Sort out the system to stop 'deplorable' tax avoidance

by Mike Parkinson, Barnes Roffe

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21 Nov 2012

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WHAT ARE WE TO MAKE of profitable, well-known water companies, amongst other corporate giants, manipulating the system to pay relatively tiny amounts of tax in the UK? Not much. It is deplorable by any measure, and barely a day goes by without another avoider being flushed out.

This is not about raising a hat to clever tax advice. This is about how, when one multi-national company avoids tax, another ends up paying it – which invariably means our small and medium-sized businesses have nowhere to run.

There has to be a balance between prudent use of tax shelters and what any reasonable person would view as flagrant abuse. The balance is not being struck by names that should be showing a lead in setting standards for corporate governance, particularly in times when, as we keep being told, we are all in this together.

The storm started with reports that three foreign-owned water companies with profits of nearly £1.5bn between them managed to whittle away their profits to leave them with a miniscule tax liability. There is no suggestion anyone has done anything illegal.

It is clear that these companies use professional tax strategies aimed at mitigating their tax bills in whichever territory these arise. Fair enough. As an advisor to small and medium-sized businesses, this is not unreasonable to me. My clients also expect me to find planning opportunities to reduce their tax bills. That is not the problem.

The problem is that the vast majority of the UK-earned profits of these foreign-owned companies are, in fact, being exported to other territories. This may be the foreign parent's home country or even countries known for their ultra-low or zero tax rates. 

The mechanism used to export these profits involves the UK trading company being charged for a whole variety of legally structured but arbitrary costs, such as management or marketing fees, royalty or license payments and finance charges, by their owners or companies connected to their owners.

These charges then become the profits, which are subject to tax in the owner company's country of choice, such that the tax is then not available to be circulated back into the country which created the revenue in the first place. There are, of course, tax laws that the UK authorities can use to stop the excessive exportation of profits. However, my personal feeling is that, in this respect, the Inland Revenue does not bite as hard as its equivalent in the USA.

It is reasonable to expect large companies, particularly public utilities that to some extent have a natural monopoly, to contribute to the tax burden where their customers reside. But by reducing their UK tax burden, these companies do not contribute their fair share to the Exchequer, thus leaving the rest of UK business, principally the small-business sector, to pay more than they should and in doing so reduce their own investment resources.

I understand fully the need to entice foreign investment into this country and to enable foreign owners to recover any legitimate costs incurred by them for the UK company, but it seems to me that somewhere the balance and sensibility has been severely lost in cases recently cited in the media.

It is not surprising that owners of smaller companies, many other large foreign-owned multinationals operating in the UK, as well as the general public, see the lack of tax paid by these companies as wrong. I am also sure that they would all agree that the House of Commons Public Accounts Committee is right to demand an investigation to understand and correct the failings in the UK tax system to prevent such avoidance from happening. The situation is unacceptable and needs to be remedied immediately for the sake of smaller businesses, which are stuck here and pay their dues.

Politicians must make a start by telling these foreign-owned companies that however legal their tax avoiding activities, they fail to meet another yardstick we use: It just isn't cricket.

Mike Parkinson is a partner with accountants Barnes Roffe

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