British Treasury ministers like to talk about “cracking down” on tax avoidance and evasion. And Chancellor Osborne is currently claiming credit for pressing fellow EU members to sign up to improved information exchange. Just how seriously should these claims be taken? Who is advising Osborne, and whose interests do those advisers serve? Can we be confident that our taxes are designed and collected on a politically impartial basis?
Up until ten years ago the Boards of the Inland Revenue and Customs and Excise departments were based in their own imposing buildings, reflecting the Boards’ legal separation from the Treasury. They managed the administration of the taxes and the development of tax policy at one remove from the Treasury, under an arrangement that worked well through most of the twentieth century. Merged into one department by chancellor Gordon Brown, the new HM Revenue and Customs doesn’t now have a headquarters of its own. What used to be the front entrance to HM Treasury in Parliament Street now carries HMRC’s nameplate. Around the back on Horse Guards Road is the new Treasury entrance, created in 2003-04 in a PFI-funded refurbishment of the building - an irony so exquisite as to outdo any political satire.
These developments reflect the emasculation of the revenue departments, at all levels. The Revenue’s service to smaller taxpayers is lamentable. And government now lacks any demonstrably impartial advisory function for tax policy, following what Richard Brooks calls “the corporate capture of tax lawmaking”, a subject that has increasingly troubled the Public Accounts Committee (PAC). It is this that is at the heart of Brook’s latest book, The Great Tax Robbery.
So comprehensively has big money and its advisers captured tax policy development and implementation that HMRC’s Board is now chaired by the former ‘head of tax practice’ (big-money “tax-planning”) at KPMG, one of the “big four” accountancy firms. These accountants are not the docile reclusives of legend, but vigorous lobbyists in their own tax-planning cause, with ready access to the very top. Revenue officials, for their part, have traditionally been extremely self-effacing. Yet HMRC’s most enduring public face over the past decade has been that of Dave Hartnett.
Ostensibly the Revenue’s top tax inspector, Hartnett is better known as chief spokesman for the “Getting Closer to Business” initiative, as the sealer of controversial deals, and as the UK’s “most wined and dined civil servant”; a situation without precedent in history of taxes in the UK. Hartnett’s deals with Vodaphone and Goldman Sachs have drawn endless adverse comparison with the increasingly shabby treatment of less influential taxpayers. In these straitened times a rational government might have been expected to look to boost its tax compliance effort. One study puts the current account deficit at up to £175bn and the tax gap at £120bn. Yet Revenue staff numbers were cut from 104,000 in 2004/05 to 67, 000 in 2011, with the promise of a further 10,000 “efficiency savings” by 2015 regardless of the consequential loss of tax and of diminished accessibility for smaller taxpayers (HMRC Business Plan 2012).
But the subversion and emasculation of the Revenue, is just one part of Brooks’ story. Formerly a senior investigator in the Inland Revenue’s (now defunct) International Division, latterly Private Eye’s leading writer on tax, Brooks gives us a virtual compendium of tax games, bookended by important statements about tax and its social function in the UK and abroad. Among this compendium is the fragmentation of businesses (by payment via tax-haven associates, for stock in trade or use of trade marks), and debt financing of trading operations. Thus, as the public is becoming increasingly aware, “branded” operations, such as Starbucks in the UK and SABMiller’s in Ghana, declare negligible local profits and pay little or no local profits tax. Outdated international tax conventions allow multinationals to strip profits away from the point of delivery, often through the Netherlands, Luxembourg or Switzerland, to be deposited in remoter tax havens. These activities, facilitated by the tax-planning fraternity, both deplete the public revenue and simultaneously undermine the competitive position of local business and talent, who don’t have the scale to exploit these “tax planning opportunities”.
Did you realize that Arsenal’s first all-overseas team of 2005 was cheaper to assemble and run than any local squad of equal ability, because of our 19th century tax domicile rules? Or that this distortion continues to affect both football and the wider financial scene, whether it involves banking, hedge funds or private equity? (Not to mention the associated inflation of house prices in London and southern England.) Brooks also maps and explains the complex interplay of differential tax treatment of inserted intermediary companies (fellow group members, resident in countries with double taxation treaties with the UK): and cross-border interest flows, giving rise to tax deductions for interest paid in the UK, attracting no tax charge for interest received, beyond a token “turn” of a fraction of one per cent for the Luxembourg Fiscal authorities. The opportunities for international “tax arbitrage” appear endless under current conventions as determined by the OECD and the EU . But public awareness of this has been growing thanks partly to the protests of development charities and of UK Uncut. The minimal tax contributions made by Google and Amazon have attracted particular attention. Amazon, relying on a business structure involving a headquarters in Luxembourg and computer servers in Ireland recently paid £3.2m corporation tax on sales of £320m or £4.2bn, depending on who you believe.
