Caroline Lucas’ bill fights taxdodging - another alternative to harmful public spending cuts

[ttosca]

Caroline?s new Tax and Financial Transparency Bill, which could help the UK recover billions of pounds of lost tax by forcing companies to be more transparent in their accounting, is on the agenda for debate in Parliament on Friday (10 June).

The Bill, launched by the Brighton Pavilion MP in March this year, is due for its second reading in the House of Commons ? and will also feature on BBC Radio 4′s Decision Time programme tonight.

The Green MP launched her campaign after posing a number of Parliamentary Questions to the Chancellor, in which she exposed the fact that H M Revenue & Customs is failing to prevent serious tax evasion which could amount to as much as £16 billion in lost tax.

A report published by Tax Research UK in March revealed that around 500,000 companies ?disappeared? from the UK?s Register of Companies in the year to March 2010 ? with billions being lost to the Exchequer as a result.

Caroline believes that urgent measures are needed to stop companies that are formally dissolved from trading fraudulently, thereby undermining honest businesses who do pay their taxes.

She is also calling for a requirement on multinational companies to publish information on where they make their sales, record their profits and pay their taxes, in order to ensure that corporations make a fair and proper contribution to society.

Caroline said: ?The first aim of this Bill is to tackle the scandalous reality that around 500,000 companies every year appear not to be paying tax in the UK.

?Tax Research UK estimate that regulatory failures by H M Revenue & Customs and Companies House mean that around 500,000 companies a year fail to pay their tax or file their accounts.

?A great many are simply struck off the Register of Companies as a result, never to be heard of again. It is thought that up to £16 billion of tax a year might be lost to the country as a result.

?This Bill would ensure that banks have to provide details on all accounts they maintain for companies operating in the UK so that H M Revenue & Customs and Companies House can chase those companies who do not file the returns they?re obliged to make for the missing information ? and the tax they owe.?

She continued: ?Secondly, the bill would force companies to ?publish what tax they pay?, requiring all companies filing accounts in the UK to include a statement on the turnover, pre-tax profit, tax charge and actual tax paid for each country in which they operate, without exception.

?If they only trade in the UK, this has no impact on them. This information would, however, mean that the answers to the questions asked of Barclays Bank earlier this year about where it earned its profits, how much profit was recorded in tax havens, and where it paid its taxes could be answered for all companies trading internationally.?

The Brighton Pavilion MP added: ?This information is vital if we are to ensure that multinational corporations make a fair and proper contribution to our society.

?Companies cannot opt out of corporate social responsibility ? and paying tax to the country that provides them with their opportunities to trade is an essential part of it. You can?t be socially responsible and accountable unless you say where you are and what you do in each place that you trade.?

brightgreenscotland.org/index.php/2011/06/caroline-lucas-bill-fights-taxdodging/

The rich thing is legacy labour but still seems ongoing.

The CEO thing sounds very odd .

Gaston, the CEO was confronted by the program investigators in his company reception and his answer was, and I paraphrase. "Ileave all that stuff to me accountants" as if that made it right.

BTW remember a said a lower percentage of tax not lower tax.

Nice excuse newwave for him. Maybe claiming wasn't resident doing duties here (only a guess)?

Gaston, you are possibly right, I had steam coming out of my ears and this was before the crash which people like him helped to happen.

I sometimes has an afterwork drink in the city area on a Friday evening and hearing some of the braying gits from the banks I want to pour my wine over their heads.

It was funny on one occassion when a couple of Ruperts made an overloud comment about a pair of builders who had come into the pub (City Wall), one of the builders obviouly heard and had the Rupert by the collar of his suit/shirt, the guy shat himself :o

Hi. Sorry to come to the party late. This thread evaded my attention somehow!

OK, here'e my analysis of this issue:

The original report cited by Caroline Lucas MP was written by Richard Murphy of Tax Research UK. Some of you will know of Murphy from past threads. His argument runs thus:

• The number of companies formed each decade has risen exponentially, with a large increase from 2002 onwards which reached a peak in 2006/07. Murphy attributes this to: the abolition of audits for small companies (turnover less than £5.6m, subsequently raised to £6.5m) in 2004; falls in the costs of incorporation; and tax incentives encouraging sole traders to incorporate, including the short-lived 0% tax rate which was introduced in 2002. Of these, tax incentives are by far the most important.

