March 2020

Supermarkets to receive billions from government coronavirus package

27th March 2020 by George Turner

The coronavirus outbreak will not be easy for anyone – but there is no doubt that some industries and businesses are set to do well from the widespread social changes that the crisis demands.

One of those industries is our supermarkets. No one can deny that supermarkets are doing an exceptional, difficult and vital job keeping the country supplied during the crisis.

However, the empty shelves seen across the country are not a sign that people have stopped buying food. Quite the opposite. UK supermarkets are currently seeing levels of demand usually experienced around Christmas as households face the prospect of two weeks’ isolation if anyone in the home gets a cough. This is not just a case of Christmas come early. Christmas is coming again and again and again. High volumes have been paired with higher prices as companies remove multi-buy deals to discourage panic-buying.

This is unlikely to be just a coronavirus blip. Social distancing measures may need to be maintained for some time after the outbreak is tamed, meaning that people are likely to be spending more time at home. The shift to home working for millions of people is also likely to persist for some time, as many companies that have been forced to build an infrastructure to allow home working will be more relaxed about their employees doing so in the future.

All of this will mean that in the long term, supermarkets are likely to make significant gains from the coronavirus outbreak. This is probably the last industry right now that needs a bailout – however, they are about to receive a cash bonanza from the government.

One of the big items of spending the government has announced in response to the pandemic been the business rates holiday for all retailers. The holiday applies to all retailers, whether or not they have been forced to close during the outbreak.

According to The Grocer, superstores and hypermarkets pay a total of £2.68bn in business rates a year. Add to this an extra few hundred million paid by smaller stores and the total bill hits £3bn.

The industry is concentrated, with a few companies making up a large percentage of shop space. The largest, Tesco, claims to pay around £700m in business rates a year. A week ago, Sainsbury’s put out a stock market announcement welcoming the Chancellor’s announcement on business rates, pointing out that the company paid £500m in business rates on its shops. Shares in the company were up over 10% on the news. The stock-market announcement said that the company was awaiting details of the scheme, however, it seems certain that they will qualify with the Chancellor stating in his first coronavirus update:

“We’re abolishing business rates altogether this year if you are in hospitality, retail and leisure.”

The amount of money this represents is mind boggling. To put it into context, Tesco made pre-tax profits of £1.6bn last year. A business rates holiday of £700m represents 50% of their total profit. For Sainsbury’s their business rates bill is more than double last year’s pre-tax profit of £239m.

Until now, the response of the government to the immediate crisis has been to throw money at entire sectors of the economy. Given the speed at which the government has to react to events, that is to some extent understandable.

However, there are risks to this approach and some significant questions which will need to be worked through. Does such broad intervention by the government, by rewarding both winners and losers, lead to economic inequalities being exacerbated?

Providing such broad interventions is easier and quicker to administer, but it is expensive. As the bill for the coronavirus continues to mount, will the public continue to support the government if they feel that their tax money is being spent on companies that are set to do very well out of this?

Should the government be asking for more in return for businesses that receive support? In the supermarket sector, should there be an obligation to use at least some of the support they receive to help stock foodbanks for example?

The business rates holiday was announced at a time when the government probably thought that the limit of their intervention on social distancing would be to tell people to wash their hands and avoid the crowds.

Now that the entire county has been put in lockdown, with all but “essential” retailers being told to close their doors, it may be a better idea for the government to take a more targeted approach, with support being directed towards businesses forced to close, whilst those that remain open and thrive continue to pay business rates in the normal way.

This research featured in The Times. Our Director has had an op-ed on the issue published in The Guardian.

Photo by John Cameron on Unsplash

Covid 19 – Pope says tax avoiders have committed “murder”

25th March 2020 by Alex Dunnagan

In an interview last week with the Italian daily “La Repubblica”, Pope Francis held tax dodgers partially responsible for the struggle Italian health services are now going through in trying to deal with covid.¹ The coronavirus has hit Italy the hardest, with close to 7,000 deaths at the time of writing, more than double that of any other country.

