YP The Multinationals Don’t Pay UK Tax – They Leave Tips

Published in the Yorkshire Post 23 November 2012

Our streets are currently full of posters from HM Revenue and Customs. They show a pair of baleful, staring eyes with a warning that the department is closing in on unpaid tax.

The UK bosses of Starbucks and Google and other multinational companies may glimpse at these posters, but I doubt if they are losing any sleep. With the help of expert, expensive advisers they have become confident, even arrogant, in any dealings with the department.

Things used to be different. I worked for HM Customs & Excise, then a separate department, during the 1970s. It chased up tax due with equal intensity from businesses of all sizes. Whether a corner betting-shop or a giant corporation each would be described as “the trader.” Officials were warned against getting too close to “the trader” or accepting hospitality above tea and biscuits. The department would never have appointed senior officials or a chairman from firms which advised clients how to avoid taxes. It did not negotiate liability with taxpayers of any size. It told them what it thought they had to pay, and why, and if it lost an argument over any major issue it would usually ask ministers to change the law so as to win next year.

That culture has gone and MPs, especially in the rejuvenated Public Accounts and Treasury Select Committees, have been very cross with revenue officials for being too timid in their approach to multinational companies. MPs should look at themselves before they start wagging their fingers, because they have allowed successive governments to create an inadequate tax system (and to sack thousands of tax collectors). Our tax system has become hugely more complex (from 1997 to 2011 the tax code doubled in length to nearly ten times that of War And Peace), but in this process it failed to plug all the opportunities for modern multinational businesses to organize their affairs to avoid taxation. Indeed, it created new ones.

The combination of bad law and kid-glove enforcement has ensured that at least £25 billion in corporation tax was uncollected (around 60 per cent of the total yield last year.) Multinational companies in the UK hardly pay tax any more – they leave tips.

Recently, Lord Myners joined MPs in expressing outrage at the behaviour of Starbucks and other giant companies with low tax bills. Coming from a former City Minister in the last government, this was a little like Claude Rains, as the cynical police chief in Casablanca, being shocked to discover gambling in Humphrey Bogart’s bar. However, he re-opened the attractive idea of replacing corporation tax with a tax on business turnover.

It is attractive for many reasons. Turnover is harder to conceal or manipulate than profits. There is also a question of equity. All businesses in the UK benefit from the British state (if only from its legal system, which makes business possible) and therefore any businesses should contribute to that state whether in profit or loss. This principle is recognized in local taxation – loss-making businesses pay rates on the same terms as profitable ones.

I did a back-of-a-bus-ticket calculation which suggested that to raise the same present revenue as corporation tax a replacement tax on UK business turnover would require an average rate of 3.5 per cent. This is not an eye-watering demand, and the simplicity of a turnover tax should save administrative costs and increase its yield.

However, a turnover tax has one overwhelming objection. It confers a major and unearned advantage on vertically integrated companies over those which buy from independent suppliers. Unlike VAT, turnover tax would not be reclaimable. If a business buys goods or services from an independent supplier, it would face an extra cost in turnover tax compared to obtaining them in-house, unless the independent supplier absorbs the tax itself. Even at a 3.5 per cent rate, that would put severe pressure on independent suppliers. It would encourage more big businesses at the expense of small businesses – a generally unhealthy change for the UK economy.

If we want to continue taxing UK businesses at all, it looks as though we are stuck with corporation tax. It should be collected with more fairness and more determination. That means tackling the proliferating pretences of multinational businesses that their UK sales are either non-existent or unprofitable.

Very cautiously, the government is considering the introduction of a General Anti-Avoidance Rule (as used in Canada, Australia and New Zealand), which might allow the tax man to assess the reality of business transactions rather than the fantasy. In summer the government put its proposal out to consultation – with companies and their advisors who have created the very arrangements the Rule is trying to prevent. (Does the government consult with drug dealers on drug enforcement proposals?)

Meanwhile the independent-minded Labour MP, Michael Meacher, has introduced a simpler and tougher measure, which could do much more for HM Revenue and Customs, and would cover VAT as well as corporation tax.

But is there any point in giving that department a battering ram if it goes on using it like a powder puff?

24. November 2012 by rkh
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