After hearing of so many people receiving them, I’ve been waiting with not so baited breath for my tax rebate to come through. Alas no such luck as yet though I am, like everyone else, ever hopeful.
After doing contract work for a couple of years I have had to complete Self Assessment tax returns, VAT returns, Corporation Tax returns etc. and I can tell you that they were some the most stressful experiences of my life. Even now, just thinking about it makes me feel sick. It wasn’t so much the complexity, though I would run for the hills if ever I were asked to fill another one out, it was the sheer gravity of it all. The solemnity of dealing head to head as it were, with the government. The ‘leaders’ of our country. It’s recently occurred to me that in fact I was dealing with HMRC, something quite different… but that’s not really the point. The point is that it was all to do with owing money to ‘the man’, and when you owe him money, things can get very nasty if you don’t pay up. I’ve seen Disney’s Robin Hood. A film that most definitely taught me at a very young and impressionable age, that not paying your taxes is very bad for you! Not even church mice are exempt for goodness sake.
First off there’s the £100 fine if you miss the deadline (this has now been changed so that, even if you don’t owe any tax, the fine still applies!). Then, if you leave it a further 3 months, it’s an extra £10 per day, for a further fine of up to £900. After that it’s an additional £300 after six months and then another £300 at twelve months, adding up to a potential £1,600 in fines. But even the fines weren’t really what worried me. It was not really knowing what would happen if I made a mistake that gave me the feeling of dread. I had visions of being locked in a room with men in suits and dark glasses, telling me they’d be willing to wipe the slate clean and give me a fresh start in exchange for my cooperation in bringing a known terrorist to justice… or something. I mean it’s TAXES right?! One of the two certainties in life as they say.
Perhaps if I had less integrity, fewer scruples and a lot more money I might have hired some fancy accountants to come up with some scheme to route my money overseas to one of these ‘tax havens’ we often hear about. You know, set up a little company in the Cayman Islands and hey presto, I’m suddenly paying 0.1% tax. It seems that if I did that though, I’d be going to an awful lot of trouble for nothing. You see, I have reached the conclusion that the U.K. is in fact one such Tax Haven, but only if you’re what is commonly known as ‘big business’.
One such member of the ‘big business’ club is Vodafone, and when I say ‘big business’ I do mean big. In 2010 Private Eye magazine ran an article with details of Vodafone’s tax avoidance schemes and indeed just this January they followed up with another. I will state quite clearly that I am not a journalist, and am merely summarising the articles I have read as I understand (and believe) them.
The first such scheme reported was of Vodafone’s acquisition of German engineering firm Mannesmann in 2000 for £112bn. To clarify, that’s one hundred and twelve billion pounds. However instead of simply buying the company (if buying anything for that amount of money could ever be simple), Vodafone instead channelled loans through a subsidiary in Luxembourg, which just happens to be one of those tax havens I mentioned earlier. The Luxembourg subsidiary then lent Vodafone in Germany the money to buy Mannesmann. At the time HMRC clearly stated that the interest these loans had built up (and you can imagine how quickly the interest on tens of billions of pounds will start to add up!) would be liable for tax, but of course Vodafone disagreed. Cue what must have been years of accountants battling away with each other (now presumably ignoring interest over this period) until the Court of Appeal ruled that Vodafone was indeed liable for the tax, and that the use of tax havens for avoidance schemes didn’t conflict with European Law, as Vodafone had claimed.
All was looking good for the tax man (and one would have to grudgingly agree, the UK in general, as no doubt the tax would be put to any number of good uses!) when along came Dave Hartnett, HMRC’s head of tax. Dave negotiated with Vodafone on our behalf and decided that they did indeed owe tax. Vodafone were to pay £1.25bn (one and a quarter billion pounds) in a lump sum of £800m to be paid up front, and the remaining £4.25m over the following 4 year period.
Let us ignore the fact that if you or I owed money, we would not be given the option of paying two thirds of it up front and the rest over a four year period. Let us instead focus on the fact that the original estimate of tax Vodafone was liable for was not £1.25bn, but around £7bn.
Seven billion pounds.
It gives a whole new meaning to HMRC’s slogan: Tax doesn’t have to be taxing.
So… our man Dave appears to have wiped around six billion pounds (or over 88% if you will) off Vodafone’s tax bill in a settlement with their head of tax John Connors, whom coincidentally was a senior official and close colleague of Dave’s at HMRC until 2007. Not only that, but he actually sidelined his colleagues at HMRC who it seemed were looking like they might be on the road to success in getting Vodafone to pay the tax they owed, and as the head simply pulled rank and took over himself.
Private Eye’s updated article goes on to describe how Vodafone developed another scheme to avoid paying more tax. This scheme however is slightly more difficult to break down, so forgive me if I don’t explain it adequately, but I’ll give it a go as far as I understand it myself.