• In 2009/10 there were 2,589,900 companies on the corporate register. Only 45.7% of companies on the corporate register some point during 2009/10 filed tax returns.

• From HMRC and Office of National Statistics data, 915,000 companies had taxable profits in 2009/10 (73% of the total of 1,183,000 that filed a Corporate Tax return). So around a 1/3 companies on the Companies House register actually paid Corporation Tax.

• Murphy calculates the ?missing companies? as follows:

1. There were 2,589,000 companies on the register at April 2010
2. Of these, 19% were declared dormant for accounts purposes
3. So he calculates that there were 2,098,000 active companies for accounts purposes
4. He makes an allowance for companies that might never trade but equally not bother to declare themselves dormant, assumed to be 50% of the number incorporated in the year. This brings the number of active companies down to 1,917,000.
5. We know that 1,183,000 submitted tax returns, so apparently 734,000 did not.
6. Assuming 73% of the non-compliant were profitable, then 536,000 profitable companies failed to declare their income to HMRC.

• From HMRC data, the average Corporation Tax bill for a small company is £10,492. Murphy assumes that the ratio between other taxes (i.e. taxes bourne and taxes collected such as PAYE) and CT for small businesses is 3:1 (PwC note that the ratio for large companies is 9:1), giving an annual tax liability of £30k. [As an aside, I can?t help but note than Murphy is perfectly happy to include all taxes collected from companies in his calculations of the tax gap, but excludes them when the banks point out the total taxes they contribute to the UK economy through employment.]

• 536,000 companies, each owing £30k per annum equals £16.1 billion.

• How might they get away with it? Murphy asserts that companies are either dissolved between their first and second anniversaries in order to avoid filing their Companies House annual return, or dissolved between their second and third anniversaries in order to avoid filing accounts at Companies House and with HMRC. He notes that 46% of companies that get dissolved each year are less than 3 years old.

Now, there are some important points that Murphy makes here.

1. The first is that there must be economically active companies out there that are fraudulently failing to declare their activities to HMRC, and they can get away with it by voluntarily dissolving themselves before their third birthday. Personally, I don't believe that the number of such companies is anything like as high as half a million, but there are undoubtedly some and Murphy is absolutely right to suggest that something should be done about it. (Why do I think it's less than 500,000? Partly because Murphy fails to allow for the fact that there is a difference between being dormant for accounts purpose and being dormant for tax purposes, and partly because I suspect 50% is a low estimate for the number of dormant companies who have simply failed to declare their dormant status.)

1. We know that in 2009/10 only 64.7% of all Corporate Tax returns requested by HMRC were actually filed. 1,796,000 companies were asked to file returns, and 1,183,000 had done so by November 2010 (1,162,000 on time and 21,000 late). I was surprised that the figure was as low as 65%, and agree with Murphy that the reason for so many companies failing to file needs to be investigated. I do note that tax geared penalties - that is, penalties linked to how much tax is due - for late filing only kick in once returns are more than 6 months late (before that it's a fixed penalty of a maximum of £200), and of course hold no fear for loss-making businesses which don't owe any tax.

1. Even if he's right and there are 500,000+ active companies which have failed to declare their tax liabilities, his estimate of £30k of lost tax per company is unfeasibly high. I believe that the majority of active companies that fail to file tax returns will be loss-makers (due to the late filing penalty point above).

1. As a matter of fact, the tax fraud that costs the Exchequer the most money involve traders registered for VAT. If they didn't register the fraud wouldn't work. Basically, they claim to recover input VAT suffered, and do a runner before they have to account for output VAT.

1. If criminals want to give their fraudulent activities a veneer of respectability, it's much easier to make up a false company and letter head, rather than go to the trouble of registering a company and then dissolving it three years later.

1. From personal experience I know that many companies get registered with every intention that they'll be used for economic activity, but never do. Sometimes it's as simple as protecting a name. Once a company is registered under a name, it can't be used by anyone else. Also, laziness is a massive force of inertia for some sole traders who intended to incorporate but never actually do.

