Last updated: October 2015
The Missing Billions
How come the big business tax gap is £12bn a year when they and HMRC deny it? Ethical Consumer’s tax correspondent Richard Murphy explains why.
In April 2012, Chancellor George Osborne declared he was “shocked” to discover the scale of tax avoidance by wealthy individuals. An editorial in the Observer in April 2012, commented it was difficult to understand why, when he must have been aware of the research I did on tax avoidance for the TUC in 2008.
George Osborne, Budget 2013
In it I estimated that £25bn is lost to HMRC annually; £13bn from individuals and £12bn from the 700 largest corporations. So why does HMRC put the figure for corporate tax avoidance at some £10.5 billion lower?
First, let’s be clear – by definition all tax avoidance is legal. That’s not the same as saying it’s legitimate, as the big accounting firms, libertarian groups and certain parts of the Treasury are apt to say.
As George Osborne put it, being legal doesn’t stop it being “morally repugnant”. Or as the Observer put it: “This undermines the integrity of a tax system that is vital for a modern democracy, especially when we are meant to be “all in this together”…This is not fair, and resentment and anger will grow if these issues are not addressed.”
So why the gap between my figures and those of HMRC?
Let me explain. This was because I started with the accounts of those multinational companies and worked down. Whereas HMRC started with the tax returns submitted to them and sought to identify anything they might consider tax avoidance within those returns.
Those are, however, fundamentally different approaches to addressing this problem.
HMRC’s approach assumes that the tax returns that they receive correctly reflect the profits that are earned in this country by the largest companies. And then looks for any tax avoidance within those declarations. My approach was to start with the global accounts of the companies in question.
I first sought to establish an estimate of the likely profit that those companies should have declared in this country if they had not engineered their affairs to ensure that large parts of that profit was relocated to tax havens and other such places.
That is, in itself, tax avoidance activity. And that tax avoidance activity in the structuring of these multinational corporations is completely ignored in HMRCs’ approach. But it is, of course, by far the most important part of the tax avoidance activity of these companies.
To give some indication of the differences that arise between the two methods we just need to look at a recent report in the Mail on Sunday by Alex Hawkes and Helen Loveless. I was interviewed during research for the article and it is based upon my methodology.2
The report examined the tax paid in the UK by Apple, Amazon, Google, eBay and Facebook.
According to the report, figures from the companies’ US filings suggest that the five made revenue of £12.2 billion in the UK in 2010 from British consumers and advertisers. Based on their global profit margins for the year, that suggests total profits from sales to British customers of almost £2.5 billion.
At corporation tax at 28% that would net austerity Britain’s public coffers £685 million. So how much did British subsidiaries of the five contribute to the exchequer in 2010? Just over £19m in 2010 – or 0.8% of estimated profit from British sales. Incredibly, Amazon paid just £517,000 tax in the UK on estimated profits from UK sales of £150m.
The simple reason they could get away with this?
In most cases, while British consumers are making their online purchases in the UK, they are buying from offshore divisions of the internet groups. Amazon and eBay have European headquarters in Luxembourg. Facebook, Google and Apple base their European operations in Ireland, where corporation tax rate is half that the UK’s.
So, in 2010 five companies paid just £19.3m in tax compared to a reasonable estimate of £685m that might have been owing. That means that the tax gap with regard to these companies, on my basis of calculation, would be some £666m. It is quite possible that on HMRCs’ method of calculating tax avoidance it would be zero.
Now you can see how we came up with such different estimates. And it’s worth reflecting that this figure for tax avoidance for just five – albeit big – multinationals accounts for over a quarter of what HMRC says the country is missing from some 700 corporations.
The question is, what are we going to do about it?
Richard’s report for the TUC ‘The Missing Billions’ is available from TUC Publications and can be downloaded free from www.tuc.org.uk/touchstone/missingbillions/1missingbillions.pdf
Richard Murphy is founder of The Tax Justice Network and blogs at www.taxresearch.org.uk. His new book ‘The Courageous State: Rethinking Economics, Society and the Role of Government’ is available from www.searchingfinance.com