As health services are being overwhelmed around the world, and members of the Vatican staff test positive for the virus, Pope Francis backed a prominent journalist’s complaint that tax avoiders are partly at fault for the current healthcare crisis.

Speaking over the phone while isolating in the Vatican, Pope Francis said he was “very impressed” by an article by journalist Fabio Fazio.² The Pope went on to quote from the article in saying:

“He is right, for example, when he says: “It has become evident that those who do not pay their taxes are not only committing a crime, but murder: if there are not enough hospital beds or respirators, they too are partly to blame”. I was very impressed by this”.*

Italian Treasury estimates believe tax evasion costs the state some 107.5 billion euros a year³. An annual report by the European Commission has Italy’s VAT gap, sometimes referred to as a compliance gap, at 24% in 2017, the most recent year for which statistics are available. Italy’s gap is one of the highest in Europe – the UK’s for example sits at 11%.⁴

Pope Francis has been vocal on tax issues in the past, referring to “tax havens for private and corporate profits” as recently as February of this year.²

In response to the Pope’s interview, Fazio tweeted that he was overcome with emotion, and that Pope Francis invited all of us not to waste this difficult time but to use it to look at ourselves and renew ourselves

These testing times may well leave behind a different world politically and economically. Whether or not it will be a better one, only time will tell.

Photo by Sins S on Unsplash

*Translators note: Fabio Fazio’s words on tax avoiders and evaders appeared as one of 15 points in an article entitled “The things I am learning”. The full text in Italian of point 7 is as follows:

7. È diventato evidente che chi non paga le tasse non commette solo un reato ma un delitto: se mancano posti letto e respiratori è anche colpa sua.

We have translated “delitto” as “murder”. “Delitto” in Italian can refer to a number of serious crimes, including murder, it is sometimes translated as “felony”. The word “reato” is also translated as a crime, but in the more general sense. Reuters, when reporting on the Pope’s citation of the article used this distinction in their translation. “It has become evident that those who do not pay taxes do not only commit a felony but also a crime”.

We do not feel this translation works in British English. The world felony denotes a subset of crime, so a felony can not be “also” a crime. The word felony is also not in common usage in Britain. The Cambridge Italian-English Dictionary defines “commettere un delitto” as “to commit a murder”. Given the context, of this article and the use of the verb “commette” in the original article, we felt that the translation – “not only committing a crime, but murder” was the correct translation in English. Translation by George Turner.

1 Pope Francis on Coronavirus crisis, La Repubblica, 18 March 2020, available here: https://www.repubblica.it/vaticano/2020/03/18/news/coronavirus_pope_francis-251572693/?ref=search

2 Things I’m Learning, La Repubblica, 16 March 2020, available here: https://www.repubblica.it/cronaca/2020/03/16/news/le_cose_che_ho_imparato-251384470/?ref=RHPPTP-BH-I251364842-C12-P22-S2.4-T1

3 Report on the Economy Not Observed, 2018, Italian Treasury Report, available here: http://www.mef.gov.it/documenti-allegati/2018/aggiornamento_relazione_2018_x27_novembre_2018x-finale.pdf

4 Study and Reports on the VAT Gap in the EU-28 Member States, European Commission, 2019, available here: https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2019_en.pdf

5 Pope Francis: Tax cuts for the rich and tax havens are structures of sin, Rome Reports, 05 February 2020, available here: https://www.romereports.com/en/2020/02/05/pope-francis-tax-cuts-for-the-rich-and-tax-havens-are-structures-of-sin/

6 @Fabfazio tweet, 18 March 2020, Twitter, available here: https://twitter.com/fabfazio/status/1240196888701415424?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1240196888701415424&ref_url=https%3A%2F%2Fwww.repubblica.it%2Fspettacoli%2Fpeople%2F2020%2F03%2F18%2Fnews%2Fcoronavirus_fabio_fazio_intervista_papa_francesco-251595266%2F

Loan Charge Parliamentary Debate

20th March 2020 by Alex Dunnagan

A debate was held in the House of Commons yesterday on the Government Response to the Sir Amyas Morse Review of the Loan Charge. Ahead of this we published an explainer on what disguised remuneration is here, and a more detailed briefing here. David Davis, Ruth Cadbury, and Julian Lewis were able to secure the debate on the motion “That this House believes that the Loan Charge is an unjust and retrospective tax; notes that the law on the Loan Charge was not settled until 2017; and calls on HMRC to cease action on loans paid before 2017.”