So in conclusion, there's something here, but nothing like £16bn of missing tax. I'd be amazed if it were more than £500m. Still a lot, but not a figure to make a material difference to the economy. Sorry Caroline.

Just wanted to add a quick word on country-by-country reporting, the other part of Caroline Lucas's Private Members Bill (which, by the way, has absolutely no chance of ever being passed or becoming law, just like every other PMB, but which are good ways for MPs to get issues raised).

Caroline Lucas, and many others, believes that the additional accounts disclosure inherent in country-by-country reporting would uncover details of two fundamental issues:

• Multinational corporate groups routing profits artificially into low- or no-tax jurisdictions (with developing countries being allocated correspondingly lower profits than should by rights be due); and

• Senior government officials in developing countries corruptly creaming off tax revenues for their own personal use, and hiding their ill-gotten gains in tax havens (by the crude means of adding together all of the tax that multinational corporate groups say they are paying to a given jurisdiction, and comparing it to the taxes declared as collected by that government).

My view is that country-by-country reporting would create an unacceptable administrative cost for business without producing any of the benefits that its supporters assume would arise:

• Requiring global companies to produce, and have audited, detailed profit and loss figures for every country in which they operate, would be expensive and time consuming (especially given that some jurisdictions do not oblige them to do so as a matter of course ? and most don?t require a company to separately identify social security contributions or irrecoverable VAT, for example). The accountancy firms, which do not support CBCR are often accused of doing so out of self-interest. In fact, if they were motivated by self-interest then they would be fighting hard for its introduction because it would mean higher audit fees.

• It would also make their accounts, already long to the point of incoherence, even less wieldy. Sheer length and complexity are already factors making accounts hard for all but very specialist readers to understand.

• There is no conceivable way to assess from accounting information whether taxes paid in a particular jurisdiction are "correct" ? there are many legitimate reasons why taxes might seem low compared to profits, including reliefs, utilisation of losses and tax holidays. Tax holidays are often a significant feature of developing countries? tax regimes.

• It would be impossible for anyone to access sufficient information to accurately assess how much tax a country should collect ? even if every single multinational provided the necessary information, and someone could collate it for every single one, it would ignore personal taxation (and indirect taxes levied on individuals, and taxes paid by local companies) which can easily make up 3/4 or more of total revenues collected.

• Turning away from multinational companies to local corriuption, if a wicked dictator is stealing tax revenues from his or her country (and of course this does happen), they are unlikely to be overly concerned by Christian Aid et al recognising the fact. What could tax protestors actually do?

In my view, the most important way to tackle corruption and indeed transfer pricing abuses is to equip national tax authorities (especially in developing countries) with the necessary skills and tools to design more effective tax systems, as well as challenge tax payers on their tax payments, and encourage democratic representation for the people. Country-by-country reporting would do neither.

Cinnabar - thank you for that. You have put the numbers on the bones of my gut feeling that Caroline Lucas is being quite unrealistic about the amount of tax being lost in this way. Some will be being lost but nothing like the amount suggested.

I know I had a small Ltd company for some years. It was dormant for some of that time and not trading or paying tax or only paying intermittently in small amounts and then larger lump sums and then I shut it down. All completely legitimate and it paid all the taxes due and filed returns on time but my company would still have fallen into the figures used in her estimate.

My strong feeling is simplification of our tax system to remove all the complexity and available loopholes and write offs would collect far more tax. The UK tax code is now I think the longest in the world (apart from India?) and it would be far far better to get George Osborne to focus on cutting its length - as I think he promised.

Junking 95% of it should be the target.

Cinnabar So Richard Murphy is behind this!!

I remember him - he was the guy behind the George Monbiot Tax heist article.

When Robert Peston finally poured a bucket of water on it, Murphy was most peeved. His blog post rebuttal of Peston was very defensive and angry. You'd have thought he's written the Heist article himself . I don't think Monbiot did a rebuttal - probably just went back to a subject he knows something about.

And now it's Caroline Lucas's turn.....

Yes, it's the same Richard Murphy who was behind the Monbiot article.

Caroline Lucas put various questions to the Chancellor in the House, which is where the HMRC statistics I quoted above come from.

I do have a problem with Murphy. He makes some good points, which I try to acknowledge, but they're buried under so much assertion and assumption that it's almost impossible to find the gems among the dirt.

