Avoiding tax: fair enough?

Accountants give their views on "rule interpretation".

The news that high-profile individuals, including an unfortunate figurehead in the person of comedian Jimmy Carr, were avoiding millions of pounds in tax by channelling money through off-shore schemes caused public outcry and brought condemnation from David Cameron.

But when it comes to corporation tax, there are billions rather than millions at stake in the tax avoidance arena. Should the outrage be similarly multiplied?

When news broke in early June that mobile phone giant Vodafone paid no UK corporation tax last year despite having its headquarters in Newbury, it provided a predictable feeding frenzy for the media. Vodafone’s chief executive Vittorio Colao launched a robust defence, saying there was nothing illegal in what it had done – write off its corporation tax contribution against capital expenditure of £575m Ð and the business had paid some £700m in payroll and other taxes.

Ian Young, international tax manager at ICAEW, says this is just one example of how a company can, quite legitimately, minimise its tax liability. “Tax is clearly a cost to business but it be can’t be treated in the same way as any other expenditure. Corporates are making decisions about how they run and structure their businesses in the context of the economic situation, competitors, how they think the market is going to change and the tax systems in which they operate.”

The CBI has been riled by the current witch-hunt against corporations perceived as not paying their fair share of tax, prompting it to produce its Tax and British Business: Making the Case report, which found that British companies paid more than £163bn in taxes to HMRC in 2010-11, constituting more than a quarter of the total tax revenue of £551bn. The report highlighted a number of reasons why UK corporations may genuinely pay less corporation tax than expected. As well as offsetting capital expenditure, which is designed to reflect the reality of operating in certain parts of the economy (such as telecoms), these included group relief, where losses can be transferred among businesses; losses from previous tax years being carried forward; and tax credits for investing in innovation or research and development.

Both the CBI and Young broadly welcome the tightening up of regulations around tax avoidance, including proposals for the new General Anti-Abuse Rule (GAAR). “We’ve had a disclosure regime in place since 2004 and the major banks have signed up to a code of conduct about the way they behave in relation to the tax system,” says Young. “The government has also had an enforcement programme for the last five or six years and HMRC has a good record of taking cases to court and winning the argument.”

Ultimately, a simpler tax system would be welcomed by businesses and the accountancy profession, says Young, who admits that the complexities of the current system can cause problems.

Where clients have heard about a scheme to reduce their tax liability, advisors should take caution. “You have to identify what appetite your client has to enter into what could be a risky situation,” he says. “If they’re investing in unquoted trading companies to get the tax relief, are they comfortable if they lose all their money? There are difficult issues that need to be addressed when you are advising clients in what are otherwise quite straightforward circumstances.”


Stephen Herring, BDO:

The vast majority of UK companies pay their fair share of tax and are intrinsically inclined to avoid anything that might create unpleasant surprises further down the line, says Stephen Herring, a senior tax partner at BDO. "A lot of larger companies are very conservative, and telling bad news if something doesn’t work is far worse than the good news if it does," he points out.

Yet in a global market, failing to fully examine the potential to minimise tax liabilities could leave UK organisations at a disadvantage. "If someone is buying a new subsidiary in another country, part of how much they can bid will be dependent on the after-tax returns," he says. "So if a UK company is bidding against a German and Dutch one it has to anticipate the right mixture of debt and equity to reduce the incidence of tax."

The GAAR should stop "egregious or outrageous tax proposals that have no commercial basis whatsoever," he says, such as the recent case involving Eclipse Film Partners No 35 LLP.

But Herring argues businesses should also do a better job of defending their position in looking to minimise their tax bills. "Tax planning is right, proper and necessary and it’s not benefiting the management as much as the shareholders, which are pensions, SIPP investments, investment trusts, ISAs and insurance policies.

"It benefits all of us that management is properly looking to reduce its tax liabilities," he adds. "Are we really asking managers to say that they had five routes available for taxation and that they took the most expensive?"


Vince McLoughlin, Russell New:

The current mood around tax means organisations risk being stigmatised for looking after their own best interests, believes Vince McLoughlin, a partner at West Sussex-based Russell New.

"If the law allows you to arrange your affairs in the best way, then doing so should not be seen as anything other than sensible planning," he says.

