March 22, 2013 6:25 pm

All carrot, no stick

Not only do multinationals avoid tax – they also help write the tax code. But do politicians have the power to rein them in?
Offices at Canary Wharf, London©Panos Pictures/Ian Teh

Offices at Canary Wharf, London

The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business, by Richard Brooks, Oneworld, RRP£12.99, 272 pages

It’s the oldest game of cat and mouse in the world. A government needs money, so it levies taxes. Its citizens, particularly those rich enough to buy time to think, go to great lengths to pay as few of these taxes as they can. Any crowd-pleasing book about tax, you might imagine, would play up the conflict in this situation, packing its pages with skirmishes between the bloodsucking bureaucrats and the honest toiling folk.

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IN Non-Fiction

The Great Tax Robbery does something much more interesting. Richard Brooks, a former tax inspector at Her Majesty’s Revenue & Customs who now writes for Private Eye, reckons that the cat and the very fattest mice aren’t actually enemies at all. They are co-conspirators.

This may seem strange, given all the noise that Britain’s coalition government has made about clamping down on dodgers since coming to power. This week’s Budget saw chancellor George Osborne duly announce another yet assault on tax avoidance.

But while the government is only too happy to put the populist boot into the tax affairs of Jimmy Carr or Starbucks, it is rather cagier about the curious twists of policy that allow swaths of the corporate tax code to be written by companies with help from the very accountants who design avoidance schemes.

This is where Brooks comes into his own: not only does he have a near-encyclopedic knowledge of anomalies sanctioned by the state, he also has an ear for resonant detail. The UK’s tax offices, he gleefully points out, have been owned by a company domiciled in Bermuda since a private finance initiative deal in 2001. So any capital gains that it makes from being HMRC’s landlord will themselves be sheltered from HMRC scrutiny: a neat symbol of the way in which the state, while officially outraged by offshore tax havens, cannot even do its bread-and-butter tax-collecting without them.

Indeed, to Brooks, the UK is beginning to look increasingly like an offshore tax haven itself. So-called non-doms, whose numbers have steadily grown from an estimated 83,000 in 1999 to about 120,000 in 2011, are spared taxation on all their foreign income in return for a lump-sum payment of £50,000 – a perk unique to the UK. Meanwhile, the rules on corporate taxation have been loosened to make it possible for companies to repatriate profits from abroad (including tax havens) all but free of tax.

 

These privileges, as Brooks points out, come at a cost to the rest of us. While they may encourage a few hedge funds and private equity firms to move to London’s Mayfair, they do little to help wider employment or investment in the UK. Indeed, they skew the burden of taxation towards smaller companies that have neither the resources nor the “mobility” to shift people or capital offshore.

Nor have they sated the corporate appetite for accountants’ wheezes to shave low rates still further. Brooks, who has been following the fiddle scene for decades, is particularly good on such exotic-sounding schemes as the “double-Irish with a Dutch sandwich”. Tax planning, he shows, has entered every nook and cranny of corporate life. Even the 2.5 per cent “charge handling” fee we paid to use our plastic in shops turns out to have been a ruse (later stopped) to allow retailers to cut their VAT payments.

Why has the government allowed this to happen? Part of the answer is that for states tax is no longer simply about extracting money from citizens to pay for collective needs. It has become the most important instrument in a global contest to attract money from multinationals. Britain is gambling that its generosity will allow it to attract corporate HQs, with their seemingly insatiable demand for business services and City financing. This explains not only why Osborne has made so much of his ambition to give Britain the “most competitive” corporate tax rate among the Group of 20 nations, but also why he has given multinationals such influence over the drafting of the tax code itself.

As Brooks reports, large companies now step easily in and out of the Treasury, helping to write the very legislation that cuts their tax bills. When the chancellor sought to amend the rules on overseas profits in 2011, for instance, he even enlisted the help of mobile phone company Vodafone, which just months before had paid £1.25bn to settle a dispute with HMRC over unpaid tax on foreign earnings. “This isn’t so much the well-documented phenomenon of regulatory capture,” Brooks notes caustically. “It’s the white flag of abject regulatory surrender.”

And not only do the rich, powerful and anonymous get to write the rules, they are treated with kid gloves when they transgress. One of the more startling statistics Brooks offers is that by 2010, the penalties levied by HMRC against large companies had dropped to 0.01 per cent of the tax they under-declared on their tax returns. This is around 200 times less than the rate of fines applied to smaller businesses.

HMRC now extols the virtues of negotiation, rather than conflict, with large companies, and David Gauke, the government’s tax minister, is able to declare without a hint of a blush that companies’ experience of the tax system “is as important to tax competitiveness as the tax we set”. Tax enforcement, as the author drily points out, has become a case of “all carrot and no stick”.

Perhaps inevitably, Brooks is better at analysing the problems than identifying solutions. He advocates more tax transparency from companies – which would be welcome, as would some more toughness from the taxman. But he gives too little weight to the pressures on modern governments and the sheer difficulty of sustaining a corporate tax base in a world of free capital movement. Not every tax change or deal is a corporatist plot hatched by greedy chief executives. This is a hardscrabble world in which Britain, far from ruling the waves, may be condemned increasingly just to waive the rules.

At the end one is left with a slight whiff of nostalgia – for the days when governments could crack the whip over even the biggest companies. Brooks is definitely on to something in this fascinating book. But it’s not simply about tax; it’s about power.

Jonathan Ford is the FT’s chief leader writer

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