Intellectually, any time he comes across a figure that he either doesn't recognise or isn't as he expects then he assumes that it's down to illegal, immoral or otherwise underhand behaviour. And sometimes it is (he's very good on the subject of Low Value Consignment Relief out of the Channel Islands, for instance). But mostly there are sensible explanations that he simply hasn't taken into account. He does both himself and the tax debate a huge disservice.

I also have an issue with the comments section of his blog. The personal abuse he levels at people who disagree with him is truly astounding. That's when he allows their comments to stand - mostly he moderates them out.

MoreBeta - yes, a simpler tax system would be a great step forward.

I do sometimes muse over what would happen if the whole tax code was ripped up, and replaced with a single sentence: "Each person in the UK shall pay taxes in line with the resources he consumes and which have contributed to his income, profits and gains."

Probably the deficit would treble overnight!

newwave - agree. Don't pour wine over them, use brandy. It burns better.

We all want to pour drinks over the heads of braying bankers! Perhaps a flaming sambuca is the answer....

(Caveat: I know not all bankers are like the ones that newwave mentioned. But a fair chunk are....)

This would have something to do with Vodafone - £6 bn unpaid UK tax bill.

And thats just one company.

HH - see CinnabarReds-tax-thread About the 6th comment from the top.

No, nothing to do with Vodafone. (That was all about buying a German company). Vodafone does not operate extensively in the developing world, nor has it failed to file tax returns or accounts, so neither of Caroline Lucas's proposals apply.

If you'd like to read a sensibly written report into questionable practices by corporations in the third world, may I refer you to ActionAid's report into SAB Miller? I'm on my phone so can't link, but a google search will find it. Although there are parts I don't agree with, it's a well researched document and is far more credible than some of the other literature from tax campaigners.

Thanks jacks but I find cinnabar makes some rather cruicial mistakes - ie Vodafone did NOT win the court case, they were actually found liable for the £7bn tax that they had tried to evade.

There was then some sort of dodgy deal which means they still have not paid their legal contribution, and only paid a small proportion. If only we could all set up dodgy deals with the tax man! The country would be in a far worse state.

As cinnabar works for one of the companies that arrange tax avoidance schemes, of course she would seek to defend these practices, so excuse me if I prefer to take it with a pinch of salt.

It is only right that companies should make clear how much profit they have made in a country, how much tax they should pay, and how much tax they have actually paid.

It may surprise many people that they dont already do this. The difference between tax owed and tax paid may surprise them even more.

If I may make a couple of factual corrections, HHLimbo?

1. Vodafone lost their argument before the Court of Appeal that the UK's CFC legislation was entirely ineffective. The court decision is here:

www.bailii.org/ew/cases/EWCA/Civ/2009/446.html.

1. However, the substantive point had already been won in the Cadbury Schweppes case. That case tells us that the UK CFC legislation can't apply where a UK company has "genuine economic activities" in an EEA overseas territory (in Vodafone's case, the EEA overseas territories were Luxembourg and Germany).

1. The problem is that Cadbury Schweppes doesn't give guidance on what "genuine economic activities" actually are.

1. Once Vodafone had lost before the Court of Appeal (and was refused leave to appeal to the Supreme Court), it was then up to HMRC and Vodafone to agree whether it did indeed have genuine economic activities in Luxembourg and Germany. In the first instance, the courts leave it up to HMRC and the taxpayer to agree this kind of thing. Cases only go to court when they can't agree.

1. In my view (and it's only my view, but it's one held by many), if it had come down to (more) litigation then Vodafone would have won.

1. Neither HMRC nor Vodafone ever expected the bill to be £6-7bn. Dave Hartnett, then head honcho at HMRC said as much to the Treasury Select Committee earlier this year - I paste below unaltered transcript from the TSC minutes:

Dave Hartnett: Vodafone put in the public domain the sum they paid, which we believe to be the actual liability, which is £1.25 billion. That is the real issue, Mr Norman, about the £6 billion. This is-may I repeat myself?-an absurd figure.

Q154 Jesse Norman: Is there anything you want to add?

