Alex Dunnagan

Tax Fraud Gap at least £15.2bn in 2020

16th September 2021 by Alex Dunnagan

An analysis of HMRC’s latest Tax Gap estimates by TaxWatch has found that the amount of tax lost to fraud in 2020 was at least £15.2bn.

The figures produced by TaxWatch are based on an evaluation of HMRC’s analysis of taxpayer behaviours underlying their annual estimate of non-compliance with the tax system.

HMRC attribute all non-compliance to eight behavioural categories: criminal attacks; evasion; hidden economy; avoidance; legal interpretation; non-payment; failure to take reasonable care; and error.

In their paper, The Tax Fraud Gap, published today, TaxWatch proposes an alternative categorisation of non-compliance based on the three behavioural categories defined in law: fraud, negligence, and honesty (which includes honest mistakes).

This categorisation would bring the figures presented by HMRC in line with the DWP’s categorisation of overpayments in the benefits system, which are simply categorised as arising from “fraud, official error, or claimant error”.

TaxWatch’s analysis of the definitions underlying HMRC’s behaviours finds that several arise from from fraudulent behaviour, specifically “Criminal Attacks – £5.2bn”, “Evasion – £5.5bn”, “Hidden Economy – £3bn” and “Avoidance – £1.5bn”. Taken together, these behaviours account for £15.2bn in tax losses, 43% of the entire Tax Gap.

Avoidance is included given HMRC’s particular definition of avoidance, which excludes tax planning and is limited to non-compliance arising from tax schemes that attempt to “exploit” the tax system through “contrived or artificial” transactions that have no commercial purpose other than to gain a tax advantage. This can be characterised as dishonest, or fraudulent behaviour on the part of professional advisors that design and market the schemes.

TaxWatch’s analysis also finds that some categories defined by HMRC will include a mix of both honest and fraudulent behaviour. In particular, the second largest category in the Tax Gap – Legal Interpretation (£5.8bn) – can include disputes that arise from either honest or fraudulent interpretations of tax law.

In addition, some forms of tax fraud, such as fraud in relation to profit shifting by multinational companies (Base Erosion and Profit Shifting, or BEPS) appear not to be included in HMRC’s Tax Gap, and fraud in relation to Covid-support schemes is not included at all.

This means that in reality, the amount of tax lost to fraud will be significantly more than the £15.2bn identified by TaxWatch and an estimate of at least £20bn would not be unreasonable.

Commenting on the figures, TaxWatch Executive Director George Turner said:

“HMRC’s presentation of their Tax Gap significantly underplays the amount of tax lost to tax fraud. Our analysis, which puts the tax lost to fraud at least £15bn, demonstrates that fraud is a significant problem in the UK and a much larger problem than many previously understood.

“HMRC regard the Tax Gap as an important part of their accountability to the public and Parliament. It is therefore vital that HMRC presents their analysis in terms that are understood by ordinary decent people.

“Presenting the tax gap as arising from either honest, fraudulent or negligent behaviour would significantly improve public understanding of tax non-compliance.”

The full report can be found as a web page here, and as a PDF here.

This research featured in The Financial Times and The Guardian among others.

GE Tax Fraud Case to be heard by Supreme Court

28th July 2021 by Alex Dunnagan

In an order dated 8 July 2021 The Supreme Court has granted permission to HMRC to appeal a decision of the Court of Appeal preventing the tax authority from making allegations of fraud against GE in relation to an ongoing tax dispute.

A previous decision from the Court of Appeal found that the allegations made by HMRC were made too late to be considered by the court.

TaxWatch made submissions in support of HMRC’s application for permission to appeal, arguing that there is no time limit on making allegations of fraud in relation to agreements reached between HMRC and companies like GE in relation to taxes.

After considering HMRC’s application to appeal and TaxWatch’s submissions, the Supreme Court has agreed to hear the case in a full hearing.

TaxWatch will now make a formal application to intervene in the case to make submissions in the public interest in the hearing.