The Loan Charge is an anti-tax avoidance measure introduced in the 2016 budget to address tax lost to the Treasury from loan based disguised remuneration schemes.

These schemes involved employees and contractors being paid in loans. As loans do not incur income tax, those using the schemes ended up getting their earnings tax free. The only cost to using a loan scheme was the fees charged by the operators of around about 13%.

As a result, loan scheme users ended up keeping far more of their income than those who paid tax in the usual way.

David Simmonds MP lays out the issue in that “the schemes themselves were lawful because it was lawful to receive a loan, but the money the constituent received was tax-free only if it was genuinely a loan”. Simmonds goes on to say that as 20 years have since elapsed, that there was no evidence that these were genuine loans, hence HMRC’s interest in the schemes. He then goes on to say that taxpayers raised the issue with him that they find it hard to believe that anybody thought that they could describe their pay on a tax return as a “loan”, and because of this never have to pay any income tax on it.

HMRC argues that these loans should really be classed as income because no one had any expectation that they should be paid back, and as such should always have been liable to income tax.

The Financial Secretary to the Treasury, Jesse Norman, described these schemes as “contrived tax avoidance in which people are paid in the form of a loan with no interest and no intention or requirement to pay the loan back.” Many of the schemes saw money routed through offshore companies and trusts.

Norman summarised the case for the charge in saying “it has cost the Exchequer hundreds of millions of pounds a year, and that, of course has two effects. It deprives public services of the money they need to operate, and it forces other taxpayers to pay more in order to make up the shortfall.”

The charge has become one of the most controversial pieces of tax legislation in recent times. A cross-party group of MPs, the Loan Charge All-Party Parliamentary Group has led the fight in campaigning against the Charge. In January of last year the Treasury was forced to agree to review the loan charge proposals, following an amendment to the Finance Act tabled by the Liberal Democrats MP Ed Davey. The former Comptroller and Auditor General Sir Amyas Morse was tasked to lead the independent review

A number of recommendations from Sir Amyas’ report were accepted last December, including halving the time period in which the loan charge would apply, from 20 years to ten. However, many campaigners and Members of Parliament do not believe these measures go far enough. MP’s have argued that the law was not agreed upon until 2017, and are urging the government to go further, with one of the key criticisms being the retrospective nature of the charge.

Adam Smith was frequently quoted in the debate, given that the Financial Secretary to the Treasury had written a book on the economist. The Conservative MP for New Forest West, Sir Desmond Swayne, said that following the principals of taxation put forward by Smith, tax should not be retrospective.

The Financial Secretary to the Treasury disagreed with the characterisation of the tax as retrospective. Mr Norman said of the Loan Charge “it taxes a loan outstanding at a future date. It does not change any law previously on the statute book.”

Peter Dowd MP, speaking on behalf of HM Opposition, stated that Smith also argued to “Take from the taxpayer only that which is needed for the public realm”, and that if people do not pay their taxes, everyone else has to pay more.

Dowd went on to frame the loan charge within the conditions HMRC is facing, referencing that “A third of its staff have gone since cuts in 2005 and later in 2010. Any increases in the cash amounts available to HMRC for its running have, in effect, been blocked”.

While Christian Matheson MP argued “nobody in this House disputes the fact that it was tax avoidance”. This does not appear to be a view shared by all, with Paul Holmes MP stating “the people this affects are not tax avoiders”, and Bob Stewart MP describing his constituents who entered into these schemes as “decent and honest”.

