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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The problem with grammar schools – and the answer to Labour's troubles

This week's news, from Erdogan the despot, to memories of Disraeli, and coffee and class.

Whom should we be cheering in Turkey? Coups are by their nature ­anti-democratic, whatever the rhetoric of their instigators, but Recep Tayyip Erdogan, the Islamist president, is about as much of a democrat as Vladimir Putin. Once he regained power, he dismissed several thousand judges, putting some under arrest. A large number of journalists were already in prison.

As recently as 1990, nearly half of Turkey’s employed population worked on the land and, even now, the proportion is more than a quarter. Erdogan has ruthlessly exploited the pious, socially conservative instincts of his people, who are rarely more than a generation away from the peasantry (and therefore politically “backward” in the Marxian sense), to win elections and push through economic liberalisation and privatisation. His foreign affairs ministry claims that the aim is to confine the state’s role to health, basic education, social security and defence. That is good enough for most Western governments. Provided he also co-operates in limiting the flow of Middle Eastern migrants into Europe, Erdogan can be as Islamist and authoritarian as he likes.

 

Quick fix for Labour

I have an answer to Labour’s problems. Its MPs should elect their own leader while Jeremy Corbyn continues as party leader. The former, recognised by the Speaker as the leader of the parliamentary opposition, would get the usual state aid for opposition parties. Corbyn would control Labour Party funds and assets.

He and his hardcore supporters should welcome this arrangement. Their aim, they say, is to build a new social movement. Relinquishing the burden of parliamentary leadership would leave them free to get on with this project, whatever it means. Corbyn could go back to what he enjoys most: voting against the Labour front bench. He would no longer have to dress up, bow to the Queen or sing the national anthem. This, I grant you, would not be a satisfactory solution for the long term. But the long term is more or less extinct in British politics. If Labour had peace for a few months, it might be enough. The situation would be resolved either by Corbyn falling under a bus (preferably not one driven by a Labour MP) or the Tory government collapsing in the face of a mass people’s uprising demanding Corbyn’s installation as supreme ruler. Don’t tell me that neither is likely to happen.

 

Divide and rule

The choice of Birmingham as the location to launch Theresa May’s leadership campaign, combined with proposals such as worker representation on company boards, has drawn comparisons between the new Prime Minister and Joseph Chamberlain.

Chamberlain, who as mayor of Birmingham in the mid-1870s tore down slums, brought gas and water supplies under public control and opened libraries, swimming pools and schools, was a screw manufacturer. There was an Edwardian joke – or, if there wasn’t, there ought to have been – that he screwed both major parties. He became a Liberal cabinet minister who split the party over Irish home rule, putting it out of power for most of the next 20 years. He and his followers then allied themselves with the Tories, known at the time as the Unionists. He duly split the Unionists over tariff reform, excluding them from office for a decade after the Liberals won the 1906 election.

Chamberlain was a populist who brilliantly combined patriotic imperialism with domestic radicalism, proposing smallholdings of “three acres and a cow” for every worker. One can see the appeal to some Brexiteers but he was also divisive and volatile, making him an odd role model for a supposedly unifying leader.

 

Mind your grammar

Justine Greening, the new Education Secretary, is the first to be wholly educated at a mainstream state secondary comprehensive. Pro-comprehensive groups were almost lyrical in praise of her appointment. Yet, unlike her predecessor-but-one, Michael Gove, she declines to rule out the ­return of grammar schools.

To understand how iniquitous grammar schools were, you need to have attended one, as I did. Primary-school friendships were ruptured, usually along lines of social class. The grammars were rigidly stratified. I was in the A stream and do not recall any classmates from semi-skilled or unskilled working-class homes. They were in the C stream and left school as early as possible with a few O-levels. No minister who wants a “one-nation Britain” should contemplate bringing back grammar schools.

 

Living history

Simon Heffer’s recent account in the NS of how his father fought in the Battle of the Somme led one letter writer to ask if anyone alive today could have a grandparent born in the 18th century. Another NS reader replied with an example: John Tyler, a US president of the 1840s, born in Virginia in 1790, had two grandsons who are still alive. Here is another possibility. “As Disraeli said to my husband . . .” If you hear a 94-year-old say that, don’t dismiss her as demented. Disraeli died in 1881. A 71-year-old who married a 24-year-old in 1946 (not impossible; the actors Cary Grant and Anthony Quinn both married women 47 years younger) could have spoken to Disraeli as a boy.

The past is not as far away as we think, though many politicians and journalists behave as though anything before 1980 happened on another planet.

 

Milk money

The class system is alive and well in parts of England. On a family weekend walk, we came across a small village with two adjacent pubs – one clearly for the toffs, the other more plebeian. This was most evident when ordering coffee. The downmarket pub told us that it served only UHT milk with its hot drinks. The other was ostentatiously horrified at the suggestion that it might serve any such thing. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt