‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad


by Guest    
1:41 pm - June 11th 2012

      Share on Tumblr

contribution by Maeve McClenaghan

The week has not started well for George Osborne.

As well as being hauled before the Leveson Inquiry today, a series of stories over the weekend have revealed the UK tax system hemorrhaging money abroad.

Investigations by The Sunday Times, and German TV programme Frontal 21 have revealed, once again, the allure of using opaque tax jurisdictions to circumvent domestic tax duties.

Calling abroad

Vodafone has made the news again this week as a Sunday Times investigation revealed the mobile phone company did not pay a single penny in corporation tax in Britain last year.

Despite generating several hundred million pounds from British customers the phone company has avoided paying any corporation tax to HM Revenue & Customs (HMRC).

Tax was avoided through the employment of a series of legal accounting manoeuvres involving a network of companies domiciled in opaque tax jurisdictions.

In March an undercover sting by the Bureau and Private Eye revealed that Vodafone’s office in Switzerland appears to be little more than a shell, indicating their main purpose is tax avoidance.

Read the Bureau’s Vodafone sting here.

The Sunday Times investigation, meanwhile, focuses on Vodafone subsidiaries in Luxembourg. Loans made by the Luxembourg branch to the UK are paid back with interest, allowing the UK business to funnel their profits to Luxembourg, where they can enjoy a lower rate of tax if they negotiate with the tax-man.

Vodafone has previously faced criticism for a supposed ‘sweetheart deal’ with HMRC. The arrangement allowed them to pay £1.25billion, rather than £2.2billion in tax following the acquisition of Mannesmann, a German telecoms company in 2000.

The company responded to the Sunday Times investigation saying that Britain accounts for less than 4% of their total profits. Vodafone also assert that they paid approximately £700m to HMRC in payroll and other taxes last year and that tax credit generated in Luxembourg has ‘no bearing on UK taxation.’

Deal or no deal?

The expose of Vodafone’s tax affairs comes at a crucial moment in HMRC’s dealings with international tax affairs. A landmark agreement is currently being drawn up with Swiss authorities to attempt to manage the movement of UK money abroad.

The HMRC’s permanent secretary for tax Dave Hartnett has suggested that the deal with Switzerland will raise between £4bn – £7bn.

However the efficacy of the agreement has been thrown into doubt following an undercover investigation of an almost identical agreement between Switzerland and Germany.

Reporters from German show Frontal 21 posed as investors looking to invest $4million in Swiss companies, specifically looking for ways that by-passed the German-Swiss tax deal.

One of the methods that the reporters discovered was that by creating a Swiss GmbH, a legal entity, rather than a company, they could by-pass the agreement, which specifies only ’pure holding companies’.

These technical tricks of the trade and loopholes led tax expert, Thomas Koblenzer to describe the German-Swiss deal as having ’as many holes as a Swiss cheese.’

Now campaigners are suggesting that the same weaknesses in the UK-Swiss agreement could result in the UK losing tax revenue.

The Tax Justice Network (TJN) has identified over 10 loopholes which could allow UK companies to escape the new rules. The organisation has called the government’s plans a ‘major over-estimation which misleads the British public’.

In a statement on the TJN’s blog Nicholas Shaxson, author of ‘Treasure Islands - tax havens and the men who stole the world’, states, ‘There is a very strong likelihood that that this deal which guarantees tax haven secrecy, will spread like a cancer through the global financial system. This is because many countries are now considering similar agreements. They are either tax havens that want to copy Switzerland, or victims of tax evasion that want to copy the UK.’

Read the Sunday Times investigation here.

—
Cross-posted from The Bureau of Investigative Journalism

    Share on Tumblr   submit to reddit  


About the author
This is a guest post.
· Other posts by


Story Filed Under: Blog ,Economy


Sorry, the comment form is closed at this time.


Reader comments


1. Barrie J

The humble taxpayer subjected to PAYE is told that these companies exploit ‘loopholes’ to minimise their tax liability.
One might be forgiven for thinking they are much more likely to be strategies, worked out between politicians whose Parties benefit from substantial donations and the companies who gain from the extra profit.
I don’t personally know anybody who believes in such loopholes being anything other than planned and executed procedures.
The complicity of HRMC rather defines it.