Total value of taxes, penalties and fines HMRC is seeking from GE is worth over $1bn

Commenting, Executive Director of TaxWatch George Turner said:

“The dispute between HMRC and GE involves represents a watershed moment. It is the first time that the tax authority has alleged that a tax avoidance scheme operated by a major multinational relied on fraud in order to work.

“If HMRC are successful in making their case, then it will represent a complete change in the way our government approaches tax avoidance by large multinationals.

“For that reason there is an obvious public interest in HMRC’s case being heard and it would be wrong to prevent them from making their case when no legal barrier for bringing fraud claims exists with regard to tax disputes.

Background to the case

The case, IGE USA Investments Limited and Others v Commissioners for HMRC involves a dispute between HMRC and GE on whether HMRC is allowed to rescind an agreement with the US-headquartered multinational due to an alleged fraud committed by GE.

The agreement meant that HMRC would not apply anti-avoidance rules to a set of financial transactions entered into by UK based subsidiaries of GE, on the basis of reassurances granted by the company that the transactions were genuine commercial transactions and not part of an avoidance scheme.

However, HMRC now allege that employees of GE fraudulently misrepresented the true nature of the transactions to HMRC and knowingly withheld information that would have revealed details of the avoidance scheme.

The tax authority is now seeking to rescind the agreement and apply the anti-avoidance rules to the transactions. GE have stated in their accounts that if HMRC prevail in their arguments it would be liable for “approximately $1 billion… not including interest and penalties.”

In April, HMRC suffered a set-back in their case when the Court of Appeal found that the tax authority had run out of time to bring their claim under the Limitation Act 1980. HMRC applied to the Supreme Court for permission to appeal the decision of the Court of Appeal.

TaxWatch’s submission, which is different from HMRC’s, argues that the Limitation Act excludes the recovery of taxes from time limits imposed under the act, meaning that HMRC is not prevented from bringing a claim based on an allegation of fraud in this case.

If accepted, TaxWatch’s arguments have wider significance as HMRC frequently enter into agreements with multinational enterprises over tax.

If this appeal is successful, then the allegation of fraud levelled by HMRC against GE will be heard in an open court. It is thought that this would be the first time a major multinational corporation will have had to answer allegations of fraud regarding a tax avoidance scheme in a public court in the UK.

With a High Court hearing set for October 2021 on the substantive issue of whether HMRC can rescind the 2005 agreement and apply the anti-avoidance rules to the transactions, the case will be heard regardless of whether or not the allegation of fraud can be heard. However, without the fraud element HMRC’s chances of winning the case are weakened, putting at risk a huge sum of money.

Public interest interventions are common in various areas of law, such as human rights and environmental law. However, we believe that this is the first intervention made by an NGO concerning UK tax law.

We previously published a report, Around the world with $5bn, which looked at HMRC’s allegations of tax fraud.

Tech giants undermine African countries by failing to collect VAT

12th July 2021 by Alex Dunnagan

African countries are missing out on significant tax revenues because multinational tech giants are failing to collect and pay VAT on services, according to new research.

A new report published by TaxWatch finds that Microsoft, Google and Facebook are not collecting VAT on sales made to customers in most African countries, even in some countries where they have a local office.

The companies say that they will only collect VAT and sales taxes in countries that have levied specific taxes on digital products, claiming that it is up to the customer to pay any taxes due.

However, analysis from TaxWatch shows that these companies should be required to register for VAT under existing VAT rules in many African countries if they make significant sales.

VAT, a tax on the final consumption of goods and services, is an important source of revenue for tax authorities. An analysis from the OECD shows that on average VAT accounts for 30% of tax revenues in Africa, as opposed to taxes on individuals, which make up just 15.4%. Taxes on corporations account for 18.6% of tax revenues on average.

Since 2013 a number of African countries have changed their laws so VAT is collected on products, such as advertising, sold to customers.

