No more cuts needed - IF we tax fairly

[breadandbutterfly]

www.guardian.co.uk/politics/2011/dec/20/inland-revenue-sweetheart-tax-deals

HMRC hid 'sweetheart' tax deals for big business, MPs say

HMRC accused of lacking fairness and transparency over corporate tax settlements 'kept from scrutiny'

"Hodge told BBC Radio 4's Today programme: "At a time when it's hugely important that we maximise the revenue that comes in, when it's absolutely imperative that everybody is treated equally in front of the law, whoever they are, however big or small they are, I think it's very, very important that the public are satisfied that there's equity here, and that HMRC are working on our behalf to maximise revenue that ought to come in to the Treasury."

The MPs found that owing to a "mistake", admitted by HMRC, Goldman paid up to £20m less tax than had been due on its bonus payments. Vodafone settled a long dispute by paying £1.25bn, but the committee heard allegations that the tax bill should have been £6bn or more.

The committee hearings found that two undisclosed firms had struck similar deals, and suspect that there may be other questionable deals among £25bn of outstanding unresolved tax bills. "

Well first of all, the Vodafone dispute had been going on for nearly a decade. So in a decade, the HMRC had collected nothing and all that was happening was lawyer's getting rich and the taxman getting nothing. So in THEORY....IF HMRC managed to win the court case then we could demand Vodafone pay up. Of course if we lost the case, they'd pay nothing. It's not as simple as "We think you owe £x billion" and Vodafone say "Sure...here's a cheque."

Now did they get an unbelievably good deal? Yes I think they did. Too good? Probably yes (in my opinion).

But..don't forget much of this dispute was centered around the purchase of Mannesmann. In other words, this was a one off issue and not an annual event.

So you can't simply say "Oh right, that £6 billion would mean we don't need to make cuts." Would it have helped? Sure...if we got it. IF.

And even assuming we could collect this £25 billion, would it mean an end to cuts? Well given our deficit was £168 billion a year when the coalition came to power then no. It would mean less cuts but cuts were/are inevitable.

Groan is what all your posts provoke, niceguy.

Yeah I can probably guess you groan when you read my posts. Because I like to use common sense and logic with my posts. Two things you have absolutely no need for, as long as the rich keep paying eh?

Jeez.

This 25 billion is it actual tax owed - by which I mean something that by law is fairly open and shut on it being due and where in the balance of probability a court would find for hmrc. Or is it one of the more controversial points (like whether uk law contravening eu lAw ) which is debatable.

I ask as i think loss of tax in Vodafone different in reasoning to the goldmans case. As I understand it goldmans was a sweetened deal that went against hmrc practice (there was a moratorium to pay up without interest on this type of case , goldmans didn't take it , lost argument but still got no interest). Vodafone involved years of arguing on interpretation of law .

Leaving all the tax Avoidance/evasion to one side, I have long thought that bolstering hmrc staff, making them stick to procedures so they can collect tax due and offer a better service than currently can would be a far more effective revenue raising exercise than a lot more complicated and often poorly drafted anti avoidance law.

My 'no more cuts' was deliberately provocative, i agree - it's a how long is a piece of string type of question.

But it's pretty much undeniable that 26 billion of savings would allow for much if not all of the worst of the cuts to be avoided - who would not wish cancer sufferers to be guaranteed disability benefits while they recover,for example?

We need to send in someone like the NAO to find out what has been going on. There are allegations and denials, and this needs to be straightened out for the sake of any sense of administrative competence (something that this lot are rapidly demonstrating that they conspicuously lack).

However this is not a magic answer that will mean no more cuts are needed. Even those making the allegations against HMRC admit that the total disputed tax (racked up over some years), if paid in full, is around £25b.

This is less than one sixth of one years' overspend. Not to be sniffed at, obviously, but not sufficient to remove the need for cuts.

Edith, agreed - see my post.

I thought nao had been into look at hmrc - certainly there was reference to it in the statement given on news this morning. I agree a closer look would be good though Edith as not sure what was looked at.

And 25bn (if correct) would be helpful If not a cure all for cuts.

