Alex Dunnagan – Page 2

We need to talk about Corporation Tax

26th July 2022 by Alex Dunnagan

Corporation Tax (CT) has been in the headlines again after several candidates in the Conservative Party leadership race promised to cut the rate. Liz Truss has promised to reverse the planned increase to 25 per cent, while Jeremy Hunt and Sajid Javid, set out plans to cut the rate to 15 per cent before they were eliminated from the contest. ^[1]15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules

This note sets out what the UK’s current plans regarding CT are, who the tax affects, how much it contributes to the treasury, and how the UK compares internationally.

Changes in the Corporation Tax rate

UK Corporation Tax rates over time

When the Coalition government came to power in 2010 the headline rate of CT stood at 28 per cent. Since then it has been gradually cut to an all time low of 19 per cent. It was initially planned that the rate would be reduced to 17 per cent from April 2020, but that was reversed, and in 2021 the then Chancellor Rishi Sunak announced that it would be increased to 25 per cent from April 2023. Should Sunak become the next Conservative Party leader, and with that the UK’s next Prime Minister, there are no indications that the proposed rate increase would change.

It should be noted that the planned rate increase affects companies differently dependent on how much profit they make. Companies with profits under £50,000 will continue to pay 19 per cent in what’s known as the “small profits rate”. Businesses with profits between £50,000 and £250,000 will pay a “marginal rate” somewhere between 19 and 25 per cent. ^[2]Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax

Who pays Corporation Tax?

The key thing to remember when looking at CT is that it is a tax on profits, not on revenues. There is also a difference between the statutory tax rate, be it 19% or 25%, and the effective tax rate, which is the amount of corporate tax a company actually pays on its pre-tax profits. There are various reasons for this difference. Companies are able to claim various tax reliefs, for example if they invest in Research and Development. There is an Annual Investment Allowance which allows businesses to claim tax relief on certain assets. A “super-deduction” on purchases of capital goods was introduced in the 2021 Spring Budget, allowing companies to deduct 130 per cent of the cost of “main rate assets” – more than the cost of the equipment itself – from their taxable profits in the year they purchase it. These are just a few of the reasons why companies often pay an effective rate lower than the statutory rate.

Of the three main legal forms of businesses in the private sector (sole proprietorships, ordinary partnerships, and companies) only companies are liable to Corporation Tax. There were 2 million actively trading companies at the start of 2021, almost half of which had no employees. ^[3]Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, … Continue reading

Over two thirds of the companies that paid CT in 2019-20, approximately 1.1 million companies, had liabilities of less than £10,000. A further 27 per cent of companies had liabilities between £10,000 and £49,999. While it is not clear from the data exactly how much profits these companies turned in order to have these liabilities, it would be reasonable to assume the vast majority of these companies – some 94 per cent of those with liabilities – would have profits of under £250,000, and thus would not be subject to the increased 25 per cent CT rate.

Number of companies and their CT liabilities by liability band, 2019-20 ^[4]Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021

How much does Corporation Tax contribute to the Treasury?

Total revenues reported by HM Revenue & Customs (HMRC) from 2017-18 to 2021-22 ^[5]‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and … Continue reading ^[6]HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for … Continue reading

How does the UK Corporation Tax rate compare internationally?

Average Corporate Tax Rate by Region or Group 2021 ^[7]https://files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf

The European average rate is 19.84 per cent, but this includes a number of very small economies with very low rates. The average European rate when weighted by GDP is 23.97 per cent. The G7 average rate is 26.69 per cent (26.41 per cent weighted by GDP). The OECD average rate is 23.04 per cent (25.81 per cent weighted by GDP) ^[8]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091378/HMRC_Annual_Report_and_Accounts_2021_to_2022_Web.pdf

Jeremy Hunt, who is no longer in the race, stated recently that “We’re scheduled to increase corporation tax to be higher than Japan, America, France or Germany.” This is half true at best. ^[9]Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/

The countries listed charge CT at both a central and a sub-central level, i.e. at a state, regional, or municipal level. The UK only charges a central CT. While the UK’s central rate may be higher than some of these countries when it increases to 25%, the total rate will not.

Take Japan for example. In 2021 Japan’s central CT rate was 23.2 per cent. However, Japan also has a sub-central rate that averages 7.4 per cent. Once deductions are factored in, the total CT rate in Japan is 29.7 per cent. Germany’s total rate is 29.9 per cent, the US is 25.8 per cent. France does not levy a sub-central CT, but the CT rate alone is 28.4 per cent. The OECD provides a useful dataset that show the central, sub-central, and combined CT rates for countries. ^[10]Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT

Conclusions

In discussing CT it is important to remember that raising the UK’s rate to 25 per cent as planned will not affect the vast majority of businesses, nor will it turn the UK into a high-tax outlier. In fact, the only companies set to pay 25 per cent will be those that are turning profits of over £250,000, and even then, they will likely pay a lower effective rate as a result of various reliefs. An increase from 19 per cent will move the UK to a rate closer to that of other large developed economies, and will still be lower than the rate the UK had in 2010.

TaxWatch discussed some of these issues recently with the New Statesman .

