Tax havens cost the UK at least £4 billion a year

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TUC research published today shows that tax avoidance by wealthy UK residents through tax havens cost UK tax payers at least £4 billion a year, as well as providing the first ever analysis of the role of individual tax havens in tax lost to the UK. This shows that most of the loss to tax havens is caused by Jersey, Switzerland, the Isle of Man and Guernsey.

I am the author of this research. It was based on data published in Hansard in February in a parliamentary answer to Austin Mitchell MP.

The logic behind the work is relatively straightforward. Under the EU’s Savings Tax Directive UK residents who held off-shore bank accounts in tax havens could either declare all their interest to HMRC or opt to instead have 15 per cent tax withheld from the interest payments by the tax haven where they held their account during the period under review. Three-quarters (75 per cent) of the tax deducted was then paid to the UK government, with the rest being retained by the government of the tax haven, making the effective UK tax rate on such off-shore accounts 11.25 per cent rather than the 40 per cent that would be paid if the money was held in the UK in the period the research covers.

This gave rise to the following data on receipts after converting all currencies at official HMRC rates for the periods in question:

Converted

Converted

Converted

Three year totals

totals

totals

totals

Country

£'000

£'000

£'000

£'000

2005-06

2006-07

2007-08

Austria

145

486

766

1,397

Belgium

453

1,099

1,569

3,121

Luxembourg

1,202

2,622

2,689

6,514

British Virgin Islands

0

1

2

4

Gibraltar

87

422

0

509

Guernsey

2,460

8,028

8,206

18,694

Isle of Man

6,393

9,765

10,700

26,858

Jersey

6,096

14,031

16,890

37,017

Netherlands Antilles

0

0

0

1

Turks and Caicos Islands

2

5

5

11

Andorra

40

0

141

181

Liechtenstein

59

159

233

451

Monaco

254

614

753

1,621

San Marino

2

8

10

20

Switzerland

5,697

5,543

17,294

28,534

Total

22,891

42,784

59,260

124,935

UK tax lost to haven

7,630

14,261

19,753

41,645

Imputed gross income

203,480

380,302

526,754

1,110,536

UK tax lost because

of non-declaration in UK

50,870

95,075

131,689

277,634

Total tax lost to UK

58,500

109,337

151,442

319,279

Lost to Guernsey

6,286

20,517

20,972

47,774

Lost to Isle of Man

16,339

24,955

27,344

68,638

Lost to Jersey

15,579

35,858

43,163

94,599

Total Crown Dependencies

38,203

81,329

91,479

211,012

Lost to Switzerland

14,560

14,165

44,196

72,921

Lost to others

5,737

13,842

15,767

35,346

For these purposes Austria, Belgium and Luxembourg are tax havens because they refuse to exchange data with the UK under the EU STD.

The payments made have been grossed up on this ratio to estimate the gross income not being declared. In three years this comes to more than £1 billion.

The tax lost has then been calculated, which would be 28.75% of the gross income because it is almost certain that anyone opting for tax withholding will not be declaring their income in the UK. If that was their intention they would have opted for information exchange. This tax lost increases from £58 million in 2005/06 (the year tax withholding started, and was a nine-month period for UK reporting purposes) to £109 million in 2006/07, leaping to £151 million in 2007/08.

The figures show that over the last three years the total tax lost was £319 million on a total income from such accounts for their holders of £1.1 billion. Most money was lost over the period reviewed through accounts in Jersey (£94 million), Switzerland (£72 million), the Isle of Man (£68 million) and Guernsey (£47 million).

But these figures are a serious underestimate of the total tax lost through tax havens for two main reasons. First only relatively small account holders put their funds in their own names in these places. I estimate based on data published by Jersey Finance and other sources that more than five times the amount held in individual’s names will be held in trusts or companies for the benefit of wealthy individuals. These trusts and companies are not covered by the EU Savings Tax Directive and as such can be used to avoid UK tax with little risk of detection. Secondly evidence published by Merrill Lynch in the World Wealth Report suggests that only 18% of people's portfolios held offshore are likely to be in cash. I would add, these losses do not relate to non-domiciled people.

Extrapolating the above data, and going for lower ratios, and assuming the annual loss is £150 million in the above table, the likely loss to the UK Exchequer from this is at least £4 billion.

As TUC General Secretary Brendan Barber said:

The mechanisms of tax avoidance are always hard to understand, but this is a very simple story. If the super-rich held their money and assets in the UK they would contribute at least £4 billion pounds extra. This would be enough for the government to meet its target to halve child poverty by 2010, and would mean that instead of being squirreled away in tax havens it was being spent in the real economy here helping us fight recession. With the tax take falling because of the recession, there can be no better time to get tough with the super-rich, so many of whom did so much to throw the world into recession.

We welcome the Prime Minister's call for the G20 to get tough on tax havens. This is an important demand of the unions, development and faith groups organising the Put People First march for jobs, justice and climate on March 28th in the run up to the London G20 summit. But the UK government can do much more.

It should back plans to reform the EU Savings Tax Directive to enhance information exchange between tax havens and the UK and other member states. It could also require that all the many tax havens it controls cancel the tax withholding option they now offer that provides this continuing opportunity for tax abuse. And we could require that they place the accounts - and even trusts - that are registered in their domains on public record so everyone can see what is going on in each tax haven.

Tough stuff? maybe. But what’s more important? Children in poverty or those evading tax in these places? It’s not a tough decision, is it?

And finally, before anybody points this out, these estimates include the impact of the domicile rule, they exclude places like Singapore and Dubai, they exclude all tax avoidance and they exclude all corporate tax activity.

Take these into account and this data is completely reconcilable with the estimate I've previously published of a minimum total cost of tax havens to the UK each year of at least £18.5 billion.