Kevin Hollinrake MP said that those people using such schemes should have been aware that entering into a scheme where you can lower or eradicate your tax bill was wrong. In an intervention during the speech of David Davis, Hollinrake said “If something looks too good to be true, it usually is? In my business, we have been brought this kind of scheme a number of times by our advisers over the last 30 years, maybe with a barrister’s letter saying, “Don’t worry. It’ll be fine. You can reduce your tax bill hugely by adopting this scheme.” We have always rejected them because we knew the risk.”

Both the advisers who ran the schemes and HMRC came in for criticism during the debate. It was argued that instead of charging the individuals that took out these loans, that HMRC should instead be pursuing the advisers who sold them. Paul Holmes MP stated, “many people were advised by financial advisers and are now being penalised because of the late realisation and intransigence of HMRC”. David Davis went further, in calling the advisers and employers who facilitated the loans “villains”.

In Norman’s final remarks, he summarised the argument as thus “If one asks the average man or woman in this country, I think they would say, “Everyone should pay their fair share of taxes. People are responsible for their own tax affairs. Real loans get repaid; if someone offered you a loan for which no repayment, no tax and no interest was due, it would probably be too good to be true.” And so it is.”

Despite this – the motion from the Back Bench committee asking that the loan charge only applies to loans taken out after 2017 was agreed to. Where this leaves the government is unclear.

The debate is available on Parliament Live here.

Photo by The New York Public Library on Unsplash

Budget 2020 – Tax avoidance and evasion issues to look out for

10th March 2020 by George Turner

The new chancellor, Rishi Sunak, has had a busy month. Thrust into the hot seat as the government prepared to present its first budget since October 2018, one of the first items to hit his desk, a global pandemic.

Although the world’s attention is rightly focused on the Coronavirus, tackling tax avoidance remains a hugely important priority for the public. For a number of years polling has consistently shown that tax avoidance is viewed as morally wrong and the public have demanded that the government do more to tackle the problem.

At TaxWatch we believe that tax avoidance is a complex issue that takes many forms. It is not something which can be solved with one simple policy or tax change. If that was the case the issue would have been dealt with many years ago!

In this article, we set out two issues facing the Chancellor on tax avoidance and tax fraud as he puts the final touches on his first budget.

The Digital Services Tax

Over the last ten years, the most high profile tax avoidance story has been the behaviour of the new digital giants, and the corporate structures they employ to shift billions of dollars of profits to tax havens every year.

Financial journalists have been publishing stories about Google’s extraordinarily low corporate tax rate since at least 2010. In that time digital companies have managed to get out of paying tens of billions of dollars in tax payments to governments around the world. In doing so, they have faced growing anger from both the public and regulatory authorities.

In 2013 the G8 mandated the OECD to come up with proposals to deal with the issue. However, when the Base Erosion and Profit Shifting plan was published in 2016, the digital economy was left on the too difficult shelf. Talks continue to this day, with the OECD aiming to agree on a plan to restructure the global tax system by the end of this year.

In the meantime, treasuries have continued to leak huge sums of money. Inaction at a multilateral level has led to unilateral action, with governments around the world seeking to introduce Digital Services Taxes.

The UK Digital Services Tax was always designed as a stop-gap measure to be put in place until an international agreement was reached on a new system of taxing digital companies. The introduction of it was delayed for two years in order to give the OECD process an opportunity to succeed. Now this time has expired, the tax is scheduled to apply from April. It is a blunt instrument, taxing the UK derived revenues of large social media platforms, search engines and online market places. It is a significant departure from the usual method of taxing companies, which focuses on profits and not turnover. As such it is controversial.

Some stopgap is clearly needed. Research by TaxWatch found that just five digital companies were avoiding almost £1bn in taxes a year in the UK. The Digital Services Tax, imperfect as it may be, ensures that at least some (and by no means all) of that money is recouped by the UK government.

A number of digital businesses will not be impacted, such as video streaming services and video games producers, despite these companies operating very similar tax avoidance strategies. In a recent adjournment debate, Dame Margaret Hodge MP called for the tax to be extended to such companies. We do not expect to see this happen in the budget, as the government response at the time was that to change the Digital Services Tax now would be too difficult.