References[+]

References
↑1	15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules
↑2	Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax
↑3	Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1019907/2021_Business_Population_Estimates_for_the_UK_and_regions_Statistical_Release.pdf
↑4	Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021
↑5	‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and fines and penalties.
↑6	HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for National Insurance Contributions, and £148.8bn for VAT.
↑7	https://files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf
↑8	https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091378/HMRC_Annual_Report_and_Accounts_2021_to_2022_Web.pdf
↑9	Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/
↑10	Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT

HMRC publishes its latest Tax Gap – TaxWatch analysis

27th June 2022 by Alex Dunnagan

HMRC’s Tax Gap has increased for the second year in a row on a like-for-like basis.

The latest HMRC estimates of non-compliance are £32bn for 2020-2021, or 5.1% of total tax revenues. This is the same gap as a percentage as seen in last year’s publication covering 2019-2020.

However, this year’s figure includes a £0.7bn revision downwards to compensate for lower compliance activity during Covid. This means that on a like-for-like basis HMRC’s Tax Gap increased.

Of the £32bn total tax gap, at least £14.4bn, or 45%, of it is attributable to fraud. Fraud as a percentage of the total tax gap hasn’t been this high since 2016-2017. This is based on the limited data available, and the actual figure for tax lost to fraud will be much higher. ^[1]TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report The Tax Fraud Gap – 2021 edition, … Continue reading

As TaxWatch has previously highlighted, HMRC’s tax gap publication significantly underestimates the true scale of non-compliance with the tax system. Profit shifting by multinationals appears not to be counted at all.

Estimates of error and fraud in the HMRC-administered Covid-19 support schemes are also not included in the figures and reported on separately. These run into the billions of pounds.

Our full analysis is available in a briefing here. HMRC’s publication is available here.

References[+]

References
↑1	TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report The Tax Fraud Gap – 2021 edition, here https://www.taxwatchuk.org/tax_fraud_gap_2021/

Committing to a world of good? Etsy’s tax affairs

20th June 2022 by Alex Dunnagan

Online marketplace Etsy paid just £128,000 in UK Corporation Tax in 2020, whilst booking huge amounts of UK revenue in Ireland, new research from TaxWatch has found.

As traditional bricks and mortar shops were hit by successive lockdowns as a result of the pandemic, Etsy saw a huge increase in turnover, with the value of goods sold via Etsy increasing exponentially. The UK accounts for over 10% of the company’s takings, making it the most important market outside of the US, where the company is headquartered.

This importance isn’t however reflected in Etsy’s UK company accounts. Etsy’s UK company, Etsy UK Limited, declared revenues of just £12.5m in 2020, a profit of £7.5m, with a tax bill of just £128,000 – after deductions for share-based compensation.

Instead, Etsy’s UK sales, which run in to hundreds of millions of pounds, are booked with an Irish Unlimited Company, where profits were subject to a tax rate of 3%.

The full report is available here.

This story was featured in The Guardian and City AM, amongst others.

Amazon – Public money but no public scrutiny

24th May 2022 by Alex Dunnagan

The Centre for International Corporate Tax Accountability and Research (CICTAR) has today published its latest report looking at Amazon,^[1]Amazon Tax Report, CICTAR, 24 May 2022, www.cictar.org/Amazon-Tax revealing the growth and scale of Amazon’s government contracts, and calling on governments around the world to require more transparency in Amazon’s tax affairs. TaxWatch was pleased to have the opportunity to assist CICTAR in the production of its report.

The report focuses on Amazon Web Services (AWS), the company’s fast-growing unit which has become by far the largest cloud infrastructure service provider, controlling more than a third of the world’s market. While AWS only accounts for 13% of Amazon’s total revenues, it makes up 74% of the company’s operating profit.

Over the last five years, AWS has grown exponentially, partly fuelled by government contracts. In the UK, AWS won almost £600m in government contracts between 2018 and 2021, a number that is likely to rise in the coming years.

Given Amazon’s significant and ongoing controversies over its international tax structure, the report questions whether governments should use their leverage to force a greater level of transparency over where the company pays its taxes. A timely issue given the recent publication of the Procurement Bill, which seeks to reform government contracting in the UK.

Amazon’s tax transparency has also become a question facing investors, who are set to vote on a proposal calling on the company to implement the Global Reporting Initiative (GRI) Tax Standard.^[2]Notice of 2022 Annual Meeting of Shareholders & Proxy Statement, Amazon, https://s2.q4cdn.com/299287126/files/doc_financials/2022/ar/Amazon-2022-Proxy-Statement.pdf The proposal was filed by the Greater Manchester Pension Fund (GMPF) – the UK’s largest local government pension fund – and the Oblate International Pastoral Investment Trust, in December of last year.^[3]CICTAR and PIRC engage with global investors to support responsible tax practices, CICTAR, 10 February 2022, … Continue reading

Amazon does not provide a breakdown in its accounts of revenues, profits, and tax payments in non-US markets, making it difficult for investors, the public, and tax authorities around the world, to evaluate whether Amazon is engaged in responsible tax practices. The implementation of the GRI would allow for necessary scrutiny.

