Five steps UK could take now to cut tax avoidance
8:59 am - April 13th 2012
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I’ve been challenged to suggest five steps that could be taken now to tackle tax avoidance, given that the topic is in the news.
Let’s be clear why this issue is important. I estimate tax avoidance costs the UK £25 billion a year.
What we do now know though is that it is substantially more realistic than the government’s own estimate of £5 billion.
1. Introduce a proper general anti-avoidance rule
All tax regulation is written, and it is an inevitable fact of life that words have uncertain meanings, however hard Parliament works to try to define them in taxes acts.
That means all tax law is open to abuse if the only basis on which it can be interpreted is the strict meaning of words, which cannot be known until a judge has ruled on the issue. So, we need a better basis for interpretation and that is to look at the purpose of the law, and the intention of the taxpayer and then decide if the two coincide. The current proposal from the government for a general anti-avoidance rules nothing like this at all and I explain why here.
2. Country-by-country reporting
My estimate of tax avoidance splits into two near equal parts. One half relates to the activities of individuals and the other to the activities of large companies. By definition there are many fewer large companies than there are individuals and each of those companies also pays (or should usually pay) a great deal more tax than any individual, and so also has a great deal more opportunity to tax avoid.
As a consequence, demanding transparency from multinational companies who have greatest opportunity to use tax havens and their associated arrangements to avoid their tax obligations in the UK is the obvious place to start with a transparency agenda.
Large companies do, of course, have to prepare and publish their accounts, but those accounts do not at present include any indication at all of what a multinational company does in each and every country in which it operates. So we have no idea of what its sales are, what its profits are, how many people it employs or at what cost, and most importantly of all, of course, how much tax it pays in each and every country in which it operates.
3. Increasing the number of staff at HM Revenue & Customs
I’m well aware that the government says that it is investing up to £900 million in additional funds to tackle tax avoidance but that has to be set against the background of £3 billion of total cuts to the budget of HM Revenue & Customs over the life of this Parliament.
Spending on staff at HM Revenue & Customs is not a cost but a revenue generation opportunity, to ensure that there is a level playing field on which all business in the UK operates, and where no one gets an advantage by tax cheating to give them an unfair benefit in the marketplace. This is a pro-business policy.
4. Reforming small business taxation
The vast majority of small limited companies are owned by just one person, have a share capital of under £10, do not retain profit for investment in the business, and are basically the incorporated persona of their owner/manager.
We need to change the format of incorporation for most small businesses in the UK so that something much like a limited liability partnership, which has been available in UK law since 2000, becomes the standard format for the small limited liability business. This means that they enjoy limited liability, but at the same time the owners are taxed upon the profits arising in the business each year under income tax rules as if they were partners in an unincorporated business.
There are enormous advantages to making this change. It will reduce the admin burdens on small business, it will reduce tax avoidance, it wil differentiate between those companies which are setting out to establish larger scale enterprises and those which are always intended to be small-scale operations (not that there is anything wrong with that) and it will help create a level playing field between smaller companies of all types who would then be face broadly consistent tax rates whether they are incorporated or not. That has to be good for fair competition in the UK economy as well.
5. Tackling tax havens
Tax havens are often associated with tax evasion activity, where a person simply hides their income, gains or wealth from the view of H M Revenue & Customs, but that is not always the case. They can also be used for tax avoidance.
The UK has more tax havens under its care than any other country in the world. The Channel Islands, the Isle of Man, the Cayman Islands, the British Virgin Islands, Gibraltar and others are all ours. We have a duty, first of all, to make sure that these places are as open and transparent with us as we expect financial institutions in the UK to be, not least because most of the financial institutions located in these tax havens are owned by UK-based organisations.
We must now proactively demand that those countries that help people avoid their obligation to pay UK tax must be transparent with us in ensuring that everyone who owes tax in this country has their affairs made known to us so that demands for payment can be made.
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A longer version of this piece is here.
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Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments
“The UK has more tax havens under its care than any other country in the world. The Channel Islands, the Isle of Man, the Cayman Islands, the British Virgin Islands, Gibraltar and others are all ours.”