The report does not make any estimate of the amount of money that could be raised if digital companies registered for VAT, as this would require detailed knowledge of the amount of sales made in each country. However, evidence from countries that have enacted a digital sales tax shows that the gains could be significant.

In 2014 South Africa became one of the first countries in the world to introduce specific legislation on VAT and digital services. The South African Revenue Service has said that it has collected an additional R600m a year since the introduction of the rules.

TaxWatch Executive Director, George Turner, said: “Big tech has for years traded on the myth that because they invoice their clients from offshore, they somehow have no obligation to pay any taxes. Our research demonstrates that this simply is not the case. If these companies have made significant sales in any country that levies VAT, then they should register to pay VAT locally.

“Google, Facebook and Microsoft wouldn’t get away with such an approach in Europe or North America anymore.

“I would encourage tax authorities across the continent to cast a close eye on the activities of these companies in their jurisdiction, and pursue them for any VAT payments that should have been made. This is likely to be a far more significant issue than any corporate tax avoidance engaged in by tech companies, as VAT makes up a far higher proportion of tax revenues than corporate profits.”

When questioned on the findings of this report, a Microsoft spokesperson stated: “Microsoft is fully compliant with all local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Google did not respond to our requests for comment.

The report is available on our website here and in PDF here.

This research was featured in Law360 and PQ Magazine.

Will Facebook, Google, eBay and Amazon pay more in UK tax under the new global tax deal?

8th June 2021 by Alex Dunnagan

TaxWatch analysis shows that package agreed at the G7 would lead to a tax cut for tech companies subject to the Digital Services Tax

On Saturday 5th June G7 finance ministers announced an agreement on changing the tax rules for global multinational companies. The deal was a significant change to the current global tax rules, introducing unprecedented restrictions on the use of tax havens, and a new system of apportioning profit made by large multinationals between countries.

Talks on reforming the global tax system started almost 10 years ago in the UK at the Loch Erne G8 conference. The process was set up in response to a number of scandals that had broken about the use of tax havens by global tech companies in particular. For that reason much of the focus of reform has looked at the tax affairs of global technology giants such as Facebook, Amazon and Google.

In this note we set out our analysis of the consequences of the deal for the UK Tax liabilities of the largest global technology companies that would be covered by the Digital Services Tax (DST).

Our analysis is based on the known shape of the deal as announced by the G7 on Saturday 5th of June. The terms of the deal may still change, and some details still need to be negotiated and are as yet unknown.

In order to analyse the position of the companies in our study we have relied on historical data and had to use some estimates of revenues generated in the UK. For these reasons the figures we have produced should not be taken as the definitive answers to how much tax liabilities will increase under the deal. However, we believe our research provides a strong foundation for an analysis.

We have used data from 2019, as that is the latest year that UK accounts are available for the companies in our study.

We find that the tax liabilities for Amazon, Facebook, Google and eBay in the UK arising from the so called Pillar One proposals are below or at the same level as their current UK tax liabilities. This means that if the new liabilities from Pillar One are additional to current tax liabilities these companies will see their tax liabilities increase. If the Pillar One allocation is not additional, but offset against existing liabilities, there will be very little change to the tax liabilities of these companies in the UK.

However, when looked at as a whole, the package of reforms announced in the G7 Finance Ministers and Central Bank Governors Communiqué could result in very substantial tax cuts for some digital companies due to agreement to remove the Digital Services Tax, which would raise significantly more from these companies than any new liabilities faced under the Pillar One proposals.

No additional revenues would be raised from tech companies in the UK under the Pillar Two proposals.

Pillar Two

The element of the deal that has attracted the most attention is the so-called Global Minimum Tax Rate. This will see countries impose a minimum 15% tax rate on the profits of multinational enterprises. The global minimum will be imposed by the home nation of a multi-national enterprise. This means that if there were any liabilities arising from Pillar Two on tech companies, they would be paid to the United States Government.

Pillar One

Under the Pillar One proposals companies see a portion of their global profits re-allocated to countries where they have a market where they are charged at the local rate.

