ECJ EUROPEAN Cleaning Journal

Whether driven by righteous indignation or plain envy, the bandwagon for a crackdown on tax avoidance by the super-rich and multinationals has gathered pace since the Panama Papers revelations. Hartley Milner looks at some of the actions pledged and asks whether there can ever be fairness in our tax systems.

Whether driven by righteous indignation or plain envy, the bandwagon for a crackdown on tax avoidance by the super-rich and multinationals has gathered pace since the Panama Papers revelations. Hartley Milner looks at some of the actions pledged and asks whether there can ever be fairness in our tax systems.

Such is the resentment generated by tax avoidance in the UK that late last year a band of angry traders from a normally peaceful Welsh town rose up and started a rebellion that would have had their historic local hero Owain Glynd?r applauding from the grave.

As in medieval warrior Owain’s day, the object of their ire was the Crown – or rather Her Majesty’s Revenue and Customs (HMRC) which they claim is unfairly clamping down on small businesses while overlooking the huge multinationals that pay little or no tax in the UK.

The alliance of family-run shops in the market town of Crickhowell took expert advice and submitted a DIY tax plan to HMRC, copying the offshore arrangements used by famous global brands such as Amazon, Google, Starbucks and Vodafone.

The traders’ journey to take the town to a tax haven was shown by the BBC early this year and centres on a trip they made to the Isle of Man, a self-governing British Crown dependency in the Irish Sea where Caffé Nero’s parent company is based for tax purposes.

“Until now, these complicated offshore tricks have only been open to big companies who can afford the lawyers’ fees,” said Jo Carthew, who runs Crickhowell’s Black Mountain Salmon Smokery. “But we’ve put our heads together and worked out a way to mimic them. It’s jolly clever really.”

But their long-term aim is not to avoid paying corporation tax, but simply to spotlight the unfair tax system and shame the government into doing something about it. It was hoped that the tax revolt, which also included the local coffee shop, bookshop, optician and bakery, would spread nationwide.

While not actually talking about a national tax rebellion, small businesses around the UK are seething over being singled out by the taxman as an easy revenue source. Investigations into SMEs raised an additional €623.8m in corporation tax in 2015 and the net is likely to be cast even wider in coming years.

Accountant and business adviser UHY Hacker Young said this extra yield shows HMRC has ramped up its probes into ‘soft target’ small businesses in a bid to slash the corporation tax gap – the shortfall between the tax that should be collected and the amount that is actually raised.

Small businesses

The SMEs’ share of the corporation tax gap contracted from €2.7bn in 2012/13 to €1.8bn in 2013/14, while the same gap for ‘large business service‘ stayed at €1.3bn across the same timeline.

“HMRC appears to be aggressively going after small businesses as ‘easy pickings’ and it’s possible they will look to accelerate investigations next year and beyond to further close the gap, rather than going after big enterprises,” said Hacker Young partner Roy Maugham.

But it is not only giant global corporations that have been embroiled in ‘tax avoidance’ revelations in recent times. The leaking of 11.5 million confidential documents from Panama-based corporate services provider Mossack Fonseca this year provided detailed information about more than 214,000 offshore companies – including the identities of shareholders and directors of the companies.

The first major casualty was Iceland’s prime minister, Sigmundur Davíð Gunnlaugsson. The leaks showed Gunnlaugsson owned an offshore company with his wife but had not declared it when he entered parliament. He was said to have concealed millions of dollars worth of family assets.
He stepped down from office amid growing public outrage that his family had squirrelled away money offshore but denied any wrongdoing.

Wealthy individuals

Then Britain’s prime minister, David Cameron, found himself pulled into the row after the papers revealed that he personally profited from a stake in an offshore investment fund set up by his late father that paid no tax. In an unprecedented attempt to clear the air, Cameron published a summary of his tax returns from 2009-15.

However, these showed he had received a €255,000 gift from his mother that could potentially avoid inheritance tax. In the UK, inheritance tax is not payable on gifts that are made at least seven years before the source dies, be they property or money.

In both cases Cameron had done nothing wrong, but his enemies promoted the revelations as further examples of how wealthy individuals are getting away with using legal or quasi-legal tricks to deprive the taxman and hang onto more of their money while ordinary working people are harried for every penny.

UK chancellor George Osborne and Labour opposition leader Jeremy Corbyn were the next to publish their tax returns, along with Scottish first minister Nicola Sturgeon, the Welsh Plaid Cymru Party leader Leanne Wood and Mayor of London Boris Johnson. Others simply refused, notably UK Independence Party leader and former commodity broker Nigel Farage. “Actually, I think in this country what people earn is regarded as a private matter,” Farage said.

In response to the Panama Papers revelations, PM Cameron announced in parliament that he was bringing forward plans to introduce a new criminal offence for corporations that fail to take adequate steps to prevent tax evasion. He said the government would also create a new taskforce to investigate the financial affairs of companies mentioned in the leaked papers.

The taskforce will be jointly led by HMRC and the National Crime Agency with support from the Serious Fraud Office and the Financial Conduct Authority. According to HMRC, it is already investigating 700 current leads with a link to Panama.

Tax avoidance is costing the world economy hundreds of billions of dollars a year. According to the most conservative estimates from the Organisation of Economic Cooperation and Development (OECD), between four per cent and 10 per cent of global corporate income tax revenues are being lost to tax avoidance.

The EU alone says its member states lose each year between €50bn and €70bn to those avoiding corporation tax. It estimates that multinationals can pay up to 30 per cent less than rival companies which do not operate across borders.

Tackling corporations

The European Commission has announced proposals that it says will build on work it has already done to tackle corporate tax avoidance. In addition to other proposals to introduce sharing of information between tax authorities, it would require multinationals operating in the EU with global revenues exceeding €750 million a year to publish key information on where they make their profits and where they pay their tax in the EU on a country-by-country basis. The same rules would apply to non-European multinationals doing business in Europe. In addition, companies would have to publish an aggregate figure for total taxes paid outside the EU.

This proposal is a “simple, proportionate way to increase large multinationals’ accountability on tax matters without damaging their competitiveness”, the commission says. The proposal also provides for stronger transparency requirements for companies’ activities in countries that do not observe international standards for good governance in the area of taxation. The commission pledged to build on its external tax strategy with the aim of establishing the first common EU list of such tax jurisdictions as rapidly as possible.

“Our economies and societies depend on a tax system that’s fair, a principle that applies both to individuals and to business,” said Jonathan Hill, European commissioner in charge of financial services. “Yet today, by using complicated tax arrangements, some multinationals can pay nearly a third less tax than companies that only operate in one country. Our proposal to increase transparency will help make companies more accountable. It will promote fairer competition between companies regardless of their size.”

He added that it was hard to justify to small and medium-sized companies “why they should be paying at a higher effective tax rate”.

Hard to justify, but even harder to rectify, according to independent business consultant Paul Petherick. “You can bet that once the hoo-ha has died down – as it always seems to with these things – it will be very much business as usual for the firms who find tax loopholes and help their wealthy clients through them.

“Just perhaps, something positive will happen this time, but I am sceptical that the measures go far enough. For instance, the commission plans require multinationals to reveal information about their EU operations on a country-by-country basis and also any operations in non-EU countries that it identifies as tax havens. Firms will have to reveal only aggregate figures for the rest of the world, so unless companies have to report on their activities in all the countries where they operate, they could continue to dodge tax on a massive scale, using the places still hidden from view.

“And, all said and done, whatever the UK and Europe agree, we need to get all the world’s countries operating internationally agreed transparency standards and there is still a way to go to achieving that.”