Tax avoidance isn't a left or right issue, it's a cancer eating our democracy

Everything you need to know about tax.

I must confess, I am a tax-dodger. As I am a Tory, and you are a New Statesman reader, this may come as no surprise. My sin was grave - last night, on my way home from work I bought some biscuits on a two for one deal, thus avoiding several pennies of VAT. We all avoid tax to a certain extent; many people pay accountants to reduce their tax bills - indeed, anti-tax crusader Richard Murphy has written articles advising people on how to minimise their tax liability.

However, it's clear that, despite the frantic attempts of assorted people to claim otherwise, there is no moral equivalence between cutting your bill by a few hundred pounds and offshoring your entire income to cut your tax by 99 per cent while chortling about it into a cigar. One is prudence; the other smacks of outrageous dishonesty, no matter how "legal and completely above board" it may technically be. However, the debate is massively clouded by where you personally draw the line between the two. To paraphrase Justice Potter Stuart, hard-core tax avoidance is hard to define, but we know it when we see it.

Of course, once you start looking into this issue, you realise there is a titanic gulf between what you can avoid as an ordinary citizen and what you can avoid as a millionaire. Equally, millionaires look with envy at the truly astounding skyscrapers of tax evasion (sorry, "avoidance") carried out by multinational corporations and billionaires.

However, this truly shocking behavior has been partially obscured by a huge smokescreen of partisan rumour and innuendo that activism & counter-activism has built up around the issue. For example, Philip Green is widely held to be the biggest tax villain of all time, whereas, in fact, by the standards of the super-rich, he's actually very scrupulous indeed. That, and other surprising facts about personal and business taxation, are what I'm going to break down in an attempt to shed some light on the topic.

Billionaires and Us

In 2006 (when figures were last available) James Dyson contributed the bulk of the income tax paid by the 54 billionaires then resident in the UK. Out of £14.7m paid by all 54, he contributed £9m. That's a whopping 61 per cent of the total tax take from billionaires. Current figures are not available, but it is widely agreed in the tax accounting community that JK Rowling and James Dyson are the only UK billionaires who pay a tax rate even remotely proportional to their income. So, on average, your grandma pays tax at a rate roughly 250 times that of the richest people in Britain.

But presumably, the HMRC goes after all these billionaire tax-evaders, right?

No. Mostly because there is a difference between the theoretically legal "avoidance" and the illegal "evasion".

However, even high end evasion is hardly seen as a priority. Over the last few years HMRC spent £633,000 on publicity around tackling high-end tax evasion, compared to £17.5m on publicity around tackling benefit fraud. By that crude measure, HMRC considers tackling benefit fraud about 27 times more important than tackling high end evasion.

When HMRC does go after tax avoiders and evaders, it often attacks low earners with irregular incomes - see this Guardian article for a typical but absolutely shocking case.

Ah, but Willard, what about all our consumption taxes - surely VAT on high-spenders is also not ignored - that does affect non-doms. If you spend £1.1m on a sports car from a swish Park Lane garage you'll pay more VAT than I'll pay income tax in a decade, right?

No.

Very few sports cars, yachts & £1m-pound plus mansions pay a penny of VAT or stamp duty. Indeed, flyers at the motor show, the boat show and so on occasionally boast of this fact. The way the tax is avoided is the cars/houses/yachts are transferred as assets to a paper company, the company directors value them at zero pounds (usually by applying depreciation over 10 years straight away), then the company is sold, usually for a token amount.

Many choose to buy their sports cars in the Emirates and have them flown in, because it saves money. They then fly them out before they would be due to pay any importation duty. This adds up and becomes irrational over time, but for some people, tax avoidance has become a competition to see how little you can pay; some would rather spend more money than give a penny to the government.

Millionaires and us

By setting up a limited company and taking a dividend as a shareholder rather than earnings, high earners are often taxed at a lower rate than any other employee. Once you are earning over around £60,000, your tax rate can drop sharply if you so choose.  Once you hit an income of about £150,000, paying tax at a higher rate than corporation tax becomes essentially optional, as the accountant is always cheaper than the tax bill.

The idea behind this is to encourage entrepreneurial activity, by compensating you for the risk involved in running a small business - but in fact it's just turned into a huge tax dodge. For example, almost all hedge fund managers pay a 10 per cent tax rate on their income; it's estimated there are 15,000 earning more than a million a year, but they pay a lower tax rate than their cleaners. This is due to income from private equity and hedge funds being classed as "carried interest", a change brought in by Gordon Brown in 2002. This is why the 50p tax rate is a charade - for most people it isn't a factor, as they don't technically earn income.

How did this happen?

The UK’s tax code is now the longest and most complex in the world, according to Lexis Nexis. This makes avoidance incredibly easy. And the UK tax code has become tremendously more complex since 1999.

The complete Tolley’s Tax Guide – the handbook of tax legislation – is now 11,520 pages long, more than double the 4,998 pages filled by the 1997 edition.

Reading it out loud would take over 120 hours. Assuming eight hours per day, that’s over fifteen working days or three weeks. And that’s just to read it, of course, at top speed – not to understand it. That would take more than a lifetime, especially given that hundreds (if not thousands) of new pages are added every single year.

This illustrates the tax system’s absurdity. Nobody understands it, not even HMRC or any individual accountant. You would need a team of dozens of professionals to start to be able to navigate it properly in its entirety. Ordinary people and employers don’t stand a chance.

The section on corporation tax alone is now 1,897 pages, 185 per cent longer than it was in 1999-2000. The income tax chapter is 1,801 pages, 54 per cent longer; the capital gains tax guide is 1,463 pages long, 70 per cent longer; the inheritance tax guide is 958 pages long, 63 per cent longer. With every revision of the rules, high level avoidance has become easier.

But really, what does this mean to me? I mean, I might do it if I was minted.

It does affect you, because the more money that leeches out of the state in avoidance, the more you have to pay. Britain's most affluent determine where most of their earnings go, while we ordinary taxpayers often pour a much larger chunk of our cash into the communal pot. Nicholas Shaxon puts it brilliantly in his book, Treasure Islands:

Imagine you are in a supermarket and you see well-dressed individuals passing through a special checkout. There is also a large item added to your bill, extra expenses, which subsidises their purchases. Sorry, says the Supermarket manager, if we didn't charge you more they would shop elsewhere. Now, pay up.

Frankie Boyle put it more succinctly on Twitter this morning:

If you're rich, don't look at it as tax avoidance, look at it as a children's hospital buying you a pool table.

Corporate Tax Avoidance

Corporate Tax Avoidance in the UK is scandalous. Let's just take one example - bananas

In 2006, Dole, Chiquita and Del Monte sold £350m worth of bananas in the UK. That's a lot of bananas, I'm sure you'll agree. On that £350,000,000 of turnover, they paid less than £235,000 in tax.

Why?

First off, you only pay tax on profits. This means that it's possible to structure your company so, on paper, you are making almost nothing. This is incredibly widespread. For example, according to the National Audit Office, one third of Britain's 700 top businesses paid no tax at all in 2007 - and bear in mind that was at the end of a seven-year long boom. Indeed, many were net recievers of government money.

For example, how much tax do you think Debenhams paid in 2007?

It received around £9m of taxpayers' money, and paid zero pounds, zero pence.

It did this by having a complex chain of ownership, structured to take account of "liabilities" which its owners control. So, it can always make a loss, because the private equity firms that own it can juggle the interest rate on the loans which it bought the firm with. Other firms do it by having chains of ownership which stretch all around the world, but many of which end up in the British Channel Islands - a sleepy archipelago with 90,000 inhabitants but 800,000 registered firms.

There are estimated to be 400,000 corporations registered in Jersey alone, and around a trillion pounds worth of assets, all untaxed by the UK. Some Jersey lawyers "sit" on the boards of over 500 companies to grant them these exceptions. Plenty of perfectly ordinary buildings in St Helier are "home" to hundreds of businesses. For example, the New Raj Tandoori St Helier is home to around 800 UK businesses; next door is an office block which "houses" defence giant BAE systems and 1,108 other firms.

Oh, that's what all this UK Uncut stuff if about, isn't it? Philip Green, Topshop and all that.