The allocation formula set out is that a company gets an allowance of 10% of their revenues. Any profit above this is considered to be a “super-profit” and 20% of these super profits are reallocated to countries where they operate.

Currently the proposal is that Pillar One would only apply to one hundred of the largest companies in the world.

We have sought to analyse what this would mean for the companies in our study based on their 2019 accounts, the latest year for which we have full data. We have then allocated the distributable super profit to the UK based on the UK market share these companies have from our estimates undertaken for previous analysis.

We have then compared the tax charge that would arise in the UK from these allocations to the current tax charge these companies have in their UK companies. Again this figure is taken from our analysis of profit shifting by big technology companies.

For Amazon, we have limited the analysis to Amazon Web Services. This is because Amazon as a whole falls out of Pillar One due to its profit margin being below 10%. However, there is an idea being considered to apply Pillar One to particular business segments within large companies. Amazon Web Services, which in 2019 had revenues of $35bn and accounted for over 50% of Amazon’s global profits would likely qualify for Pillar One in itself if it was agreed to apply Pillar One to individual business segments.

Pillar One proposals 2019 analysis	eBay	Amazon (AWS only)	Google	Facebook
Global revenue	$8,636,000,000	$35,026,000,000	$161,857,000,000	$70,697,000,000
Global profit margin	20.25%	26.27%	24.48%	35.10%
“super profit” (margin -10%)	$885,400,000	$5,698,400,000	$23,439,300,000	$17,742,300,000
20% of super profit	$177,080,000	$1,139,680,000	$4,687,860,000	$3,548,460,000
UK portion of total sales	15.00%	6.25%	9.00%	5.45%
UK portion of super profit	$26,562,000	$71,207,147	$421,907,400	$193,406,303
Exchange rate on balance sheet date	0.75	0.75	0.75	0.75
UK Pillar One charge (@19%)	£3,803,864.07	£10,197,361.22	£60,420,088.81	£27,697,134.56
UK current tax charge	£5,260,000	£14,582,000	£58,987,000	£40,049,000

The Digital Services Tax

The UK Digital Services tax was first announced in 2018 and came into effect in April 2020. The tax applies to the UK sourced revenues of large multi-national companies providing social media services, search engines or online market places. The tax is levied at the rate of 2% on revenues above £25m, with a discount for any corporation tax paid.The tax is counted as a business expense, and so deductible against revenues for the purpose of working out profit for corporation tax liabilities. This means that if a company books their revenue in the UK, they will see a reduction in their corporation tax bill as a result of the DST.

The purpose of the DST was to target companies that the government determined were not paying a fair share of tax in the UK. The then Chancellor Phillip Hammond said of the DST in his Budget 2018 speech – “It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”¹ It was always intended as a stop-gap ahead of a global deal on international tax reform.

The communiqué released by the G7 Finance Ministers and Central Bank Governors states that “We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes [emphasis added], and other relevant similar measures, on all companies.”²

The removal of the UK DST is therefore part of the package of reforms announced by G7 ministers. The impact of removing the DST must therefore be considered when analysing the proposals.

We have tried to estimate the UK DST that would be placed on eBay, Amazon, Google and Facebook, using our previous work on looking at the sales these companies make in the UK.

For Amazon, the DST would only apply to the fees generated from sellers on the Amazon Marketplace. The Amazon 10-K disclosed that in 2019 Amazon made $54bn in fees to third party sellers. To estimate the UK portion of these fees, we have applied the percentage of Amazon’s total revenues that come from the UK which can be derived from their 10-K form to their disclosed figures for third party seller services.

Both Facebook and eBay book a substantial amount or all of their fees through a UK company. This means that the DST would be an allowable expense to deduct from their pre-tax profits and they would get a discount against their corporation tax liability arising from the DST. We have tried to account for this in our calculations of the total tax liability arising from the DST.

