The extent to which the UK has become a tax haven became apparent yesterday at the Public Accounts Committee Hearing when Margaret Hodge asked why 30% of all UK companies are not asked to submit tax returns, a statistic based on my research in 2009-10.
Jim Harra replied that the companies in question were either dormant or not liable to tax in the UK as they were entirely trading overseas. He cited the example of Germany as a country where a great many UK registered companies trade because it is much cheaper to form a UK company than a German one. He even resorted to claiming that "off the shelf companies" held by company formation agents were another explanation - which is absurd: they don't stay on the shelf that long.
I find all these answers deeply troubling. The last is troubling because it indicates an official thrashing around to find an answer when they don't really know what they're talking about, but the other two are more profound.
Firstly he claimed that form CT41G sent to a company when incorporated showed whether a company was dormant or not. It does, if its completed. There is no penalty for non-completion.
Second, the exemption from filing a corporation tax return if form CT41G with a statement that the company is dormant is completed is almost invariably 5 years. That's absurd. Just because a company is dormant at a point in time does not mean it will stay so. This five year exemption granted without almost any questions being asked or evidence being supplied is therefore a simple opportunity for those in the know to form a company, declare dormancy and then trade with tax impunity. And although it is true that forms are sent out towards the end of the five year period to enquire whether or not the company has traded these do not ever appear to be followed up in practice. The system is wholly unpoliced, a point on which Margaret Hodge did not, on this occasion, drive home her advantage as much as she might.
The reality is that there is simply no excuse for not sending out a corporation tax return to supposedly dormant companies every year - and for pursuing it if not submitted. Ways of policing the arrangement are included in the UK Corporate and Individual Tax and Financial Transparency Bill I have written for Michael Meacher MP and which is back before the House of Commons for debate on Friday.
And this answer also ignored that fact that at least a third of all tax corporation tax returns requested are not submitted - meaning the overall failure rate can be as high as 50%. That's why corporation tax is now a voluntary collecting box arrangement in this country due to HMRC failing to undertake the obligations imposed on them by parliament.
The claims on residence are even more troubling though. The default assumption of UK tax law is that all UK registered companies are UK tax resident unless proved otherwise. As the HMRC manual says:
The incorporation rule at CTA09/S14 states that, with certain exceptions, a UK incorporated company is resident in the UK for tax purposes. This rule was originally introduced as FA88/S66 and FA88/SCH7.
The exceptions are the important bit, of course. Broadly speaking the same section of the HMRC manual says these apply as follows:
Some companies may clearly fulfil the condition, for example, a company which can show that
- its place of management, for example, its Head Office, is in a country which, at least in principle, taxes companies incorporated in the country on their worldwide income
and
- the company is taxed there on the same basis as a company incorporated there.
These are strict conditions and they need data to prove they are true. So, to qualify it must be known that:
a) The company is based abroad
b) That the company where it is based taxes it
c) Its world-wide income is taxed
There is no way this can be known without a corporation tax return that requires accounts to be submitted with evidence on all three points - and part of that evidence would have to be data on which country is taxing it under what reference with some indication of tax being paid.
But that's not what Jim Harra said HMRC demand. Instead he said that HMRC simply do not require corporation tax returns or accounts from these companies. Now that is worrying. Because that's something very different to what the law seems to demand of HMRC - which is that it must be satisfied on the basis of evidence that the company is not resident here and because it is resident somewhere else. A bland statement from a director cannot prove that - only evidence of another tax jurisdiction accepting taxing responsibility can do that and that requires a corporation tax return with that evidence attached.
But that is not being required so what we have is a situation where HMRC is simply turning a blind eye to the fact that UK companies are being formed at almost no cost and no economic gain to the UK to be traded overseas, often run by nominee UK directors and shareholders to hide their true identity and are almost certainly as a result not paying tax anywhere but about which companies HMRC ask no questions, so facilitating their fraud.
This, to put it bluntly, is the activity of a grossly negligent tax haven state. It's what I have accused the Crown Dependencies of for years, and now it is being admitted quite openly that it is what is happening here in the UK.
