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Tony Wickenden: Where UK tax avoidance crackdown is failing

While HMRC has done well to control the demand from individuals for tax avoidance schemes, its lack of focus on multinationals is letting it down

In an article of mine a few weeks back, I looked at the general anti-abuse rule, how it works and the rationale behind it. The catalyst for that review was the recent application of the GAAR to combat and render ineffective a tax avoidance scheme founded on payment of remuneration in gold bullion, an employee trust and interest-free loans.

The move was HM Revenue & Customs’ way of reminding people the rule exists and it is not afraid to use it.

Tax is rarely far from the news these days it seems. Over the years, both the broadsheets and tabloids have not disappointed. The “rich and famous” have made relatively easy pickings, with the headlines grabbed by those members of the footballing and showbiz elite that have engaged in successfully-challenged tax avoidance.

This naming and shaming tactic has most definitely helped HMRC control (in fact, pretty much destroy) demand for the more racy tax avoidance schemes.

UK corporation tax

 A similar crackdown on UK corporation tax avoidance seems to lagging behind, however. In the past, Starbucks, Café Nero, Google and Amazon have all caused outrage for the small amount of UK corporation tax paid given the huge transactions such businesses undertake with those living in the country.

Tony Wickenden: Tax avoidance rules back in the spotlight

Sadly, the theme has cropped up again, with well-known and well-used multinationals, Ebay and Netflix, now reported to have paid significantly less UK corporation tax than one might expect.

The two US companies with millions of British customers collectively paid less than £1.9m last year, raising new questions about how multinationals structure their businesses to minimise tax bills.

Ebay’s UK business paid £1.6m in tax on £7.6m of profits and £200m of revenues last year, according to its latest filings with Companies House.  However, the online retailer has previously told US authorities it registered more than $1.3bn worth of revenues in the UK in 2016.

Revenues reported in the US appear to include commissions Ebay receives on sales in the UK but those figures are not included in UK accounts. Instead, the UK subsidiary describes its revenue as coming only from providing marketing and advertising services to Ebay’s Swiss entity, Ebay International AG.

Netflix’s latest UK filings show it registered a 39 per cent fall in its UK tax bill to less than 300,000 last year, while its UK revenues and profits almost halved to 22m and 1m respectively. It appears the California-based company, thought to have roughly 6.5 million subscribers in Britain, books all of its subscription revenue from UK users through its parent company, Netflix International BV, which is based in the Netherlands.

One research firm suggests Netflix made $520m of subscription revenue last year in Britain (about 20 times what the company’s UK filings suggest) on the basis of estimated user numbers and monthly subscription pricing.

Low-tax jurisdictions

The underlying issue in relation to these low tax payments is the booking of profits through entities in low-tax jurisdictions, despite the individuals and businesses through whom the revenues are generated living in or being located in the UK.

Such low payments understandably attract the ire of those who live, work and generate income and profits in the UK and pay tax in full on those amounts. Why should they miss out?

How the UK competes on corporation tax

The UK anti- avoidance provisions applying to individuals with offshore structures is largely accepted as being effective. Similarly, solely UK operating SMEs, which look to merely invoice out of a company established in a low/no-tax jurisdiction, will find this to be ineffective to avoid UK tax.

Of course, there is the continuing problem of non- disclosure and evasion for HMRC to deal with but, even here, we have witnessed a few successful amnesties and disclosure opportunities in relation to previously undeclared foreign income.

So it is the recently introduced diverted profits tax for multinationals paying less than trading activity would imply, and imposing a 25 per cent corporation tax rate on such profits, that has been less effective.

And what about the OECD-driven base erosion and profit sharing provisions initiative? The direction of travel in relation to this kind of under-declaration is quite clear but the destination in that journey has clearly not yet been reached.

Indeed, only recently the European Court of Justice ruled that Luxembourg and Ireland had illegally granted unfairly low corporate tax rates to Amazon and Apple, collecting significant amounts of tax as a result.

And just last year, our own ex-chancellor George Osborne was also castigated for what many saw as a “soft” tax payment agreement with Google that meant the US tech giant paying £130m back in taxes on £5.6bn of UK revenues in 2013.

 Keep the pressure on

The exposing of these companies’ practices must continue, as all the publicity (like that given to the rich and famous of football field and showbiz) will keep pressure on the Government to continue its fight against aggressive, abusive tax avoidance, and encourage the public to support it.

The world of tax planning has changed from one where a scheme would be seen as alright if it was within the letter of the law, to one where a successful arrangement must not only be within the letter of the law but also the spirit of the law. And it absolutely must not, regardless of the precise words of the legislation, “defeat the ascertained intent of Parliament”.

HMRC winning majority of tax avoidance cases

Purpose and intent

How did such a huge change come about? Well, it can be traced back to the WT Ramsay and Furness v Dawson cases in the early-eighties where so-called “purposive” interpretation started. This determined that a series of transactions should be looked at as a whole to assess their purpose and intent rather than individually assessing each transaction in a chain independently.

It was also decided that any steps inserted solely with a tax avoidance motive and with no commercial purpose should be ignored when assessing the success or otherwise of the scheme being reviewed.

Boring is the new exciting

Gone are the days when judgements could be relied upon to support tax avoidance within the letter of the law but outside the spirit of the law.

To remind you of what the “old school” judgements on tax avoidance look like, here are a couple of key extracts from two interesting cases:

Lord Tomlin in Duke of Westminster v CIR (1936) AC1: “Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Lord Clyde in Ayrshire Pullman v CIR (1929) 14TC754: “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”

You can see how things have changed. For financial planners and advisers these days, the message is clear: concentrate on the tried and tested. Boring is the new exciting.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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Comments

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  1. The positions taken by Lord Clyde and Lord Tomlin should, I feel, be just as valid today as no matter what politicians say (“you have a duty to pay tax”) everyone in a business will reduce this through legitimate methods. This is right and proper and in the spirit of both judgements. Where there is a problem is that business operations such as that now conducted via the internet was not expected to occur when those statements were made (What would Lord Clyde make of “Double Irish with a Dutch Sandwich”)and tax law has not caught up globally.

    The problem is that changes when applied need to be effective rather than just “to be seen to be doing something”. Targeting the “licencing agreements” for multi-nationals and those arrangements which feed UK based revenue to an offshore base directly is the method which will bring the best results through carefully drafted legislation. This isn’t what has been done so far.

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