Doesn’t that tell us something about past, present (and future) British Governments and their attitude to tax avoidance/evasion?
There is ample evidence that tax like the law substantially only affects the ‘little people’.
A Footsie 100 CEO once told my son that “paying tax is a bit like going to a football match – the ordinary supporters go through the turnstiles and the rich go straight to the VIP lounge”.
All very nice in principal but the devil is in the detail. Multinationals are for example able to transfer pricing across borders to evade local taxes so it isnt just a question of transparency. Are Kraft and Amazon entitled to offset disproportionate management fees against sales and production in the UK for example?
Many think not. The alternative is possibly to tax the companies at the point of sale rather than through Corporation tax.
Not sure how that would sit with the West’s exploitation of say African raw materials though.
On the issue of incorporation how would you like to stop people from creating small companies? I think you’ll find that LLP’s have declare even less detailed accounts than Companies do (might be wrong on this). In any event LLP are in many people’s eyes a very bad idea over protecting extremely bad practices.
I love the bit about tackling tax havens. Ok this all started with the British but now most countries are on the bandwagon this, I would suspect, is more than a little tricky to resolve and impossible for one Government alone
Finally, the issue of increasing staff at HMRC has to be targeted to large corprations to be effective. The issue about a level playing field in the market place is long gone I’m afraid and relates more to pricing rather than taxation.
@OP:
The current proposal from the government for a general anti-avoidance rules nothing like this at all and I explain why here.
No you don’t; you assert that it will not work, and poison the well with criticism of Lord Hoffman; but nowhere do you even say what the current proposal is, let alone explain what’s wrong with it.
3 Robin Levett
Aaronson’s GAAR proposal is here:
http://www.hm-treasury.gov.uk/d/gaar_final_report_111111.PDF
If you read Richard’s link with reference to this report it does make more sense.
@Frances #4:
If you read Richard’s link with reference to this report it does make more sense.
I fear that it does not. I cannot see why, for example, Google billing all its UK sales from Ireland would be caught by his own GAAR, but not by Aaronson’s. It may be that La Murphy is correct, but because he hasn’t shown the basis of his assertion, I don’t know.
The above post is full of nonsense such as “Spending … is not a cost”, “a better basis for interpretation …” , the proposal that all sole traders should register as limited liability partnerships, “Tax havens are often associated with tax evasion activity, where a person simply hides their income, gains or wealth from the view of H M Revenue & Customs, but that is not always the case. They can also be used for tax avoidance.” “demand that those countries”
I do not need to comment on i); ii) involves independent judges chosen by the Lord Chancellor for their wisdom, integrity and knowledge of the law by Richard Murphy; iii) implies that the formats now used by Ken Livingstone and formerly by Richard Murphy are evil, ignoring the more transparent (and higher-tax-paying) choice of Boris Johnson – why? Oh you can’t possible admit on LC that the writer is less moral than Boris! iv) Murphy seems to take tax evasion for granted when complaining that these places permit legitimate tax avoidance about which he is complaining – actually this is total spurious junk. The greatest tax haven using the definition that he uses to condemn Jersey is Bermuda which chooses to tax consumption instead of income – a valid choice – and he knows that he would be shredded if he accused it of tax evasion. Jersey is scrupulous about taxation and ensures that it can maintain low taxes by only accepting immigrants who can demonstrate that they will be net contributors to the States budget. v) Abolish the UN Security Council !! Replace it with Richard Murphy!
Sunny, please, please, if your are still editing this site get up in the morning, drink some coffee and eliminate the Napoleon-fantasies from he posts.
5 Robin Levett
I admit I haven’t looked at this too closely (I’m in enough trouble with Mr Murphy already for picking holes in his ideas on banking and economics). It’s just easier to correlate his criticisms of Aaronson with what Aaronson actually recommends if you have the report itself to hand, that’s all.
However, as you have challenged me, I shall now have to do “due diligence”, write a detailed report and and risk being blocked YET again…..
@Frances #7:
However, as you have challenged me, I shall now have to do “due diligence”, write a detailed report and and risk being blocked YET again…..
How are you getting along? ::biggrin::
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