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.
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Tax avoidance is a billion pound problem, but it’s being made worse by this New Labour government. At the risk of repeating what ha been said many times: Brown was not elected by the Party to the Party leadership; this government is camping on Blair’s 2005 majority; the circumstances are so changed from the manifesto upon which Blair was re-elected there should have been a general election when the debt crisis hit and the choice of means to deal with it was so divided; in truth there should have been a general election to confirm Brown in office.
Once you break the democratic arrangements of any state, then you break all the arrangements on conformity to an agreed state agenda.
Yes, we should all pay our fair share of tax. No we should not recognise any duty to pay it to Brown’s New Labour regime. Not after his clunking fist landed in the face of democracy.
Rubbish
Anyone who voted Labour in 2005 knew they’d got Brown
Blair said as much
Richard
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Mr Murphy,
I am very closely following your research into tax avoidance and find it extremely interesting and useful while writing my dissertation on this topic.
Could you please specify a bit more clearly where the £4 billion figure lost to UK exchequer comes from ?
It is not explicitly clear from the Hansard data neither from your article ?
Does it involve estimated overall tax loss to the UK , or the amount of money that is exported from the economy annually etc ?
this clarification would be very much appreciated
Jake
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