease back deals in Cayman,
- that it is a seasoned tax avoider, and
- it does create complex offshore structures for this sole purpose.
This structure in Zug is proof if ever it were needed. All of which means that Tesco’s claim against the Guardian has already seriously backfired, simply because it must have known that it’s protestations were inappropriate.
But there is a broader issue to consider as well. Tescos has proved that HM Revenue & Customs are 100% right to challenge the structures that big business is using to abuse the tax systems of the UK and other countries. It’s exactly the sort of structure that Tesco is using that the proposed rule changes on foreign profits are targeted at. But its these same rule changes that have created furore and have caused some companies to say they wish to leave the UK. But what is wrong with targeting this sort of abuse, and why should multinational enterprise be allowed to operate in this way? These structures are, however looked at, abusive. And that’s why they must be brought under control. No one has the right to abuse the ordinary people of the UK in this way by denying them the tax they have the reasonable right to enjoy.
Which then leads to the obvious question, which is why Alastair Darling has acceded so speedily to the will of this group when he should be in possession of the facts on this sort of abuse? Might it just be the time for the Revenue and Treasury to go on the counter offensive and make quite clear what sort of challenge they are facing by publishing, even if in anonymised form, examples of the abuse they are tackling? I do think this appropriate. After all, how else can people realise the extent of this abuse if government is not going to put as much effort into stopping it a they do into the equally repugnant, but much less costly, fraud in the benefits system?
This is a question that really does need to be answered.
AccountingWeb has an article in which it is claimed that 95% of accountants may be negligent with regard to tax planning because they do not tell all their clients of all the tax planning schemes that might be available to them.
I think that an absurd suggestion and have said so on that site, saying:
This debate has been around for a long time. Let’s deal with the tax avoidance thing first. Most people are risk averse, especially when they know the facts. Kite G has outlined some of them. Most accountants are risk averse, especially when they know that the cost of a tax investigation on a scheme they sold to a client will probably fall to their account (and don’t always rely on insurance). In that case, and given the ethics of tax avoidance (or rather, the absence of ethics in tax avoidance which means that in my opinion a professional person has a duty not to partake in that activity) then the accountants position can be made abundantly clear to a client at the outset of the relationship – and can be summarised in the engagement letter. It can be stated that arrangements that the accountant thinks to be tax avoidance will not be offered to the client for consideration on the basis that the risk inherent in them is always considered unacceptable for either accountant or client to consider. Use David Ulph’s definition of tax avoidance if it helps:
Using artificial or contrived methods of adjusting taxpayers’ social, economic or organisational affairs to reduce their tax liability in accordance with the law while not affecting the economic substance of the transactions.
That gets one contentious issue out of the way. Completely.
Let’s now get back to the point. Does an accountant have a duty to advise a client on every tax compliant planning opportunity available? No, of course they don’t. To say they do is complete cop-out of professional duty. Client’s engage accountants to take stress of their shoulders in an area they do not understand: in our case accounting and tax. They do not choose to have an accountant to be the recipient of endless unrequested advice on complex issues they do not comprehend and on which they are not qualified to form an opinion. They paid an accountant to do that.
So, it’s an accountants duty to use their professional judgement to suggest opportunities to clients that might be suitable for them. But that has to take into account the broad range of knowledge an accountant has.
Let’s take an example. It remains true that limited companies can, theoretically, save tax for a lot of self employed people, most of whom have no regard for the corporate veil, the need to account for tax whenever funds are withdrawn from a company, and who believe that any account with money in it is theirs to raid. It is completely negligent of an accountant to recommend the use of a limited company to a person who does not have the discipline to operate it within the constraints of the law and so expose that client to all sorts of risk. So why do it, to then follow up with a comment which basically says ‘You could do this apart from the fact that I think you far to negligent to manage the arrangement?’ Is that good client relationship management? I don’t think so.
In other words, the accountant has a duty to exercise their own judgement. That is what being a professional person means: exercising judgement. The solution recommended here is a technical solution designed to alienate clients. I’d suggest giving it a very wide berth.
But as for the glaringly obvious advice everyone should supply, why aren’t you doing that by email, web site, in routine letters, even (hard to imagine they’re relevant anymore, but someone must do them) newsletters? If the client refuses to take the service, so be it. Make sure it’s been offered. Then liability risk is removed.
That is being proactive.
I get very annoyed by accountants who claim they have no choice in what they do. They have. They’re not technicians who deal in certainty. They’re professionals who deal in uncertainty. That means choice is an essential part of their work. To deny that is seriously misleading, at best. It is as often irresponsible because it creates an entirely false impression of what a practicing accountant can and should do.
And what they should do is form judgements. This article appears to deny that essential truth. As such it is very poor advice indeed.
I note BAT now has a new reason for not paying UK tax. Previously it was that it’s UK head office made a loss. That’s been their story for the last year or so, until a week or two back.
Now I note that they told the Sunday Express that it’s because all it’s tax is paid abroad and so it doesn’t need to pay further tax here. Which one is true? Take your pick.