This farce has to end. Proper regulation of UK companies has to be put in place, Every company has to submit a UK corporation tax return and accounts. penalties have to be imposed on those that do not do so. And the UK has to proactively collect data on companies registered here but trading elsewhere to make sure we fully cooperate with other counties to ensure that tax is paid in the right place at the right rate and at the right time. The last thing HMRC can say is that they are ensuring that this is the case at present and that is an outright scandal.
I've said it before and I'll say it again: we have a tax authority that seems better suited to running tax abuse than collecting tax right now and that has to change.
And we're fast heading for being the default tax haven for Europe so negligent are we on these issues. That has to change too. But where is the willingness to force that through?
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Whilst I suspect there’s an element of truth in HMRC’s statemenst that some companies simply aren’t liable to tax – becasue they are non resident and trade overseas or are dormant etc. – But it simply canlt be right to just rely on that and to not have some of policing in place to ensure that cmpanies not filing and/or paying UK tax do indeed qualify to not pay tax.
Even if it’s a not a full return – the filing of accounts and something to declare the directors rationale for not paying tax at a minimum ought to be in place.
When I last did UK corporate tax compliance wihtin a group, we always sent copies of our dormant company acocunst to HMRC on an annual basis to ‘prove’ they were indeed dormant. And have had many disucssion regarding non resident companies – both with HMRC and overseas fiscs (where we had non UK incporated companies that were resident in the UK). I guess as a MNC who had a good history of filing we were an easy target to police. But that level of policing ought to be followed as a matter of course, I would have thought.
Agree with your last sentiment
I agree there’s definitely an issue here (though I got a bit confused in the column as to what CT return was needed from a ‘non-tax resident’ co – I assume you just mean a covering letter to HMRC saying “here’s our overseas return” would suffice, rather than another whole return for the company to complete & HMRC to process? Apart from anything you’ll give the constitutional lawyers a logic headache about submitting a return to prove you’re not within the charge to tax; IIRC TMA requires returns only if you are within the charge to tax. Mucking around with something that fundamental is a recipe for collateral damage.)
But whatever the solution, right now HMRC just don’t have the resource to police it, and attacking them for resource failures isn’t fair when they can’t turn round and publicly blame the politicians who hold the purse strings; that’s where you need to direct your complaints, otherwise you’ll just have to accept that if chasing dormants goes up then chasing ghosts, or answering the phone to respond to compliant tax payers’ queries, or something else they currently do, is going to go down.
I do criticise them: they do not produce tax gap data that shows they need the resources – so my justification is wholly appropriate
And yes – you can be required to do a tax return with no income – all Uk companies are prima facie resident unless proven otherwise – it would take little effort to add a page for use by companies claiming not to be to justify their position
All of this consumes HMRC resources. The number of dormant companies in existence must be enormous. The suggestion that there must be an additional annual compliance requirement which is then actively policed and investigated is not a trivial suggestion, and would remove resources from other areas of HMRC. It is not at all obvious to me that this is a good use of HMRC’s resources. Changes like the ones you are proposing must surely be measured on a return on investment basis. What makes you so sure that this will deliver an equivalent or better return when compared to OTHER projects/reforms which are already underway, or are competing for limited resources?
I suppose where I am getting to is that it does not contribute to sensible and constructive public discourse if we attribute to HMRC the worst of motives just because they do not do simply everything they could possibly do, with infinite resources available, to close the tax gap.
Which is why I have proposed legislation to identify as accurately as possible which companies are and are not dormant – which is this year’s private member’s bill from Michael Meacher
On the returns point, my apologies; you’re right – s11 TMA allows HMRC to demand a return from any company, whether within the charge or not. I didn’t recall correctly… But doubling the number of returns running through the Gateway would I suspect have capacity implications, and they’d need to engineer the validation/scrutiny carefully for the exercise to have any meaningful value. Not impossible, but probably expensive both for HMRC and compliant dormant/non-res Cos. (I think we’re probably agreed that we don’t particularly care about the cost to those abusing the current system).
On the tax gap evidence though – are you saying that HMRC should inflate their figures so as to justify staffing levels? And it still wouldn’t be HMRC deciding the budgets, it would be the politicians, who should surely be able to see the resource gap already..?