Digital Services Taxes have become a major diplomatic issue, with huge pressure being put on countries to stop or delay their introduction by the United States Government, who have threatened trade sanctions for countries going ahead with the measure. Most companies impacted by digital services taxes are headquartered in the United States.

With the budget coming just weeks ahead of the UK tax coming into effect, any announcement on the Digital Services Tax, or even no announcement, will be highly significant.

Avoiding unintended consequences

Tax avoidance can be seen as an unintended consequence of government policy. By definition, tax avoidance is people using the tax system in a way that was never intended by the framers of tax policy.

A clear avoidance risk therefore emerges from the 1,190 tax reliefs and allowances which are part of the UK tax system. Tax reliefs reduce the amount of tax owed by a company or person based. In recent years, they have increasingly been used as a tool of economic policy, being granted to encourage a multitude of economic activities.

Tax reliefs have been introduced to encourage the production of films, video games, and spending on R&D to name a few. These schemes work by allowing companies to make additional deductions from their tax bills for spending money on the desired activities.

Although these types of tax reliefs are obviously popular with the people getting a benefit from them, they are also open to abuse. The history of tax reliefs shows that no sooner does the government come up with a scheme to promote one sector, a group of accountants and lawyers find inventive ways to claim it.

In recent years film tax relief has been the focus of a lot of media attention after a number of high profile celebrities were caught investing in a scheme which abused the film tax relief system.

A huge risk is posed by the research and development tax credit system, where there is very clear evidence of abuse. The government currently spends a little under £4.5bn on R&D tax credits, a figure which has quadrupled over the last decade.

These tax credits work by awarding companies credits based on the amount of money they spend on research and development activities. These credits can then be offset against their tax bills. If the company has no tax liability they can receive money back from the government.

In 2016-7, the last year where figures are complete, HMRC awarded credits to companies claiming that they spent a total of £32.3 billion in spending on R&D. However, the Office of National Statistics (ONS) recorded just £22.6bn of spending on UK R&D activities in 2017.¹

It is unheard of for any tax relief to get anywhere near 100% take up, never mind more than 100%! The ONS data and the HMRC data are different and not directly comparable. They cover slightly different time periods, with the ONS looking at a calendar year whilst HMRC looks at the financial year. The HMRC data also counts some non-UK spending, which can be claimed under the R&D tax credit scheme (for example if a company subcontracts some R&D work to a non-UK company). The ONS data looks at UK spend only. However, the difference is very large, with the ONS data suggesting that R&D expenditure for tax purposes is 143% of UK R&D spend. This can’t simply be explained by differences in methodology, even the inclusion of non-UK spending. In fact, HMRC has identified the practice of some companies opening up UK subsidiaries with the sole purpose of routing payments through the UK to collect tax credits as an abuse of the system. The data suggests a worrying level of abuse.

The government accepts there is a problem. The last budget brought measures to cap the amount small businesses could claim in cash under the R&D tax credit scheme based on their UK payroll. It did this after identifying “fraudulent attempts to claim the SME scheme payable tax credit… even though they had no R&D activity.”²

These measures are due to come into effect in April this year. However, as recently observed by the National Audit Office, even when the changes to R&D tax credits announced in the 2018 budget are made, companies will still have until 2022 to claim under the old rules. This means that tax will continue to be lost for years after serious fraud in the system was identified.

The cap on SME R&D relief only deals with part of the problem. A significant amount of tax loss occurs from what is charitably termed “poor quality” R&D tax relief claims. This is where companies and their agents make claims for expenditure which should not be allowed, and the claim is not picked up by HMRC compliance staff, leading to an incorrect payment being made. According to the NAO:

“Following the increased assessment of tax at risk in 2018, HMRC is also exploring opportunities to improve its systems and processes for risk-assessing claims and preventing incorrect payments, which is likely to require both legislative change and funding.”³

This highlights a serious problem with the tax relief system. Tax reliefs can be very difficult to change, even where there is clear evidence of fraud in the system. Given that it is likely that the Chancellor will seek to increase spending on R&D tax credits in line with the commitment made in the 2019 Conservative Party Manifesto, it is important that this comes alongside more resources dedicated to tackling the abuse of the system.

