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Banks and tax avoidance

The financial industry is notorious for tax avoidance – including some well-known high street brands. 

So why does tax avoidance matter and how can you avoid the worst offenders?

What is tax avoidance?

Tax avoidance involves moving profits around so you have to pay a lower rate of tax. It uses loopholes in tax laws in ways that lawmakers never intended but which are legal.

For example, a multinational bank might set up a company in a tax haven, which lends large amounts of money to its subsidiaries in higher-tax paying areas. The bank can then pay back its own company out of its profits, lowering the taxable income in the high tax jurisdiction and moving money to the lower tax country.

Tax avoidance is different to tax evasion, which is illegal and involves hiding profits or fiddling accounts.

Read our article ‘What is tax avoidance?’ and find out which countries are on our list of tax havens.

Which banks are involved in tax avoidance?

Companies are often extremely opaque when it comes to their tax practices. However, the majority of the financial institutions we’ve reviewed are high risk for tax avoidance strategies.

We found that many banks own multiple companies in tax havens. These companies don’t appear to be serving the local population and are ‘high risk’ company types, e.g. holding companies, which are more likely to be used for tax avoidance purposes.

More and more companies are publishing statements on their tax practices. However, few give adequate information to demonstrate that they are not involved in tax avoidance, for example explaining the reasons for their tax haven subsidiaries.

In our Pensions guides, over 75% of companies received our Worst rating for likely use of tax avoidance strategies. In our Current Accounts guide, all of the big five high street banks – Lloyds (includes Bank of Scotland and Halifax), Santander, HSBC, Natwest (includes Royal Bank of Scotland), and Barclays – also received a Worst rating.

Find out more about our tax avoidance ratings.

Why is banks’ tax avoidance a problem?

Every year, global tax avoidance and evasion costs over £300 billion. This means that countries are deprived of £300 billion for essential services, like public healthcare or education.

On a wider scale, tax avoidance also exacerbates inequality and poverty.

The poorest countries consistently pay the highest price from tax avoidance, when considered in relation to their GDP. It is estimated that in 2020 in Gambia, tax losses outstripped the total amount of tax collected.

These countries face an impossible decision. They can charge a fair rate of tax and risk companies shifting all their profits abroad. Or they can lower their own taxes, slashing government income.

In 2020, the Tax Justice Network estimated that “South Africa’s tax losses could lift over 3 million people out of poverty”. A report the same year found that, at the height of the COVID-19 pandemic, Chad, Pakistan and Nigeria were among multiple countries losing more from tax avoidance each year than their total health care expenditure. Gambia was losing thirteen times the amount.  

Banks are amongst the companies contributing to such enormous losses.

Man using laptop to look at finance charts

What can consumers do?

1. Find out how your bank is doing

Investigating their accounts yourself may not be much of an option, but our guides to Current Accounts, Savings Accounts and Small Business Accounts rate over 35 different banks on their likely use of tax avoidance strategies.

Check how your bank is doing by using our ethical finance guides.

2. Consider switching banks

Switching accounts is remarkably quick and easy. Within just seven days, all your money could be transferred to a company not involved in tax avoidance.

If you set up an account with a new bank, it will usually ask you if you want to switch accounts from an existing one. It is then up to the bank to move all your money, direct debits and standing orders over, as well as closing your existing account. Any money paid into your old account should be automatically forwarded for the next three years.

3. Tell your bank why you’ve switched

Companies really care what consumers think, especially when it’s affecting their bottom line. If enough of us tell companies that tax avoidance is unacceptable, practice may eventually change.

If you are switching accounts for ethical reasons and want to write to your previous bank to let them know why, we have published a template letter for you to use.

Use Ethical Consumer’s ratings to avoid likely use of tax avoidance strategies

At Ethical Consumer we have been researching and campaigning on tax avoidance for years, launching both an Amazon boycott and working with the Fair Tax Foundation.

We rate all companies in our guides on their likely use of tax avoidance strategies. This means checking whether they are registered in tax havens or own companies in tax havens, and looking at whether these companies are the kind likely to be used for tax avoidance.

Each of our guides provides a clear list of those receiving Best, Middle or Worst ratings for likely use of tax avoidance. You can also see their tax avoidance ratings in the context of their wider ethical record by viewing their company profiles and clicking on the tax avoidance rating in the politics section.