"If the belief is that the law is wrong then change it, but don’t criticise individuals and companies for benefiting from it."

A fairer and simpler tax system would remove the need for companies to go to extreme lengths to reduce their liabilities, he adds. "The majority of taxpayers – both individuals and companies – are prepared to pay taxes and accept that it is a necessary cost in a developed society," he says.

"If HMRC can create an environment in which companies believe they are paying a reasonable amount of tax, that they will not be attacked for any attempt to carry out an investment proposal and that HMRC understands how businesses operate, then the tax avoidance industry will essentially operate by self-regulation."

The government’s policy of having different rates of tax for smaller and larger enterprises is antiquated, says McLoughlin, who expects a single, uniform rate to be introduced in the next five years.

He has concerns, however, over the introduction of the GAAR. "The risk is that, in order to make it work, many planning opportunities that even the greatest moralist would deem to be acceptable will be caught under a general rule," he warns.


Mark Simpson, Simpson Burgess Nash: 

The UK tax system has always lacked a set of underlying principles and has evolved in a piecemeal fashion with too much political interference, says Mark Simpson, director, tax saving, at Manchester firm Simpson Burgess Nash.

As a result, larger companies – and the pre-crisis financial institutions in particular – have, over the years, devoted vast resources to devising schemes to radically reduce their tax bills, he says. This has been made easier by the increasingly globalised nature of organisations and business as well as the emergence of ecommerce, which has made it easier to operate in low-tax jurisdictions.

"The danger of this is that it is to some extent becoming the case that the bigger a company you are and the more profit you make, the lower your effective tax rate, which is morally unacceptable," he says.

The financial crisis, though, has changed not just public awareness of tax avoidance but also the attitude of the vast majority of the accounting profession to what Simpson describes as the "unacceptable nature of large-scale tax avoidance using artificial, non-commercial arrangements".

Simpson has high hopes that the introduction of the GAAR will provide a platform for a more credible tax system, and help accountants deal with the relatively few requests from clients to advise on such morally dubious schemes.

"I would be delighted to be able to tell clients that from April 2013 there is no point considering such schemes as they would almost certainly be caught by the GAAR," says Simpson.


Chris Morgan, KPMG  :

Chris Morgan, head of tax policy at KPMG, makes the point that there is a "massive black line" between tax avoidance and tax evasion. "The thing that’s being blurred is the distinction between mitigation that works and avoidance, which is where you try and do something which is totally legal but either there’s a piece of legislation that says it doesn’t work or a court says you made the wrong interpretation," he says.

Accountants have an important role in advising clients on the implications of the approaches they wish to take in this area, says Morgan. "If a company is saying it is not going to do any planning at all, how do you get benefit for the public for that?" he asks. "Equally, if a company says shareholders want it to push it as far as possible, how would it then communicate that in such a way that it’s not seen as acting against the interest of society?"

The introduction of the GAAR is a good idea in principle, says Morgan, but the dangers will lie in individual decisions made by courts over what constitutes abusive transactions. "If you could get a ruling upfront, as you can do in many other circumstances, you’d have certainty as to whether or not the rule would apply," he says.

There is a risk that companies assessing whether to invest in the UK or overseas could be put off by the vagaries around the GAAR until sufficient cases have come to court and been challenged on appeal, he adds.


Andy White, Carter Backer Winter:

The government has launched a "deliberate and concerted campaign to characterise tax avoiders as pariahs," says Andy White, a tax partner with mid-tier accountancy firm Carter Backer Winter.

"This has been achieved by tacking the word ‘abusive’ in front of the phrase ‘tax avoidance’ and by calls for citizens to pay ‘the right amount’ of tax, as if that were something that could be defined," he says. "If the government were to concentrate more on having a cohesive tax policy and not over-complicating the system, they may have more success."

There are, however, a number of practices which some organisations use to minimise their tax payments, he admits. Chief among these is the use of offshore group companies. "This might be by setting their head offices offshore or by ‘transferring’ income offshore," says White.

"Favoured techniques for the latter might be for an offshore subsidiary to own the intellectual property of the group and for UK companies to pay royalties or licence fees, which are tax-deductible. Another is for the UK company to be financed by large loans from offshore group members, on which tax-deductible interest is payable."