What is less well understood is how our domestic tax-base has been whittled away by endless concessions over the tax rates payable, on the profits of private equity and also the overseas subsidiaries of UK multinationals. In the name of “modernization” of tax law we have become a tax haven, where the profits of overseas operations are exempted while the costs of financing them are tax-deductible. The rationale for this, according to the Treasury, is to achieve “a better fit with the way [multinationals] structure their commercial operations…”. Thus, as Brooks puts it, anti-avoidance laws had to be relaxed in order to… accommodate companies’ tax avoidance schemes.
He also reveals how the PFI (Private Finance Initiative) explosion of capital expenditure under Gordon Brown combined desperately poor value for public money with wholesale avoidance of tax on the commercial profits of the providers. Additionally, it provided a huge “in” to the Treasury for the “big four” tax scheme designers (KPMG, Deloittes, E&Y and PwC) and their legal associates. All this to keep the capital costs of schools and hospitals off the government’s balance sheet. The British state fiscally eating itself, in Brooks’ words, to facilitate Brown’s claim to be sticking by his “golden rules”. And this is just a sample of the extraordinary abuses exposed by Brooks.
Without saying so directly, Brooks is plainly an advocate of the postwar mixed economy, un-persuaded by the relentless pro-big-money, anti-tax rhetoric of recent decades. He cites the extreme imbalance in the resources and publicity devoted to relatively trivial benefit fraud, compared with huge losses to tax fraud and avoidance. Questioning another favourite of the low tax lobby, he examines OECD data on the lack of evidence that low tax rates necessarily promote growth. And on the Coalition’s audacious break up of the NHS, Brooks looks at the evidence reported by the British Medical Journal that in terms of reducing mortality, the NHS is one of the world’s most cost-effective systems, while the US health system is one of the least.
His prescription for restoring some order is relatively modest. Unlike fellow-campaigner, Richard Murphy, of Tax Research UK, he seems to doubt that unitary taxation (or country by country apportionment of world income/profits by reference to local turnover, staff, capital investment etc) is a political possibility, not withstanding that the EU is now proposing it. He suggests more modest changes, mainly in relation to transparency, on the basis that avoiders and evaders hate publicity. Brooks wants tougher disclosure obligations on taxpayers, a moderation of EU fundamental freedom rules where they produce perverse tax results, for tax havens to be forced to provide information on their activities. He wants abolition of the current asymmetries in multinationals’ tax treatment and abolition of non-domicile status, introduction of a basic minimum tax rule, and an end to the one-way-bet treatment of tax avoidance schemes, where the aspiring avoider risks nothing more than his fees, regardless of the artificiality of scheme in question.
Brooks’ final plea is for a restoration of the appropriate distance between the Revenue and major taxpayers and a rebuilding of HMRC’s greatly depleted capacity, not least of its specialist units. While Dave Hartnett was addressing conferences on “Managing Tax Optimization Expectations”, and making controversial “bespoke” deals with avoiders and tax havens, Brooks’ former colleagues were telling him “We used to have a priority to collect tax, now we have a priority to have a good relationship”.
This, surely, is the first priority for parliament. Absent an impartial and adequately resourced fiscal authority, staffed by public servants trained and incentivised to do a professional job (as once they were) the details of the tax code are almost academic. Hartnett has now quit the department following multiple run-ins with the Public Accounts Committee over alleged “sweetheart deals” he made with big business. Brooks identifies these as having created precedents deeply adverse to the public revenue and the public interest. But very serious questions remain over the ethics of tax avoidance and the appropriate posture of parliament.
In a recent BBC 4 profile of Margaret Hodge, Chair of the PAC, the editor of the Taxation magazine complained that members of his tax-practitioner profession were being “traduced” by her comments about the tax-planners. Yet the political class at large has been reluctant to confront the fact that the designers and promoters of tax avoidance schemes not only help extract value from the public purse without contributing anything to the real economy, but they also facilitate the smothering, by big money, of small business and local enterprise. Brooks doesn’t quite develop this, and discuss why more political voices have not been raised in protest. The anti-competitive, anti-local effects of big-business tax avoidance, combined with the Hartnett phenomenon and the growing dysfunctionality of the Revenue, should be issues of primary political concern. At the most superficial level, for instance, HMRC’s website has not carried a proper organization chart for the best part of a decade, and its telephone response times are quite dreadful.) Perhaps a new, joint parliamentary fiscal committee would be helpful.
It would also have been good to have Brooks’ assessment of the impact if interest costs generally were to cease to be a deductible, and if unitary taxation were introduced by the EU/G8/OECD. These two measures alone would surely transform the landscape overnight, and they don’t look much more aspirational or optimistic than some of Brooks’ own proposals. But The Great Tax Robbery remains a brilliant and important expose, regardless. As public interest is further sparked by the PAC’s dogged examination of HMRC’s failure to keep a serious grip on any part of its remit, Brooks’ book will serve as the handbook of choice for interested observers, wishing to understand just what big money and its advisers have been up to.
(Chris Hill is a pseudonym)