Either way this means it can only be upset about any proposed changes to UK corporation tax change because it thinks it is likely to pay tax as a result of what is proposed. This says only one thing, which is that it must have passive income in what might be considered a tax haven that might be caught under the new controlled foreign company rules that it does not want to pay tax on.
It’s either that or it’s making political mischief. Surely not, with former Chancellor Ken Clark on its board? Again, take your pick. Country-by-country reporting would, of course, prove the point, and so be of inestimable worth, yet again.
What I do think is it is making more noise than can be justified. Curiously, so does every journalist I have spoken to.
It’s now being said that capitalists are the worst friends of capitalism. Is BAT trying to prove that? Or is it just a case of the company protesting too much?
Disclosure: I am an external research fellow at the Tax Research Institute at the University of Nottingham. Some activities at the University of Nottingham Business School are sponsored by BAT.
Is this justice?:
If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.
That’s basically been UK law since 1869.
There is an alternative. This has been law in Australia since 1901 (tax excepted):
In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.
Which do you think is likely to give the best result?
I think it’s obvious that it’s the latter.
That’s why we argue for purposive legislation.
I was quoted in the Independent on Sunday saying of the new corporation tax review:
It has no representatives from the professions, only one from the TUC, none from small business all of whom have interests in corporate tax – how can it come up with the right answers?
Yet again, I wonder why it is that it is TJN that is making these obvious points.
Incidentally, the quote omits the fact that I said civil society also needs to be represented.
The point is obvious: asking big business for solution to corporation tax is so one sided a request that the wrong outcome is almost inevitable. Balance is needed, and that’s what we’re calling for.
The Sunday Express is the latest paper to notice the comments John Christensen, the international director the Tax Justice Network, and I have to make on tax. I apologise for the time taken to get to them on here, but I’ve been travelling.
Several things shocked that paper. The first was that those companies complaining most about changes in UK tax are those that are also paying little or no tax here. This is a fact only known because of research I have done, now covered by numerous papers.
Second they were surprised at how hard it is to find out how much tax a company does pay with any accuracy. They want to take that issue up and run with it.
Third, they appreciated that if the largest companies in the UK are going to pay less tax someone is going to pay more. Tax need not be a zero-sum game, but given the state of the economy right now it is in the UK. And as I pointed out, this may well be the smaller companies of the UK. Already the largest companies pay little more than 22% on average, which is a figure that is bound to fall as the headline tax rate declines. But already many small companies pay tax at higher rates than that, whilst medium sized and large privately owned UK based companies might pay at more than 30% in many cases.
As far as I am concerned, and as far as TJN is concerned, progressive taxation has as much role in the corporate sector as it does in the taxation of individuals. Capacity to pay is vital in both cases, and in the corporate sector has to be linked, at least in part, to capacity to raise capital from external sources, which multinational quoted companies have relative ease in doing but which is something smaller companies have very great difficulty in achieving, meaning any tax bias must be in favour of smaller companies.
Despite that we are now seeing the exact reverse situation developing. Now I know all the abuses of tax rules that take place in small business, and have written both about them and how to stop them. But whilst we keep our current corporation tax and company law what is not reasonable is that we have a tax system that is so clearly biased against small business and UK based companies and so clearly favours large business and the multinational enterprise.
What the Sunday Express did not point out though, but which does amaze me, is that it has taken the Tax Justice Network to draw attention to this. I would have thought that this would have been the job of the IoD, the ICAEW, the ACCA, the CBI, The British Chamber of Commerce, the Federation of Small Business and others. Don’t get me wrong. We’re happy to make the point, but we are surprised that these others, who are so often in print, are not saying the same thing and do not seem to be undertaking research on this issue either.
If they’d like to join with us in doing research into the effective tax rates of smaller business I would be delighted to work with them. I’m sure that this is something most of their members would appreciate. The methodology to do this exists. I’ve created the benchmark for comparison with the work I’ve done on larger companies. For the partner who would like to join with us to create some innovative and ground breaking research, perhaps in association with a medium sized form of accountants, the likelihood of excellent publicity is high.
Anyone want to give me a call? I’m keen to show that this is real issue for the companies that make up the backbone of British enterprise and that we need to get this right. Given that the future of corporation tax is on the agenda now, this is the time to do this work for the sake of smaller businesses in the UK. It’s your call. We can deliver the results. Just try 01366 383500.
I’m still struggling to believe that anyone could as blatantly promote tax evasion Konrad Hummler, a partner in Wegelin & Co., did when saying this to Der Spiegel:
German tax evasion is a legitimate defense by citizens attempting to “partially escape the current grasp of the administrators of a disastrous social welfare state and its fiscal policies.”
“Swiss-style saving outside the system” is something to which not only the wealthy, but also productive small and mid-sized businesses are entitled. “These people must be protected,” he says.
With opponents like this our job is made that much easier.
These are my links for May 23rd:
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