What the law ‘demands’ of HMRC is that it husband its resources as best it can to optimise the net return to the Exchequer (hence the Commissioners’ discretions) and if you don’t agree with how they spend what they’ve got, that’s one thing (and has its corollary impacts should they reprioritise), but criticising them for not getting funding in the first place is quite another when the decision is out of their hands. I’m not sure I like the vision of a system where HMRC has to massage its image from year to year to make it more attractive to whatever is currently on the political hit list simply to justify adequate funding.
Why don’t we just allocate the resources need to collect tax
I think collecting what I estimate to be £16bn of missing tax would make this more than worthwile
Wouldn’t you agree?
I think you will find that the “certain exceptions” you have quoted only apply to companies that have been in that position since 1988. So I suspect there are very few companies that now fall within their scope.
That leaves the exception where a company is treated as resident elsewhere under the terms of a tax treaty.
The UK/Germany Treaty includes the following test:
3) Where by reason of the provisions of paragraph 1 a person other than an
individual is a resident of both Contracting States, then it shall be deemed to be a resident
only of the State in which its place of effective management is situated.
A much simpler test for HMRC to administrate.
You said in July these were estimates, nothing more, and you were going to redo them. Is that underway?
The original research used data on returns at a cut off date four months before the final closing date for that year, so is there a case for uplifting the number over the 12 month delivery period by projecting say an extra 30 or 30%?.
I also don’t understand how the lack of a CT return gives rise to any VAT loss when a) VAT returns are separate and (b)the VAT gap is measured, as you have noted, by a top-down approach. Are they linked in a different way?
And do you have any figures on the number of small clubs and societies (or small charities) who are legally treated as companies but not required to deliver a return?
The 30% not requested is a quite separate figure from those not submitting when requested: you are confusing two issues
The missing companies help explain the VAT loss
Sorry, I may not have explained myself very well. There is a 12 month window for the return to be delivered. The cut off date in the PQ was about 8 months into that period. That means about 4 months of data are missing. To adjust for that I thought you could use the 8 months of data to estimate what a full 12 months would look like.
Or another way would be to now check with the full 12 month period, which is what I thought you meant when you said you’d be doing more work.
Still don’t follow on the VAT side. I thought as they have to make separate VAT returns they are a separate problem from the company side.
No – you are still missing the point
There were about 2.8 million companies and only 1.9 million were asked to submit
The 30% is that difference – not the number who were asked who failed to then submit
I have answered the VAT point endlessly before
Quite right RM. The awful thing is that in the round you possibly understate your case. HM Revenue & Customs live on a myth. That is the way their current systems are designed. Yes there might be a law of diminishing returns or a cost/benefit re the collection of further taxes- but a) I don’t think we have reached maximum tax take yet and b) you can’t keep fleecing the tax compliant and ignoring the non compliant
without the compliant waking up to that fact.
Well said
That is the issue
So you are suggesting that there’s widespread fraud involving dormant companies that would justify adding the costs of filing a CT return to the many genuinely dormant companies to catch those up to no good?
But dormant companies are already required to file accounts at Companies House. Are you saying many of these are fraudulent? That’s quite an accusation.
If someone is trying to keep a low profile and stay out of the tax net, it seems an odd thing to do to form a company, bring yourself to the notice of the authorities and then file an annual return and annual set of accounts which render you liable to prosecution if they are false.
Do you have any evidence at all to support your accusations?
I am certain there is widespread abuse
And yes requiring a CT return – the work of a few minutes for a real dormant company – is a price well worth paying
After all, limited liability is not a right; it’s a privilege that has to be paid for
“I am certain there is widespread abuse”
As I say, for that to be true it can only mean fraud on a widespread basis by the filing of inaccurate accounts at Companies House. And if a company is filing false accounts at Companies House wouldn’t they do the same to HMRC? You haven’t addressed the point regarding accounts filed at Companies House and what you’re suggesting as a solution for perceived tax evasion is just an administrative cost to be added to hundreds of thousands of legitimately dormant companies which would achieve nothing.
Besides, simply saying you’re ‘certain’ that there is widespread abuse without offering evidence is akin to McCarthy’s declarations about ‘reds under the bed’.
Read my UK Corporate and Individual Tax and Financial Transparency Bill
Read this http://www.taxresearch.org.uk/Documents/500000Final.pdf