Island havens help firms in £8bn tax rip-off

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WHILE the government is busy borrowing record amounts so it can bail out banks, one in four of Britain's biggest businesses has sidestepped paying any tax. Of the 700 largest companies in the UK, 181 did not pay any tax last year – and that was before the near-collapse of the global economy squeezed profits.

The government is fighting a losing battle trying to claw back money as its own tax officials are outflanked by private armies of experts hired by multinational corporations. Assets and funds are shifted away from Britain to the sunny shores of Bermuda and other tax havens.

The extent of tax avoidance is laid bare in a report by MPs today. While more families face being turfed out of their homes as they struggle to pay their mortgage, businesses are getting away with not paying their bills to the tune of billions.

The MPs' report, Management of Large Business Corporation Tax, finds that two-thirds of the entire tax take from big business collected is paid by just 50 companies. And it shows that the government also relies on a very narrow range of industries for two-thirds of the 24 billion collected. Much of the tax collected from big business last year came from banking, oil and gas and insurance.

These were once boom industries, but the credit crunch has particularly jeopardised the bottom lines of banks. The government will have to brace itself for its sources of revenue drying up at the most inopportune time.

MPs estimate that the government – and, therefore, ordinary taxpayers – are missing out on about 8.5 billion of tax. HM Revenue and Customs (HMRC) has imposed penalties on large businesses for negligence in their tax returns in just 19 cases over the past year, totalling 15 million. A new penalty regime comes into force this year, however, to make it easier to fine companies actively seeking to avoid tax.

Much of the sidestepping is done through offshore tax havens. Multinational companies can also shift their profits and costs to their overseas divisions, where the rate of tax is usually much lower than the UK.

Thanks to globalisation, complicated tax laws and crafty accountants, a company can pay much of its profits in a country where it neither produces nor sells most of its goods or services. Businesses can also minimise their liabilities by ploughing money into company pension funds or by claiming relief for servicing interest on debt.

For example, J Sainsbury, the supermarket group, paid 110 million into its pension fund in 2005-6, so instead of paying corporation tax it received a credit of 3 million. In 2006-7, it paid 240 million into its pension fund, resulting in a 9 million tax credit.

The beleaguered HMRC is struggling to get a grip on this situation, at a time when tax receipts are more desperately needed than ever.

In addition, a quarter of the department's 600 experts on big-business tax are due to retire over the next decade. The knowledge gap will become even worse as the government has cancelled any international training courses on tax avoidance for its staff, despite much of the money that should be destined for the Exchequer disappearing off-shore. While the government has been losing its expertise, however, the banks and other large corporates have beefed up their army of tax consultants.

Dave Hartnett, the acting chairman of HMRC, told the committee during its recent inquiry why tax was often not collected from the biggest companies: "London, as a financial centre, attracts the headquarters of many corporates, but not the economic activity behind it, so there are many large businesses which have very little economic activity to be taxed in the UK.

"The UK is regarded as having a relatively generous regime for interest relief as well. Then, of course, there are pension contributions. And it would be remiss of me not to say that tax avoidance plays a part in this and we bear down on that."

It is this relief that winds up Richard Murphy, of Tax Research LLP, who said that many of the largest companies were now paying lower rates of tax than much smaller companies. "We need to tackle the real cause of tax avoidance and that is that the government is too weak in standing up to Big Business," he said.

"It gives them far too many reliefs and allowances. Some of the largest companies have undertaken very aggressive tax-avoidance practices. They do this through using offshore tax havens or structured finance transactions. Among the perpetrators are our banks, who are now being bailed out by us."

Mr Murphy said Barclays and Lloyds TSB were actively using structured finance arrangements. He called for new accounting practices to be introduced that would make it easier to see how much tax a company paid. He thinks the amount of lost revenue is nearer 12 billion a year.

There has been an explosion in the number of "bespoke" schemes that help companies minimise their tax bills by transferring some of their assets to lower-tax countries.

Edward Leigh, the chairman of the Public Accounts Committee, has also pointed out that the government spends too much time and money chasing relatively small amounts of money. "The fact that nearly 60 per cent of the department's inquiries into compliance turn out to produce less than 1 per cent of the additional tax raised constitutes very poor targeting," he said. "It is extraordinary that there is no correlation between the resources HMRC commits to each inquiry and the amount of corporation tax in question."

Inquiries can often drag on for years. Nearly half of HMRC's tax investigations last for more than two years, while 13 per cent are more than four years old. However, HMRC is taking defensive action. It has signed up to the Tax Shelter Information Centre based in the UK and United States, which co-ordinates intelligence on tax avoidance activity with Canada, Australia, Japan and America.

It has also introduced a "high-risk corporates" programme, in which senior officials work directly with the management boards of big businesses. Six companies have so far been targeted and the HMRC insists that it has "resolved significant tax issues". One unnamed firm has more than 150 officials assigned to it.

An HMRC spokesman said it had significantly improved its targeting of corporation tax inquiries. "We have cut the number of open inquiries by over 50 per cent since April 2007 and the number of cases focused purely on low-risk issues is down by nearly 90 per cent."