The £25bn is tax which HMRC think could be owed by the largest 770 companies in the period since 1990 - it is the difference between what the companies have self-assessed and what HMRC think might be owed. It may of course not actually equate to £25bn cash even if the HMRC were correct in every instance - the companies may have losses which could be used up to cover the additional liability for example.

Tying HMRC's hands by not permitting out of court settlements will just reinvigorate the careers of tax advisers and lawyers. Many of these cases will concern theoretical pricing or valuation issues rather than issues of law.

If you want to be angry, then imo the taxation policy of Labour in the last decade needs to be fully considered, together with its impact on company taxation. Too many companies took the opportunity to move taxable operations out of the UK as it was too expensive to keep them here when cheaper jurisdictions nearby were available. Would love to know if the NAO are looking into the amount of tax revenue, both in terms of corporation tax and NI/PAYE that have been lost.

Completely agree that an extra £25 billion would be bloody handy but because of the difficulties as described above, it's not something easily retrieved.

This is no different from any large company or organisation. Companies rarely ever collect 100% of money due to them. Council's don't get 100% of all council tax due. Government's don't get 100% of all tax owed to them.

HMRC overall seems to be doing a good job. Yes the numbers look big but the amount they collect is far higher.

why doesn't this self anointed nice guy apply directly to messrs Dacre, Desmond and Murdoch for a job as a rightwing agit prop hack instead of shlepping round a parenting forum patronising and paternalising? he (?) is an irritant.

"as long as the rich keep paying eh?" well, I'm sure this NICE guy would much rather the poor kept paying. Eh?

Or, perhaps we could discuss the fact that corporation tax will be further reduced to "help the economy" and provide all those private sector jobs we were told would be available for all those losing jobs in the public sector?

Anyone noticing this working?

Seriously, is it a good thing? Will it work?

HMRC think that Vodafone owe them more than £6bn, Vodafone think that figure is closer to £1.25bn. To arbitrate, the whole matter has gone to court. Why is everyone jumping the gun and getting worked up about this before the verdict is delivered?

There is every chance that HMRC will be wrong (and, in my opinion and experience, bugger all chance that the £6bn figure is correct) and once this error is codified in law every other company in Britain will follow Vodafones example and arrange their tax affairs in a similar way - the net result will be an even bigger loss for the treasury.

Actualky, I think Niceguy's posts do a good job in debunking ill-founded froth. £25billion over 20+ years does not remove the need for cuts (as suggested in title) to stop overspending of over £100billion each year.

CinnabarRed's tax thread is worth reading in this context too, as that really does show up the misinformation that seems inherent when anyone mentions tax policy. It's a very good read.

"ill-founded froth"? that's what your £25billion over 20+ years not removing need for cuts sounds like to me Mrs. Weston. what about that quaint, old fashioned notion of principles regardless of the cuts conspiracy? strange how the tax dodging apologists of the right have no morals or principles when it comes to filthy lucre. at all.

Jingle I think reducing corporation tax is the ONLY way to get us out of this hole that we're in. It needs to be slashed across the board to levels lower than the rest of the EU. We saw, when the economy was good, that Ireland got a huge boost to its economy by undercutting the rest of Europe (it was so succesful that Germany and France demanded that the rate was raised as a condition of the Irish bailout) Irelands subsequent financial horrorshow is nothing to do with tax rates. We need to make Britain the country of choice for foreign investors to start up businesses in - the easiest way to do this is to attract firms here with our low tax rates - new jobs in new industries will follow.

God - cheer up everyone. It's Christmas!

Attacking the person, not the argument, is usually a sign that the debate is lost.

£25billion - even if it was all collected at once - would reduce this FY's projected overspend by only one sixth. This thread has been very illuminating - I'd probably never have looked at the detail of the Committee's conclusions otherwise. It's abundantly clear (unfortunately) that putting right deficiencies in collecting tax from companies is not going to come anywhere near providing an alternative to the cuts agenda.

MrsMicawber We need a bold alternative to pick this country up and drive it forward. At the risk of getting flamed for what I'm about to say, the socialist model has been tried and it has not worked. High state spending has nearly bankrupted the west - the most prosperous people of any epoch in history - and we have little to show for it that couldn't have been achieved in a purely market driven economy. The sooner we abandon the discredited idea of socialism the better, and in my opinion, a shift to a low taxation economy can't come soon enough.