Dave Hartnett: There are a few other things, if I can pick two or three things at random. There have been allegations, which we haven?t felt able to counter before, that Mr Connors of Vodafone and I met regularly and in secret to cook up the deal. At no stage during my involvement with Vodafone did I meet Mr Connors. I never wrote to him. I never received a letter from him. I never had a text from him, or an e-mail, or telephoned him or received a telephone call. We had nothing whatever to do with each other.

Secondly, I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout.

The third thing worth saying is that I think I have read somewhere that I brought Mr Cruickshank of Deloitte into the matter. No, not at any stage. Of course I know Mr Cruickshank, he is one of the country?s leading tax accountants, but I did not bring him into anything. We don?t do that.

Q155 Jesse Norman: On that point, do you mean that you did not bring him in, or he was not brought in?

Dave Hartnett: He came in, I think, at the request of the company.

Jesse Norman: So the company brought in Deloitte?

Dave Hartnett: Yes. We don?t do that.

Q156 Jesse Norman: He is someone with whom you have had no other relationship?

Dave Hartnett: No. Over probably 15 years in tax I have seen him on many occasions, on many different matters, because he is one of the country?s leading tax specialists.

Q157 Jesse Norman: He has advised HMRC?

Dave Hartnett: No. He has not advised us. He has always acted for taxpayers.

Q158 Jesse Norman: I understand. Thank you for that. Can you tell us how the case was settled? What was the procedure by which you settled the case?

Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone.

Q159 Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for.

Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can. We had to balance out whether we were going to get more money for the country by litigating or more money by getting the right negotiation, and there were plenty of tax QCs in the UK lined up telling us and the media that we were not going to get a penny through litigation.

Q160 Jesse Norman: How many large business corporate tax avoidance cases have you litigated or taken to the Tax Tribunal in the last five years?

Dave Hartnett: Quite a lot. We protected through litigation last year-most of this number will be big business-about £6.25 billion. I am trying to find a list I have brought because I thought that it might be helpful. Can I just illustrate with one or two?

Jesse Norman: The number that you have taken to the Tax Tribunal is the question I really want to get to.

Dave Hartnett: I will have to let you have that in writing-the number to the Tax Tribunal. But we have, across all our tax litigation, about 10,000 cases in litigation at any one time.

Q161 Jesse Norman: But how many with what you might call your large business service? How many of those were litigated?

Dave Hartnett: I can?t give you a precise number but quite a lot of the 800 or so entities that are in there.

Q162 Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, two commissioners of HMRC.

Q163 Jesse Norman: Are they board members?

Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well.

Q164 Jesse Norman: Was there any difference of view as to how the case should be prosecuted as between the board members and the team involved?

Dave Hartnett: Not once the case had been escalated. I think one or two of our colleagues-not working on the case but elsewhere in the department-felt that we should have said to everyone in the department how this case was progressing. When you think of the scale of it, this was incredibly market sensitive in terms of an amount of money, so we could not explain to large numbers of people how the matter was being dealt with, but it wasn?t dealt with differently from other cases.

Cinnabar - of course, you are always welcome to correct yourself, this is something I always encourage. Thanks, its appreciated.

Vodafone lost their case. It was confirmed that they were legally liable for the tax, but as far as I know they are still refusing to pay it. unethical

Sorry late in day and not that quick- what do you mean refusing to pay it? The settled amount or the estimated amount (ie the 1 billion odd agreed with hartnett or the higher amount referred to in judgment)

google it.

Am none the wiser so please explain as all I can see is references to the settlement process cinnabar red alluded to.

It wasn't ever confirmed that Vodafone were legally liable to pay £6bn in tax over this case. Never!

It was confirmed that the principles established in the previous Cadbury Scweppes case couldn't be extended as far as Vodafone wanted. So the Court of Appeal sent Vodafone and HMRC back to the negotiating table to discuss how much tax should in fact be due. Hard as many people find it to accept, there isn't always a clear answer to that question when there is genuine uncertainty about how tax law should be interpreted. Together, HMRC and Vodafone agreed that the right amount was £1.25bn. Which Vodafone has paid.

BTW, it's not fair to hijack this thread with a discussion on Vodafone.

I'm very happy to keep debating Vodafone, or any other tax matter, on my tax thread.

www.mumsnet.com/Talk/politics/1154984-CinnabarReds-tax-thread