Our analysis shows that for every company that is subject to the DST, the Pillar One proposals would lead to substantially less money being raised in taxation in the UK. If the UK therefore goes forward with the removal of the DST, as the G7 communiqué strongly suggests it will, the package of reforms will lead to a net loss of tax in the UK from eBay, Amazon, Google and Facebook. While not the only companies likely to see a UK tax reduction as a result of the removal of the DST, these four are almost certainly the largest. Between them, based on 2019 revenues, these multinationals look set to pay £232.5m less in tax than they would under the DST.

DST 2019 analysis	eBay	Amazon (Marketplace only)	Google	Facebook
UK Revenues	$1,323,000,000	$3,359,046,970	$14,567,130,000	$3,853,290,000
£/$ rate	0.75	0.75	0.75	0.75
UK DST @2%	£19,443,458	£50,135,685	£219,091,036	£58,086,111.84
Discount on CT for UK booked sales	-£3,789,257	£0	£0	-£8,213,543
Total DST	£15,654,201	£50,135,685	£219,091,036	£49,372,568
UK Pillar One charge	£3,803,864	£10,197,361	£60,420,089	£27,697,135
Benefit from removing DST	£11,850,336.64	£39,938,323.60	£158,670,947.00	£22,175,433.80
Reduction from removing DST	75.70%	79.66%	72.42%	43.90%

Conclusions

The removal of the digital services tax as part of the agreement reached by the G7 creates significant winners and losers. Companies that are subject to the DST will all see a substantial taxcut arising from the G7 proposals.

This is because in all cases the DST liability is more than any increase in taxes under the Pillar One proposals.

There are some companies that will receive a particular benefit, being companies that are too small to fall under Pillar One, but would have been subject to the DST. This includes smaller social media platforms and online marketplaces.

However, the UK DST is narrowly defined and there will also be companies that do end up paying more in UK tax if they fall under the new Pillar One rules and were not part of the DST regime.

One key issue that needs to be addressed by negotiators is whether corporation tax currently being paid in a jurisdiction will count towards any liability arising under Pillar one. If it does, then all of the companies in our study will not see any significant change in their corporation tax liability in the UK arising from the agreement.

Detailed methodologies

Facebook

In order to estimate Facebook’s real revenues in the UK, we looked at Facebook’s average revenue per user (APRU), which is published in a chart, broken down by region, appended to the company’s US stock market filings. We then took the mid-point between the US APRU and European APRU basing this calculation on the assumption that the UK would be at the top end of the European APRU range, but less than the US. Using the online tool Napoleon Cat, we calculated an average of 42,000,000 Facebook users in the UK for 2019.

On the basis of these numbers we estimate Facebook’s revenues from the UK to be £2.9bn in 2019.

Facebook’s US 10-K shows a pre-tax margin of 35%.

Facebook bills larger UK clients via its UK company. As a result it can deduct a portion of its DST from its revenues before corporation tax is applied. We calculated that this would have led to a £8.2m discount on 2019 corporation tax liabilities at Facebook UK. This results in a total DST impact of £49.4m.

With the new Pillar One proposals, the amount owed would be £27.7m. The removal of the DST therefore results in a net tax cut of of £22.2m based on 2019 figures.

Google

Until 2016 Google reported the revenues it made from the UK in its US 10-K filing. On average, around 9% of Google’s global revenues came from the UK between 2014 and 2016. We applied this average figure to Google’s 2019 global revenues to estimate the revenues generated from the UK in 2019.

Based on 2019’s revenues, Google would stand to pay £219m in DST.

With the new Pillar One proposals, the amount owed would be £60.4m – a tax cut of £158.7m.

Should the percentage of Google’s global revenues arising from the UK have decreased since 2016, the result would be the same. The DST would remain higher than the pillar one charge. The proposals represent a tax cut for Google.

eBay

The online marketplace eBay launched in the UK back in 1999. eBay’s 10-K shows a global pre-tax margin of 20%, and UK revenues of £997,172,883 for 2019.

All of eBay’s fees are earned via a UK company, which means they would be able to deduct the DST from their taxable profit. This would result in a £3.8m discount leading to a total DST impact of £15.7m based on 2019’s revenues.