Some of you might remember the excellent thread created by tax expert Mumsneter - CinnabarRed.

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

This is how she explained the Vodafone issue:

"OK. Vodafone. What happened is this:

In 2000 Vodafone bought the German Mannesmann group. I forget the sums involved but they were huge. Can we use £50bn for the purposes of this thread without anyone wrongly assuming it to be the correct sum?

Vodafone borrowed the money in the UK. It had to because the banks required it to secure the borrowing over its profitable worldwide businesses. Vodafone then incorporated a Luxembourg subsidiary. The Lux sub had £50bn of equity but no debt. The Lux sub incorporated a German sub, and lent the German sub £50bn. The German sub bought Mannesmann.

So what were the implications? The German sub had interest expense that it had to pay to its Lux parent, that it could relieve against the German profits of Mannesmann. I don't have any issue with that because it's a good example of source taxation - a German expense incurred to buy profitable German businesses.

The Lux sub had interest income paid to it from the German sub, and no expenses. But Luxembourg is the tax haven of Europe. Its tax authorities agreed a ridiculously low tax rate on the interest as an incentive to Vodafone to include Lux in the deal at all (not that it's specific to Vodafone - the Lux authorities offer the same deal to anyone who asks. They rationalise that they'd rather collect 8% on something than 37% on nothing). Now frankly, that's Luxembourg's business, not the UK's.

In the UK, there was interest expense on the borrowing from the bank and no immediate income. Because one of the fundamental differences of holding shares (in the case in Lux sub) rather than lending debt is that the return on shares in the form of dividends is discretionary whereas debt interest has to be paid.

The Revenue wasn't happy about Lux. There are specific anti-avoidance provisions that say that if a UK company has a foreign sub, and that sub pays a materially lower amount of tax than an equivalent UK company would then the profits of the foreign sub are taxed on the UK company as if it had earned the profits itself. So the Revenue said to Vodafone that it should pay UK tax on the Lux interest income.

What the Revenue hadn't reckoned on was that way back when the UK joined the European Union it signed the Treaty of Rome. And among all the other stuff that's in there are clauses that say that all companies within the EU are entitled to establish their businesses anywhere within the EU without being discriminated against due to where they're based). Vodafone argued that it was being discriminated against because it was entitled to have subs anywhere the hell it liked in Europe without the UK tax system penalising it for the European locations it chose. And Vodafone won.

(BTW, when I say Vodafone won the argument, I meant with the Revenue - it did go through some of the lower courts, which found in favour of Vodafone, but didn't make it to the Supreme Court. In my view if it had done then Vodafone would have won. The Revenue did bloody well to get £1.1bn out of them - I think Vodafone probably bottled it a bit!)

That's not a loophole, which might be defined as creating an unexpected outcome from the legislation- it's an unambiguous and inevitable outcome of the UK signing the TreatyIVodafone'st not Vodafone's fault that the UK government wasn't smart enough to realise all the implications of what it had signed up for.

The aspect of this that Vodafone really took advantage of was the fact that there's a fundamental difference in the UK tax treatment of debt and equity invested in a (in this case Lux) subsidiary. If the UK was stupid enough to try to treat equity like debt and compute an interest like return to the parent then at a stroke it would make itself the harshest parent company regime in the world. No-one does it. And that's because economically debt and equity are fundamentally different.

The other thing to bear in mind is to speculate over what Vodafone might have done if it didn't use the Lux structure to buy Mannesmann. The simplest thing would have been to borrow in the UK and have the UK buy Mannesmann direct. The problem then would have been that the interest expense wouldn't have been matched against the German income, so the source taxation principle wouldn't have been met. Plus the UK would still suffer exactly the same stinking great interest expenses, so there was no tax lost to the Exchequer.

Finally, at the time of the deal, Vodafone would have expected to pay UK tax when it started to receive dividend income from Mannesmann. Dividends are now exempt from tax, a deliberate policy decision by the previous government to make the UK an attractive location for US businesses to use to invest into Europe."