In 1999, Vodafone bought a 45% stake in Verizon Wireless (a large US mobile operator), held through a US company called Vodafone Holdings Inc. and a Luxembourg company. In 2006, Vodafone Holdings Inc. borrowed $12.6bn from Vodafone Luxembourg 5 sarl (this last part is from the article so I assume it’s also part of the company name, which I will from now omit). Only it didn’t borrow the money directly from Vodafone Luxembourg, it borrowed the money from the Swiss branch of Vodafone Luxembourg. This allowed them to exploit a loophole and take advantage of laws in Luxembourg that exempt foreign branches from tax, and Swiss laws that all but exempt local branches of foreign companies. Neat. This lending then continued to the tune of around $500m a year until they were massively increased to around $27bn. By now, we’re talking about billions of dollars of interest being generated as profit from the scheme. Private Eye estimates that by now it would total around $12.5bn or £7.5bn.
Now it is this profit that Britain’s anti-tax avoidance laws say should be taxed (in other words a percentage of that £7.5bn interest is owed in tax, not a percentage of all the money that has been lent, which is… a lot more). The European court had previously stated in another case that schemes like this were liable to tax if they are “wholly artificial arrangements intended to escape the national tax normally payable” – but not if the company involved “is actually established in [a] member state and carries on genuine economic activities there”.
Any more detail begins to cloud the issue for me, but what I believe is clear is the artificiality of the schemes Vodafone used to avoid paying tax on their interest, and that the courts were fairly clear that the tax was owed. Dave Hartnett however, saw things differently and thanks to him HMRC will be receiving what may perhaps be less than a tenth of what it is owed.
Good work Dave.
My next example is Goldman Sachs (although it may surprise you to know that the numbers I will be throwing out on this one are almost insignificant in comparison to Vodafone.)
Goldman Sachs’ scheme centered around an attempt to avoid paying National Insurance on the huge bonuses they paid to London bankers way back in the 90’s. They set up Goldman Sachs Services Ltd. in the British Virgin Islands (Caribbean islands south east of Puerto Rico) and claimed that all their London bankers were employed by this company and merely ‘seconded’ to the UK. This also meant that the accounts would be confidential and would not fall under the public domain.
To be fair, they certainly weren’t the only company doing this, but come 2005 when HMRC were able to show that these schemes existed solely to avoid paying tax, the other firms raised their white flags and paid what was owed. Not Goldman Sachs. Instead they invested in lengthy legal battles and steadfastedly refused to pay their £30m (I told you it was peanuts compared to Vodafone) bill.
Now we’re back on to the subject of interest, and by 2010 the bill had increased to around £40m. Fastforward a little further and cue the case being thrown out, resulting in a win for HMRC and it looking highly likely that Goldman Sachs would have to pay the full amount. Finally, some positive results!
At just about the last moment, Dave Hartnett stepped in and, having personally met with Sachs’ tax director Mike Housden, the two men had ‘shaken hands’ on a deal which effectively absolved them from paying the interest. In effect, he had knocked £10m off the bill. So rather than attempting to penalise Goldman Sachs for resisting payment for 5 years, he lowered the bill by 25%. That doesn’t seem to tally with the penalties I would face if I were to owe no pounds, let alone forty million of them. HMRC now claims that the actual reason for the reduced bill was a ‘technical mistake’.
Presumably that mistake was to hire Dave Hartnett, whom I now think of as some backward version of Robin Hood. Unlike the hero who rescued those poor little church mice, this Robin Hood doesn’t take from the rich to give to the poor, he gets all chummy with the rich, takes as little of their money as he can get away with and makes sure the screws are put on the rest of us. Yes, good work, Dave. Good work.
Now as I’ve said, I’m no journalist and I’m certainly no tax expert or economist, but by showing a mere interest in the subject, I’ve managed to find enough about these two examples that I can’t help but wonder how many more are out there? How many more companies are making billions in profits without paying as high a percentage of tax as I do on my wages?
I would also ask why the government is scrabbling around for loose change in just about every sector of the public, telling everyone to ‘tighten their belts’ and warning that times of austerity call for more drastic measures, when there are evidently billions of pounds in tax being literally wiped off the system? Why is HMRC making deals with companies when the rest of us are being fined even if we don’t owe anything? Why are big businesses getting these kinds of tax breaks, when we’re all paying more VAT and getting less for our money?
Perhaps we should start asking.
- The Independent – Tougher Tax Regime
- The Guardian – Vodafone Tax Evasion
- The Guardian – Goldman Sachs Interest Tax Avoidance
- Private Eye -Vodafone Calls Again
- HMRC tax deal with Vodafone ‘may have been illegal’ (guardian.co.uk)