With the new Pillar One proposals, the amount owed would be £3.8m – a taxcut £11.9m.

However, it is possible that eBay would not fall into Pillar One, as it is much smaller than Facebook, Google and Amazon, and may not end up being one of the world’s largest, most profitable companies. If that was the case than the package of reforms would be of even greater benefit to the company.

Amazon

Amazon’s 10-K shows a global pre-tax margin of 5%. As such, it would not qualify for Pillar One, which only bites when a company has a profit margin of more than 10%.

However, Amazon Web Services, which accounts for more than 50% of Amazon’s pre-tax profits, has a margin of 25%, and so could qualify if the proposals applied to business segments within companies.

With regards to the DST, this would only apply to Amazon’s fees to third party sellers using its platforms.

Amazon publishes its total revenues from the UK market in its 10-K. It also publishes the total fees it generates from 3rd party sellers, and total revenues and profits at AWS.

We applied the proportion of Amazon’s business that takes place in the UK (6.25%) to AWS’s profits and fees generated from 3rd party sellers to calculate the DST liability and the pillar one liability for the UK.

Based on 2019’s revenues, Amazon would stand to pay £50.1m in DST.

With the new Pillar One proposals, the amount owed would be £10.2m – a taxcut of £39.9m.

This analysis is available as a PDF here.

1 Budget 2018: Philip Hammond’s speech, Gov.uk, 29 October 2018, https://www.gov.uk/government/speeches/budget-2018-philip-hammonds-speech

2 G7 Finance Ministers and Central Bank Governors Communiqué, Gov.uk, 05 June 2021, https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique

Eight tech companies in the UK avoided an estimated £1.5bn in 2019 – New Research

2nd June 2021 by Alex Dunnagan

£45.4bn in revenues
£9.6bn in profits
£296m in tax paid
£1.5bn in tax avoided

Eight large tech companies in the UK made an estimated £9.6bn in profit from sales to UK customers in 2019, a new analysis by TaxWatch shows.

But by moving money out of the UK, these companies ended up declaring a fraction of these profits in the accounts of their UK subsidiaries, radically reducing their tax liabilities.

Amazon, eBay, Adobe, Google, Cisco, Facebook, Microsoft, and Apple faced UK corporation tax liabilities of £297 million in 2019.

That puts the total amount of tax avoided by the companies in the UK at an estimated £1.5bn in 2019, the latest year where figures exist.

Large US-based technology companies have tens of millions of UK users and make billions in sales to UK customers. The UK is unarguably a significant source of corporate profits for these companies. But a glance at the accounts of their UK-based subsidiaries shows that little of this profit ends up in the UK.

As Finance Ministers seek to negotiate a new international settlement on how large multinational companies should be taxed, understanding the scale of tax avoidance by global digital giants is key to evaluating the outcomes of any deal.

The latest figures are an update on TaxWatch’s 2018 study, Still Crazy After All These Years, which looked at the activities of Google, Cisco, Facebook, Microsoft, and Apple, five of the largest technology companies in the world, over the period 2013-2017. Last year we updated these figures taking 2018 into account. This year three companies were added to our analysis, eBay, Adobe, and Amazon.

The full report is available here, and as a PDF here.

This report featured on ITV News, Channel 4 News, and in several newspapers.

The Deloitte Disaggregation

27th May 2021 by Alex Dunnagan

Sports Direct worked with big four accountancy firm Deloitte on a VAT scheme that has led to litigation in several European countries.

The findings have emerged in High Court papers lodged as part of an ongoing case brought by the Financial Reporting Council against Frasers Group, formerly Sports Direct International Plc.

TaxWatch has published a report, ‘The Deloitte Disaggregation‘, setting out the case.

The scheme involved contracting out deliveries to a company set up by Mike Ashley’s brother, which had no vehicles or drivers.

Grant Thornton did not disclose this relationship in company accounts and have since quit as Sports Direct’s auditors.

A number of European countries are known to be concerned about the scheme with the potential losses to tax authorities likely to be very significant, perhaps running into the billions.

The case illustrates again how, despite claims to the contrary, leading elements of the tax industry remained in the business of designing and marketing complex tax avoidance schemes.

TaxWatch intervenes in GE tax fraud case

21st May 2021 by Alex Dunnagan

HMRC have filed an appeal to the Supreme Court seeking permission to make allegations of fraud in relation to an ongoing dispute with General Electric over a massive tax avoidance scheme.
TaxWatch has made submissions supporting HMRC’s application.
Should HMRC’s appeal be successful, then this would be the first time a major multinational corporation will have been forced to answer allegations of tax fraud in relation to an avoidance scheme in a public court in the UK.
TaxWatch’s submissions argue that there is no time limit on making allegations of fraud in relation to agreements reached between HMRC and companies like GE in relation to taxes.
Total value of taxes, penalties and fines HMRC is seeking from GE is worth over $1bn

TaxWatch has taken the preliminary step to intervene in a Supreme Court case between HMRC and General Electric (GE) as part of our Tax and the Rule of Law project.

The case involves a dispute between HMRC and GE on whether HMRC is allowed to rescind an agreement with the US-headquartered multinational due to an alleged fraud committed by GE.

Last month, HMRC suffered a set-back in their case when the Court of Appeal found that the tax authority had run out of time to bring their claim under the Limitation Act 1980. HMRC have applied to the Supreme Court for permission to appeal the decision of the Court of Appeal.

TaxWatch’s submission argues that the Limitation Act excludes the recovery of taxes from time limits imposed under the act, meaning that HMRC is not prevented from bringing a claim based on an allegation of fraud in this case.

If accepted, TaxWatch’s arguments have wider significance as HMRC frequently enter into agreements with multinational enterprises over tax.

The full written submission to the Supreme Court is available here.

Our previous report on General Electric, Around the World with $5bn, is available here.

Furlough fraud to cost up to £7bn – with no civil penalties issued yet

12th May 2021 by Alex Dunnagan

• Furlough fraud and error set to cost between £3.5bn and £7bn

• 5 known arrests for fraud so far concerning £5m in fraud

• No civil penalties have yet been issued for furlough fraud

• More investment required to tackle the scale of the problem

Furlough fraud and error is set to cost between £3.5bn and £7bn by the time the Coronavirus Job Retention Scheme (CJRS) ends in September 2021 a new estimate produced by TaxWatch has found.

Despite being aware of the scale of the problem, and making several high profile arrests, HMRC appear not to have issued any penalties for furlough fraud yet.

DWP estimates that £4.6bn per year is lost to benefits fraud and error. To tackle this, the Counter Fraud, Compliance and Debt (CFCD) Department of the DWP had approximately 8,000 staff in 2019. By comparison, this new Taxpayer Protection Taskforce sees 1,265 HMRC staff chasing up to £7bn of money lost to fraud and error lost from CJRS, while also having to deal with issues arising from the multitude of other Covid-19 schemes.

Read the full report here.

“Amazon Tax Cut” features in Parliamentary debate

29th April 2021 by Alex Dunnagan

On Monday 19 April MPs met to scrutinise the Finance (No. 2) Bill in a committee of the whole house. In the debate, TaxWatch’s research into “super-deductions” featured prominently, as MPs sought to amend the legislation to ensure some companies were excluded from the benefit of the super-deduction.

The new policy, at a cost of £12bn for this financial year, allows companies to deduct 130% of the cost of “main rate” assets from their taxable profits in the year that they purchase it. We calculated that many large companies with significant expenditures would be able to reduce and perhaps even extinguish their tax bills as a result of this policy. Logistics companies, energy, infrastructure, Amazon, would all likely gain significantly as a result of super expensing.

More details can be found in our report, “The Amazon Tax-Cut”, which was published in March following the announcement of the policy in the Budget.

