Why the Tesco tax story rankles

The supermarket group's alleged behaviour has provoked outrage, but hundreds of other British compan

When Alistair Darling delivers his first Budget on Wednesday, large sections of Britain will be listening out for tax changes. No one voluntarily wants to hand over more of our wages or savings to the Exchequer, whether through higher wine and spirits duties, National Insurance or inheritance taxes. All of us look for ways to minimise taxes, whether it means finessing a house purchase price to keep stamp duty below a higher threshold, paying the roofer in cash to avoid VAT, skipping across the Channel to buy booze for a party, or - for the richer among us - setting up trust arrangements in the Channel Islands to avoid the full brunt of inheritance, dividend and other taxes.

Yet the opportunities for minimising taxes, or "tax efficiency", as it is fashionably called, are generally limited. Under our PAYE system, Her Majesty's Revenue and Customs (HMRC) grabs a chunk of our income first and we end up asking questions afterwards. The iniquity, for instance, of emergency taxation is something that affects almost everyone starting a new job and can take months to rectify. This is because most people do not have access to the best legal and tax minds paid to avoid taxation.

In the early 1990s, I wrote a business biography of Lord Hanson, at the time Britain's most successful tycoon and one of the handful of bosses with whom Margaret Thatcher enjoyed a whisky. Hanson regularly used to take to the columns of the newspapers extolling the virtues of free markets and low taxation. He was something of an expert in the latter: Hanson was run largely by accountants (including the great man himself) and had within it one of the best tax teams in the business. By running its profits through a complex series of offshore companies and trusts in Panama, it managed to avoid paying any taxes in the early 1980s and only tiny amounts of corporation tax from then on. So, with the right advice, companies can and do keep their tax bills low. Indirectly, even the government is at it. Private finance deals for refurbishing the Treasury and Home Office have been parked in Channel Island tax havens by Whitehall's investment partners in the City.

Personally I was not greatly surprised when the Guardian, in an incomprehensible series of articles late last month, sought to demonstrate how Tesco, using a network of offshore enterprises, aimed to keep taxes on sales of property as low as possible. Tesco is, of course, not doing anything wrong, nor is it out of line with normal business practice globally. What may rankle with the public is that it was Tesco which was allegedly involved. Hanson was a huge global conglomerate, with very little direct contact with consumers, but Tesco is known to us all. Indeed, it boasts that £1 out of every £8 spent on Britain's high street goes into its tills.

The point is that most people spending that money at Tesco tills will have paid up to 40 per cent tax on their earnings. If they decide to buy an electrical kettle, they will be paying double taxation in the shape of 17.5 per cent VAT. They have little opportunity to offset any of their tax bills.

There is another distortion, too, that affects every director at every company that seeks to be tax-efficient. The less tax paid, the greater the earnings attached to each share and the more likely the bosses will earn a larger bonus. Indeed, one of the great untold stories of foreign takeovers of major British companies is the impact on HMRC's revenues. For instance, once Rowntree Mackintosh became part of the Swiss giant Nestlé, it vanished into a food behemoth that pays virtually no tax in Britain. It is not an exception.

There is something grotesque about the highest-earning people in our society paying the lowest taxes. Yet when Darling sought to address some of these issues with his reforms to capital gains tax and non-dom status, he found himself vilified by the City and an unseemly alliance of the Confederation of British Industry, Financial Times and Daily Telegraph.

So what is the answer to the inequities of Britain's tax system? The key, in my view, is the Hong Kong and Eastern European model of flatter and lower taxes. For decades, the UK was obsessed with progressive taxation under which richer people or companies faced the highest tax rates and the less well-off the lowest. That was fine in principle but it simply encouraged tax avoidance and cheating. If, for instance, there was one single, low rate of corporation tax for every company in Britain, and no allowances or reliefs at all, there would be no need for setting up elaborate structures ending up in Liechtenstein, Panama or the Cayman Islands.

In recent Budgets, new Labour has shown a great liking for tax reforms that eliminate reliefs and lower headline rates. It should stick to its guns, otherwise it may end up ceding this high ground to the Tories.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 10 March 2008 issue of the New Statesman, How Hillary did it