Actually, no. Topshop pays 140 times as much tax as Google, despite being a smaller and less profitable business.

Arcadia, Green's retail business, is one of the most highly taxed and responsible companies in the UK. It's paid £290m pounds in corporation tax since 2006, paying at full rate - it is scheduled to pay £80m this year.

Green's personal tax affairs (where he took a £1.5bn dividend and paid no tax due to his wife's residence in Monaco) are of course open to criticism, but he is on the record as saying he made a conscious choice to pay business tax, but not personal taxes. In fact, the UK's biggest tax avoider is internet search giant Google. The UK represents 28 per cent of Google's earnings and is Google's second biggest market after the US. However, in 2009, it paid only £600,000 in tax, on £1.25bn of UK income; an effective tax rate of 3.2 per cent.

Google's European arm has a huge base in London - it has thousands of UK employees and uses local services and infrastructure. However, it pays its tax through a convoluted chain of foreign dependencies known in the trade as "the double Irish", where profits are siphoned between Ireland and Holland to get this low rate. The reality is, the more tax that companies like Google avoid, the more the tax burden falls on the rest of the public.

But HMRC cracks down on this, right?

No. In fact, last year, HMRC spent the bulk of its investigation budget investigating 20,000 small firms, none of which had a turnover of over £2m, to make sure they had at least seven years of paperwork for their taxes, and prosecuting those who could not produce it. It is unknown how many small firms were bankrupted arguing these cases, but Tory MP Priti Patel estimates it to be in the hundreds.

But there's another problem...

If Topshop pays 140 times as much tax as Google, despite being a smaller and less profitable business, then that creates a huge business problem.

It creates a situation where there is a race to the bottom - a UK-based business that doesn't avoid tax will be far less profitable, and far less able to expand and invest than a competitor who is cheating. Thus, honest businesses are forced into the tax evasion game.

Of course, because of access to international tax havens, and ever more sophisticated means of avoiding tax, this means that globalised multinationals have a titanic advantage in terms of taxation over their domestic rivals, stifling innovation and competition even more.

In conclusion, this isn't a left-wing problem or a right-wing problem - it's a huge cancer eating at our democracy, our business community and our ability to pay down the deficit.

Our tax code is fundamentally broken, easily abused by the unscrupulous, and HMRC is absolutely not fit for purpose. These are crucial national problems that can't be swept under the rug with a wave of the hand and saying "well, I'd do it too if I had the money".

If, like me, you're a Tory, and even if you don't think much of the crusty jugglers of UK Uncut, the next time you look at a Google doodle, remember, some poor bloke slogging in the heat of Afghanistan would be better equipped if they actually paid the same rate of tax as your greengrocer.

This article draws heavily on facts and figures from Robert Peston's book 'Who Runs Britain?' and Nick Shaxon's 'Treasure Islands'. If you want the complications of Britain's tax nexus explained, I cannot recommend a better place to start. 

Update: this article was edited at 17.46 on 21 June 2012.

Police guard the entrance to HMRC during a demonstration against corporate tax avoidance in 2011. Photograph: Getty Images

Willard Foxton is a card-carrying Tory, and in his spare time a freelance television producer, who makes current affairs films for the BBC and Channel 4. Find him on Twitter as @WillardFoxton.

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Under pressure at home, Donald Trump will struggle to deliver what Saudi Arabia wants

Above all, the Gulf states want stability. Can this beleaguered US president bring order?

There is a nervous energy around Riyadh. Fresh palm trees line the roads from the airport, punctuated by a wall of American flags and corporate slogans: “Together we prevail.” All the street lights are suddenly working.

The visit of any American president is always a lavish affair in Saudi Arabia, but there is an optimism to this visit that evaded the Obama years and even the recent visits of Theresa May and Angela Merkel.

Yet, there are two distinct parts to this trip – Trump’s first overseas engagement as president – that will determine its success. The first is relatively straightforward. Trump will sign huge defence contracts worth billions of dollars and offer trading opportunities that allow him to maintain his narrative of economic renewal for American businesses.

