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.

Photo: Getty
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What's happened to the German left?

For a fourth successive election, the left seems to be failing to challenge the status quo.

When Germany goes to the polls this weekend, Angela Merkel is expected to win a fourth term in office. Merkel has maintained her commanding lead in the polls on 37 per cent, while her closest competitor, the Social Democratic Party (SPD) has been relegated to, at best, a possible coalition partner. 

The expectation that the status quo will continue has left commentators and politicians of all stripes asking: what has happened to the German left?

Lagging behind in the polls, with just 20 per cent of the country's voting intention, Martin Schulz’s SPD has slumped to its lowest level this year only days before the vote, according to the latest poll by Infratest dimap for ARD television.  

Even the prospect of a left-wing alternative to a Merkel-led coalition appears to have become unpalatable to the electorate. An alliance between the SPD, die Grünen (the Greens) and the socialist party die Linke (the Left) would not reach the threshold needed to form a government.

One explanation for the German left's lack of impact is the success Merkel has had in stifling her opposition by moving closer to the centre ground. Over the last four years, she has ruled a grand coalition known as GroKo (Große Koalition) with the centre-left SPD, leaving many of its voters believing their party was no longer any different to the chancellor's conservative Christian Democratic Union (CDU).

Rolf Henning, 34, has been a member of the SPD since 2004. Campaigning in Pankow, a diverse area of eastern Berlin which has traditionally voted on the left, he told the New Statesman that although the coalition had enabled the SPD to push its social agenda, the party did not receive any credit for it.  

“It is now hard to motivate people to vote for the SPD because people think it will not make any difference. If we were to enter a coalition again with Merkel and the CDU then our support base will drain even further,” he said.  

Another grand coalition between the CDU and the SPD is very much on the cards, as Merkel is unlikely to win an outright majority. But while the arrangement has seemingly worked out well for the chancellor, its benefits for the SPD seem rather less certain.

“The political strength of the left is an illusion," says Gero Neugebauer, a political analyst and a former senior researcher at the Freie Universität Berlin, "The SPD did a good job in the coalition to push issues of social policy and family policies, but Ms Merkel took the credit for a lot of it. People saw the car and the chauffer rather than paying attention to the engine."

In 2015, under pressure from the SPD, the Merkel administration introduced a minimum wage in Germany, a benchmark for many in the party which yet did little to gloss over the SPD’s image. On the contrary, Merkel’s election campaign sought to win over disillusioned SPD voters.

According to Neugebauer, the left-wing parties have failed to work together to form a real alternative coalition to the Merkel administration. He warns that Germany’s left-wing camp has become “an illusion” with “virtual power”.

For a short-lived moment the election of Martin Schulz, the former president of the EU Parliament, to head the SPD, brought hope to the idea of a left-wing coalition. 

Stefan Liebich, a member of parliament for die Linke representing the Pankow district, says the SPD initially rose in the polls because people thought there could be an alternative coalition to Merkel. "But then the SPD made a lot of mistakes and they were wrongly told they would lose support if they worked with us," he adds.

"Now nobody believes a left-wing coalition could ever happen because the SPD is so low in the polls.” 

Before Schulz took over the SPD, few believed that after four years in the coalition government the party had a good chance in the upcoming election. “But Schulz arrived and said ‘I will be chancellor’ and it was like a phoenix rising from the ashes,” says Neugebauer.

Schulz revived the social-democratic tradition and spoke about social justice, but the delay of his election programme left many wondering whether he would be able to walk the walk – and his popularity started to fall.

“Compared to Merkel, he became less credible and less trustworthy,” says Neugebauer.  

The SPD are, of course, not the only left-wing party running. Back in Pankow, Caroline, a lawyer and a long-time SPD voter said she was considering voting for the more left-wing die Linke because she did not want to give her ballot to Schulz.

“There is something about him, he is not straightforward and he is too much like the CDU," she continues. "As the head of the EU Parliament, Schulz was good but I don’t think he has what it takes to tackle issues in Germany."

For Ulrike Queissner, also a Pankow resident, the SPD’s lurch to the centre convinced her to vote for die Linke: “The SPD has become mainstream and part of the establishment. It has become too close to the CDU and has no strong position anymore.”

Stable at about 8 per cent in the polls, die Linke is still trailing the extreme-right Alternative fur Deutschland (AfD), which is anticipated to win between 8 and 11 per cent of votes. This means it would enter the German parliament, the Bundestag, for the first time, becoming its third biggest party.

At the core of die Linke’s manifesto is the redistribution of wealth, a peaceful foreign policy and measures to stamp out the remaining social rift between east and west Germany.  

The party strives to challenge Merkel’s feel-good slogans by putting the spotlight on the discrepancies between rich and poor, and east and west.

 “When we look around to Portugal, Spain, Italy, and maybe even to the UK, we seem happy," says Liebich. "We don’t have an exit [from the EU] debate or a high unemployment rate. And yet, there is a part of Germany that sees that things are not going so well."

And for some of die Linke’s eastern electorate, immigration is at the top of the list of grievances, putting pressure on a party which has always defended an open door-policy – something Liebich acknowledges.

“In Berlin a majority of voters say they are open to people who need help, but in the eastern states, where we have a high unemployment rate and a lot of people who are not used to living with people of other cultures, there is a lot of anger."

That will add to concerns that large numbers of silent AfD supporters could create a surprise in the traditionally left-wing area of east Germany, where the far-right party is capitalising on the anti-immigration sentiment. The left seems to be squeezed between Merkel’s move to the centre ground and the AfD’s growing populist threat.

For Neugebauer the prospect of AfD members in parliament should force left-wing parties to sharpen their political lines, and form a consensus bloc against the rising extreme-right. The silver lining lies in the hope that all three left-wing parties – die Linke, die Grünen and die SPD – find themselves together in the opposition.

“Then, there would be an opportunity to start a conversation about what the parties have in common and start working together," he says. "It would be a chance for the German left to find itself again and create a vision for co-operation.” 

And yet, commentators still anticipate that at least some part of the left will end up working with Merkel, either through a grand coalition with the SPD or a three-way “Jamaica coalition”, with the pro-business FDP and the Greens. For the German left the time for cooperation, and a shot at taking charge of Germany's future, may still be some years away.