Legislation already exists to counter such abuse, in the form of transfer pricing and thin capitalisation, he says. "What is unclear is why this legislation is apparently not being used fully," says White. "HMRC needs to be sufficiently resourced to be able to distinguish those companies that are abusing the legislation from those that have little or no UK tax to pay because they are making legitimate use of the various reliefs offered by the tax code."


Brian Lindsey, HW Fisher & Company: 

Many companies that pay different rates of tax do so simply by virtue of the sector they happen to be in, with those involved in research and development likely to benefit from tax breaks, points out Brian Lindsey, corporate tax partner at HW Fisher & Company in London.

"Just because companies pay taxes at a different rate doesn’t mean they are arranging their taxes in a particular manner to reduce their tax liability," he says.

There are, however, organisations that have decided to take advantage of the tax rules as they stand, and accountants have to be sensitive to this. "We wouldn’t countenance any form of evasion but clients would like us to ensure they are paying the correct amount of tax, based on what the legislation says, so we will always advise on what allowances are available," he says.

He admits, though, that the current climate means there is a greater emphasis on what is perceived as fair, and clients are increasingly having to factor this into any decisions they make.

The introduction of the GAAR should provide a greater degree of certainty in the long run, he says, although in the short term there is the potential for greater confusion.

"All parties would prefer a simpler system that would not put us out of work," he adds. "But every time there is a new Budget the legislation gets more complex. A system with fewer rates of tax where everyone knows where they’re heading with their tax position would be helpful."

This story first appeared in economia.

Jimmy Carr. Photograph: Getty Images
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The quiet civil war for control of the Labour grassroots machine

The party's newly empowered far left is trying to wrest control of local branches.

“Party time! PARTY TIME!” A young man wearing a Jeremy Corbyn t-shirt appears on screen and starts dancing, accompanied by flashing emojis of a red rose and a party popper.

“There’s only one game in town and it’s getting our boy J Corbz into Downing Street”, he announces, and to do that, he is planning to explain the “nitty gritty” of local Labour politics, and, promisingly, “give a little gossip on the way”. The man is Michael Walker of online left-wing outlet Novara Media, and the video has been watched more than 38,000 times on Facebook in just two weeks.

So why should Labour members suddenly be made to care about “structures, factions, conference, selections, rule changes”? “There were shedloads of people who got involved in the Labour Party for the first time by knocking on doors during the general election,” Walker explains, “but to make sure that the Labour Party represents their voices as it goes forward, they’re going to need to take getting involved in Labour’s bureaucratic structures seriously.

“There’s a risk that the party structures and bureaucracy will try and shut down participation in the Labour Party just like they did last summer, and we want to make sure that it can’t happen again.”

While the Parliamentary Labour Party is going into recess as a more united group since the election than it had been in the past two years, there is a quiet war still being fought at local level. Now that their man has proved that he could exceed expectations and turn Labour into a solid opposition, Corbynites want to make sure that the centrists cannot keep a hold on the internal party machine.

This involves projects like Walker’s catchy videos, and Momentum’s Your Labour Conference website, which encourages members to get interested in the election of the conference arrangements committee, in order to have more of a say on what gets discussed at the party’s annual conference.

“We recognise the fact that sometimes the Labour Party can be a bit of a labyrinth and something which can be pretty hard to work out, and we want to push people forward and help them get more involved,” a Momentum spokesperson says. “We’re trying to make it more open and more accessible to younger people and help people understand what’s going on.”

With tens of thousands of people joining Labour over the past few months – including around 20,000 since the election – their intentions seem noble: the Labour party internal structure is, after all, notoriously complex. However, it isn’t clear how the existing members who are involved in local organising – a lot of whom are or were until recently sceptical of Corbyn – will deal with this new influx of activists.

“Corbyn supporters are no longer the underdog in the party, and understandably people who joined recently are highly motivated to get their opinions across, so they’ve been turning up in droves at local meetings,” says Richard Angell, the director of Blairite organisation Progress.

“They’re not brilliantly organised but they’re there, and they turned up with this sense of 'we told you so', so they’re starting to win things that they wouldn’t have before the election.”

Centrist and centre-left Labour factions have often been the most organised campaigners in constituency Labour parties, and they’re now worried that if they were to get ousted, the party would suffer.

“Lots of our members are the people who hold the CLPs together – lots of people turned up in certain places to campaign, and the people who organised the clipboards, the data, did the work to make that happen are still a network of moderates,” Angell adds. “If Momentum tried to sweep them away in a vindictive wave of jubilation, it would backfire, and that’s what they have to think about now.”

Though the people at the helm of Momentum have never explicitly called for a takeover of the party at local level, some CLPs are struggling with bitter infighting. Lewisham is home to some of these battlegrounds. With three CLPs in the borough, the local Momentum branch is trying to gain more power in the local parties to implement the changes they want to see at that level.

“There’s an organised left-wing presence in all three CLPs in Lewisham,” a local Momentum organiser, who did not want to be named, says. “We want the CLPs to become outward-looking campaigning bodies, and we want them to be functionally democratic.”

What the branch also wants is to have a radical rethink of what Labour does at council level, and the activist was critical of what the councillors have been doing.

“Under the right-wing, Lewisham CLPs never really campaign on anything – they’ll occasionally have these set pieces, like the Labour day of action on education, which is good, but in reality there’s no one going campaigning on anything,” he says.

“The other thing is about the record of the council - no-one would deny that Labour councils are in a difficult situation, in terms of getting cut again and again and again, but equally at the moment, the attitude of a lot of Labour councils in Lewisham at least is 'it’s not just that there’s nothing else we could do, we’re actually going to go further than the Tories are demanding'."

“It’s not just that they’re saying 'oh, there’s not really anything we can do to fight back against cuts' but it’s also that they’ve actually absorbed all the neoliberal stuff.”

The response to these allegations from a long-term Labour member, who wants to remain anonymous but is close to the currently serving councillors, was unsurprising.

“It is utterly absurd to suggest that councillors want to cut services – Labour members stand for council because they want to stand up for their community and protect local services,” he says. 

“As for campaigning and taking on the Tories, it was the 'right-wing' Lewisham Council which took the government to the High Court over their plans to close Lewisham Hospital – and won. The 'right wing' CLPs worked tirelessly with the Save Lewisham Hospital campaign, and we won.”

According to him, Labour is doomed to fail if it doesn’t unite soon, and he worries that left-wing activists may be getting carried away. “The vast majority of members in Lewisham are really pleased with the result and with the way the party pulled together – locally and nationally – for the election campaign,” he says.

“At the second members' meeting after the election, we had a discussion about how we all needed to carry on in the spirit of unity that we'd recently seen, and that if we did so, we have a good chance of seeing a Labour government soon.”

“It's a shame that some people want to label, attack and purge fellow members, rather than working together to beat the Tories. The more they focus on internal, factional in-fighting, the less chance we will have of seeing a Labour government and ending the cuts.”

Beyond the ideological differences which, as the election showed, can mostly be smoothed over when the party senses that it’s getting close to power, an explanation for the Labour left’s occasional bullishness could be its sense of insecurity.

After all, the wave of new members who joined after Corbyn became leader was hardly welcomed by the party’s mainstream, and the narrative quickly turned to Trotskyist entryism instead.

Momentum also spent many of its formative months being treated with suspicion, as a Trojan horse aiming to get MPs deselected, which is yet to happen two years on. Painted as the opposition to the opposition, activists from the Labour’s left had become used to being party pariahs, and need to figure out what to do now that they are in a position of power.

“They’re behaving like an insurgency still, but they’re in charge”, says Angell. “It’s quite a big change in mindset for them, and one I don’t think they’re really ready for.”

“We have shown that we will campaign for the Labour Party anywhere in the country, whoever the candidate is, to try and get the best result in a general election, and there is no acknowledgement of that from them at all.”

This was, amusingly, echoed by the Momentum activist – if there is one thing all factions agree on, it seems to be that the Labour left needs to figure out what it wants from the party machine it’s in the process of inheriting.

“Momentum nationally had a very good election, it mobilised a lot of people to go to marginals, and got a lot of people involved in campaigning, and that’s a step forward, to go from getting people to vote Corbyn to getting them on the doorstep,” he says, “but it’s another step from actually having a vision of how to transform the Labour Party.”

Marie le Conte is a freelance journalist.