Photo by Steve Smith on Unsplash

1 Office for National Statistics, Research and Development Tax Credit Statistics, October 2019, see table on page 16 for comparison of HMRC data with ONS data. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/837282/Research_and_Development_Tax_Credits_Statistics_October_2019.pdf

2 HM Treasury, Preventing abuse of the R&D tax relied for SMEs: consultation, see paragraph 1.3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/790243/preventing_abuse_of_the_R_D_tax_relief_for_SMEs_consultation_web.pdf

3 National Audit Office, The management of tax expenditures, p35, https://www.nao.org.uk/wp-content/uploads/2020/02/The-management-of-tax-expenditure.pdf

TaxWatch research features in UK Parliament debate on evasion and avoidance

2nd March 2020 by George Turner

On February 25th an opposition day motion gave MPs an opportunity to debate the issue of tax avoidance and evasion.

Our research into the work of digital tech companies featured prominently in the debate.

Opening the debate for the Opposition, Shadow Chancellor John McDonnell highlighted our report “Still Crazy after all these years” which estimated the top five tech companies alone had avoided £5 billion in UK tax over five years.

Our recent update to the report, which estimated that £1.3 billion had been avoided by the big five as recently as 2018, was cited by Dame Margaret Hodge MP. The MP for Barking also highlighted our recent investigation of Netflix’s profit shifting activity.

Dame Margaret said that whilst the government’s proposed digital services tax was “a tiny start” it would raise only around £400 million by 2023.

“It makes me so angry,” she said, “Because these companies are as dependent as anybody else on the services our tax provides. They need a well-educated workforce, which is provided from taxpayers’ money; they need a healthy workforce, which is provided from taxpayers’ money; and they need infrastructure—whether roads, the internet or whatever else—which is often also provided from taxpayers’ money.”

The fact that large multinational companies are not paying enough in corporation tax was a point of cross party agreement. Kevin Hollinrake, Conservative MP for Thirsk and Malton, agreed the UK was not getting its fair share of tax from the tech giants.

“We know that Google turns over about 10 billion quid in the UK, we know that its international profit margin is about 22% and that 19% corporation tax on that should be £418 million, and we know that it pays about £67 million,” he said.

Conservative MP for South Cambridgeshire, Anthony Browne, highlighted how large multinationals arrange their finances to avoid declaring profits in the UK.

He said: “What any fair-minded person objects to is aggressive tax avoidance which results in companies or people paying less tax than is clearly their fair share…. The biggest examples are multinational corporations, who frequently arrange their internal transfer pricing, often of intellectual property, to ensure that most of their profits are booked in low-tax regimes.”

He added it was “an offence against any sense of fairness, and certainly against the public purse, that incredibly profitable global companies, such as Amazon, Facebook and Google, pay minimal tax in the UK because of the way they arrange their internal finances.”

Rounding up for Labour, Anneliese Dodds MP, noted TaxWatch’s recent work on Netflix and last year’s report detailing how Rockstar Games manages to avoid substantial amounts of tax, whilst claiming cash subsidies from the government.

TaxWatch recently reported that Rockstar took 37% of all the available subsidy for UK video games production in 2018/19 despite having paid no corporation tax for four years and the fact that Grand Theft Auto V, which is produced by the company in Scotland, is being widely cited as being the most profitable entertainment product in history.

Responding to the debate on behalf of the government, Financial Secretary to the Treasury, Jesse Norman MP, defended the operation of creative sector tax reliefs and argued that larger companies in receipt of the reliefs are subject to an “exceptional level of scrutiny” but that they should pay the “taxes due under UK law.”

Mr Norman also appeared to confirm that the government is pushing for international agreement to publish country by country reporting.

He said: “Private country-by-country registration is of course in place. The problem lies in securing the international agreement required to roll out the public registration. It demands a measure of international agreement, and that is something that we continue to focus on.”

A full transcript of the debate is available to read here.

Monthly Archives: March 2020