Speaking in support of these amendments, James Murray MP, speaking on behalf of HM Opposition, raised the issue of the super-deduction benefiting companies who have seen business increase throughout the pandemic, saying:

“The super deduction that we are debating now is designed to help companies such as Amazon, which do not need any help with their investment. It is important that we see this in the context of those companies that have done well throughout the outbreak and are already avoiding much of the tax they should be paying. It is no wonder that TaxWatch has nicknamed this the “Amazon Tax Cut”. This giveaway from the Chancellor could wipe out Amazon’s UK tax bill entirely.”

Dame Margaret Hodge MP highlighted how small Amazon’s tax bill was, and the fact that the super-deduction could see it wiped out altogether, saying:

“In 2019, Amazon’s UK turnover was £13.7 billion, but by claiming that its UK sales took place in Luxembourg it exported its profits and avoided corporation tax. It declared only a bit of profit in the UK, as the shadow Minister said, on its warehousing and logistics activities. Its corporation tax contribution was less than 0.1% of its turnover. Analysis by TaxWatch shows that even that miserly contribution would be wiped out with super deductions. It would write off its investment in IT equipment and machinery against its deliberately understated profits.”

Rebecca Long-Bailey MP reiterated the fact that due to the amount Amazon spend on plant and equipment, they stand to see their tax bill wiped out entirely while the super-deduction remains, saying:

“I would have no problem if such businesses desperately required the relief in order to protect jobs or to invest in our local economies, but let us look at some of the potential beneficiaries. Amazon has benefited from the pandemic, seeing its sales jump by 50%. According to TaxWatch, the company’s latest accounts show that they spent £66.8 million on plant and machinery, £80.4 million on office equipment and £15.3 million on computer equipment in the same year, so the 130% super deduction could entirely account for the pre-tax profits of the company even before any deductions of staff pay awards.”

Responding to the debate on behalf of the government, Rt Hon Jesse Norman MP, the Financial Secretary to the Treasury said that the deduction had been deliberately broadly drawn to ensure that a range of companies could benefit from this “very generous policy” and that avoidance was best dealt with via other means. He said:

“the deduction has been very carefully assessed and includes important exclusions, including as to related party transactions and second-hand assets. It also includes a new anti-avoidance provision, which is designed to give it additional protections….

It is true that this is a country that takes the question of tax avoidance and tax manipulation extremely seriously. The right hon. Member for Barking (Dame Margaret Hodge), who has been a great campaigner in this area, focused on that. Of course I cannot discuss individual taxpayers. No one knows what an individual company’s taxpaying arrangements are. She purported to know—that is her privilege—but I am not in a position to discuss that. None the less, I can tell her that it would be very bad policy indeed for any Government to base tax policy on a single employer or taxpayer. If she thinks that this country has been soft in any respect on tax, let me remind her that we have led the international charge on base erosion and profit shifting, on diverted profits taxes, and on the corporate interest tax restriction. We have put into law a digital services tax and are consulting on an online service tax. That is not the action of a Government who take these things in any way other than very seriously.”

The debate is available on Parliament Live here, and on Hansard here.

Photo by Deniz Fuchidzhiev on Unsplash

TaxWatch included in International Tax Review’s 2020-21 Global Tax 50

10th February 2021 by Alex Dunnagan

Here at TaxWatch we are hugely proud to announce that we have been listed in ITR’s Global Tax 50 2020-21 (paywall).

International Tax Review’s Global Tax 50 is an annual list of “the most influential figures and events in fiscal policy over the past year.” The list also seeks to recognise “who and what will be particularly important” in the coming year.

In their article about TaxWatch ITR noted:

“TaxWatch has existed for just over two years but, in that time, it has made a big name for itself.”

The article goes on to profile our work on Netflix, James Bond, Disguised Remuneration, and Covid-19, amongst other efforts.

A huge thank you to all our staff, trustees, editorial committee and supporters who made this possible through their passion and dedication to raising the important issues TaxWatch covers in its work.

alexd