2. Tim Worstallt

We can’t read the S Times investigation because it’s paywalled.

“Vodafone has made the news again this week as a Sunday Times investigation revealed the mobile phone company did not pay a single penny in corporation tax in Britain last year.”

That really would surprise me. For they a) made prifts and b) paid a dividend. And whatever the hell you do with offshore if you bring the profits onshore to pay a dividend then you will pay corporation tax. Unless they’ve got some massive past losses to cover that of course.

I really would be fascinated to have this explained to me. Because it does sound very hard to believe.

3. Tim Worstallt

Ah, googling around, I see what it is.

“Vodafone was able to avoid paying corporation tax in Britain last year by offsetting the bill against its capital expenditure, which rose from £516m to £575m.

It invests £1.5m a day in mobile networks in Britain, and is still writing tax off against the £5.96bn it paid the government for mobile spectrum in 2000.”

Even Ritchie doesn’t think that using capital allowances is even tax avoidance: it’s tax compliance.

4. Andy Calvert

Its all very well the Sunday Times investigating tax avoidance but it is owned by News International, a company surely not known for its wish to pay corporation tax itself.

5. Max

Here we go again – a company is described as ‘entirely legal’ in it’s tax accounting i.e. complying with the law, and because some people think they should have paid some (unidentified) amount, because they say so, the phrase ‘entirely legal’ becomes akin to ‘tax evader’.

If people don’t like this then change the law, but beware the EU single market rules.

6. Robin Levett

@Maeve (OP):

Vodafone has previously faced criticism for a supposed ‘sweetheart deal’ with HMRC. The arrangement allowed them to pay £1.25billion, rather than £2.2billion in tax following the acquisition of Mannesmann, a German telecoms company in 2000.

Nobody has yet explained to me why Vodafone should have paid any UK Corporation tax at all on profits made by selling Korean, Japanese and Chinese goods and providing services in Germany to Germans. Could you enlighten me, please?

And where did the £2.2bn come from? UKUncut says it should have been £6bn. Neither figure has the merit of actually having been calculated in any meaningful way.

7. Luis Enrique

IF Tim is right, then this post and the Sunday Time “investigation” really is disgraceful and illustrates the dangers of a thoughtless witch-hunt mentality against tax avoidance.

Would left-wingers really want to change the law so the capital expenditure cannot be written off against profits? (i.e. allowing the cost of big lump sum investments to be spread over years) I thought left-wingers think that we need more investment in the UK (and I’d agree). In which case, what the hell are people doing creating a furore about a company writing capital expenditure off against profits?


Reactions: Twitter, blogs
  1. Maeve McClenaghan

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/A5Y0oEYv – by @MaeveMCC

  2. leftlinks

    Liberal Conspiracy – ‘As many holes as a Swiss cheese’: how the UK tax system loses money… http://t.co/LgHtzRt5

  3. laura williams

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/kUUdUVNe

  4. Neil Bradley

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/A5Y0oEYv – by @MaeveMCC

  5. Janet Graham

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/kUUdUVNe

  6. Maeve McClenaghan

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/kUUdUVNe

  7. Martin Wilson

    Don't pay tax pay interest (to yourself). http://t.co/fdopDJdd

  8. BevR

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad | Liberal Conspiracy http://t.co/J6EYcQO8 via @libcon

  9. representingthemambo

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad | Liberal Conspiracy http://t.co/Wa85eyN6 via @libcon

  10. Mark Smithson

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad | Liberal Conspiracy http://t.co/J6EYcQO8 via @libcon

  11. BevR

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad | Liberal Conspiracy http://t.co/J6EYcQO8 via @libcon

  12. NORBET

    RT @libcon: ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/U5QttqG1 #Vodaphone #Georgeosborne

  13. David Davies

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad ~ http://t.co/PaJY3K5S

  14. ibhasi

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/XaFKFo2m

  15. Clive Burgess

    ‘As many holes as a Swiss cheese’: how the UK tax system loses money abroad http://t.co/4ubAIV5o





Sorry, the comment form is closed at this time.