For the Saudis, too, these deals will fit into their ambitious project – known as Vision 2030 – to expand and diversify their economy away from its current dependence on oil revenues. Both parties are comfortable with this type of corporate and transactional government, enjoying the gaudy pomp and ceremony that comes with the signing of newly minted deals.

The more complicated aspects of the trip relate to its political dimensions. As the Middle East continues to convulse under the most significant turmoil to envelope it since the collapse of the Ottoman Empire, what Gulf leaders desperately want is the re-establishment of order. At its core, that is what will define Donald Trump’s visit to Saudi Arabia – and the Saudis are optimistic.

Their buoyancy is borne of shared regional interests, not least curbing Iranian influence. Ever since the Arab uprisings in 2011, Tehran has asserted itself across the Levant by organising hundreds of proxies to fight on its behalf in Syria and Iraq. Closer to home, too, the Gulf states accuse Iran of fomenting unrest within Shia communities in Saudi Arabia’s eastern provinces, in Bahrain, and in Yemen.

All of this has left the House of Saud feeling especially vulnerable. Having enjoyed an American security umbrella since the 1970s, Obama’s pursuit of the Iran deal left them feeling particularly exposed.

In part at least, this explains some of the Kingdom’s more frantic actions at home and abroad – including the execution of prominent Shia cleric, Sheikh Nimr al-Nimr, and the war in Yemen. Both are really about posturing to Iran: projecting power and demonstrating Saudi resolve.

Trump shares these concerns over Iranian influence, is prepared to look the other way on Saudi Arabia’s war in Yemen, and is deeply opposed to Obama’s nuclear deal. Riyadh believes he will restore the status quo and is encouraged by the direction of travel.

Just last month Trump commissioned a review of the Iran deal while the US Treasury imposed sanctions on two Iranian officials. Saudi Arabia also welcomed Trump’s decision to launch cruise missiles against a Syrian military base last month after Bashar al-Assad used chemical weapons in the town of Khan Sheikhoun.

These measures have been largely tokenistic, but their broader impact has been very significant. The Saudis, and their Gulf partners more generally, feel greatly reassured. This is an American presence in the region that is aligned to their interests, that they know well and can manage.

That is why Gulf states have rushed to embrace the new president ever since he first entered the Oval Office. Saudi Arabia’s deputy crown prince, Mohammed bin Salman (colloquially known simply as “MBS”), already visited him in Washington earlier this year. The Emiratis and others followed shortly afterwards.

A spokesman for Mohammed bin Salman later described the meeting with Trump as an “historical turning point” in relations between the two countries. A White House readout of the meeting baldly stated: “The President and the deputy crown prince noted the importance of confronting Iran's destabilising regional activities.”

Now that Trump is visiting them, the Saudis are hoping to broker an even broader series of engagements between the current administration and the Islamic world. To that end, they are bringing 24 different Muslim leaders to Saudi Arabia for this visit.

This is where Trump’s visit is likely to be fraught because he plans to deliver a major speech about Islam during his visit – a move that has seemingly no positives associated with it.

There is a lot of interest (and bemusement) from ordinary Saudis about what Trump will actually say. Most are willing to look beyond his divisive campaign rhetoric – he did, after all, declare “I think Islam hates us” – and listen to him in Riyadh. But what can he say?

Either he will indulge his audience by describing Islam as a great civilisation, thereby angering much of his political base; or he will stick to the deeply hostile rhetoric of his campaign.

There is, of course, room for an informed, careful, and nuanced speech to be made on the topic, but these are not adjectives commonly associated with Donald Trump. Indeed, the pressure is on.

He will be on the road for nine days at a time when pressure is building over the sacking of the former FBI director James Comey and the ongoing investigation into former national security advisor Michael Flynn’s contacts with Russia.

It is already being reported that Trump is not entirely enthusiastic about such a long overseas programme, but he is committed now. As with almost everything concerning his presidency, this extra pressure adds a wild air of unpredictability to what could happen.

Away from the lucrative deals and glad-handing, this will be the real standard by which to measure the success of Trump’s visit. For a relationship principally defined by its pursuit of stability, whether Trump can deliver what the Gulf really wants remains to be seen.

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at King’s College London’s International Centre for the Study of Radicalisation.

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