The resolution is the first of its kind to be filed in the United States and will go to a vote at Amazon’s annual shareholder meeting on 25 May. Unsurprisingly, Amazon’s board of directors is recommending shareholders vote against this proposal, with one reason being given that the GRI “would potentially force disclosure of competitively sensitive information about our operations and cost structures and would hamper our ability to make operational decisions.”^[4]Notice of 2022 Annual Meeting of Shareholders & Proxy Statement, Amazon, https://s2.q4cdn.com/299287126/files/doc_financials/2022/ar/Amazon-2022-Proxy-Statement.pdf

Photo by Marques Thomas @querysprout.com on Unsplash

References[+]

References
↑1	Amazon Tax Report, CICTAR, 24 May 2022, www.cictar.org/Amazon-Tax
↑2, ↑4	Notice of 2022 Annual Meeting of Shareholders & Proxy Statement, Amazon, https://s2.q4cdn.com/299287126/files/doc_financials/2022/ar/Amazon-2022-Proxy-Statement.pdf
↑3	CICTAR and PIRC engage with global investors to support responsible tax practices, CICTAR, 10 February 2022, https://cictar.org/news-roundup-cictar-and-pirc-engage-with-global-investors-to-support-responsible-tax-practices/

Another record year for Rockstar Games Tax Relief (RGTR)

9th May 2022 by Alex Dunnagan

Rockstar Games has revealed that they claimed £68.4m in Video Games Tax Relief (VGTR) in 2020-2021, equivalent to 38% of the entire amount of VGTR paid out that year. The amount Rockstar are claiming is rising every year, taking the total the US-owned company has claimed to a staggering £205m.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced. ^[1]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading We now have one company claiming almost double that in a single year.

The 2020-2021 accounts of Rockstar Games UK Limited (previously Rockstar North) were published last week, just three months late, after the 2019-2020 accounts were published over a year late in January.

	2016	2017	2018	2019	2020	2021	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£9,399,572	£43,138,711
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£64,359,515	£243,003,247
VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£68,376,369	£204,981,384
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£73,831,443	£286,421,578
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£0	£67,500,000

While the Edinburgh-based company is responsible for developing some of the most profitable games of all time, its corporate structure ensures that it sees almost none of that profit returned to the UK. ^[2]The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, https://www.taxwatchuk.org/reports/gaming-the-tax-system/

Not content with hundreds of millions of pounds in VGTR, Rockstar’s latest accounts reveal the extent of Research and Development Expenditure Credits the company is claiming – £304k in 2020-2021, £1.46m in 2019-2020, and £970k in 2018-2019, for a total of £2.73m over the past the three years. The previous years show how much expenditure they classed as R&D, but no figures are given for the actual amount of relief claimed.

Rockstar’s latest figures provide just another example of how Video Games Tax Relief has gotten out of hand, becoming a large corporates subsidy worth hundreds of millions of pounds a year.

HMRC’s creative industry statistics commentary for the 2020-2021 year states:

In the year ending March 2021, the majority of claims tend to be for smaller amounts, with 47% of all claims being for £50,000 or less; however, these claims are only responsible for 2% of the total amount paid out. Claims over £500,000 account for 87% of the total amount paid out. This proportion has increased from the previous year.

In order to receive VGTR, a game has to be accredited as “Culturally British” by the BFI. Since the introduction of the relief in 2014 through to 31 March 2021, 1,239 games received this certification. ^[3]This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at … Continue reading ^[4]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, only two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

A total of £624m for all VGTR claims had been paid by March 2021, with £205m of it going to Rockstar. The result is that Rockstar has managed to claim a third of the total amount paid out whilst only being responsible for 0.16% of the games receiving the relief.

It’s worth bearing in mind that when this relief was introduced, the intent was to provide targeted support for games that were “culturally British”, and to help smaller publishers create games that might not be economically viable without the relief.

The staggering amounts paid out to Rockstar Games was raised by Lord Prem Sikka in February of this year, speaking during a debate on the Finance (No. 2) Bill, he said:

“According to its accounts, it has claimed £136.6 million in total in tax relief over the years. It has paid no corporation tax at all but has paid £67.5 million in dividends. Where exactly did those dividends come from? They came from picking the pockets of the British taxpayer. There is no other explanation for this. It does not seem to me that these kinds of tax reliefs are monitored. No evidence is provided by any government department to show what exactly the benefit to the UK economy is of this American company receiving all these tax reliefs.” ^[5]The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; … Continue reading

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

The amount of relief paid out to video game developers in 2020-2021 increased by 48% compared with the previous year.

Despite the odd dissenting voice, there is very little scrutiny of this corporate subsidy that is spiralling out of control. To the best of our knowledge, the government has no plans to review this relief. Expect the next batch of statistics to reveal even more money paid out, and for Rockstar’s 2022 accounts to reveal yet another increase in the amount they are claiming.

References[+]

References
↑1	“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑2	The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, https://www.taxwatchuk.org/reports/gaming-the-tax-system/
↑3	This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑4	For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/
↑5	The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; https://hansard.parliament.uk/Lords/2022-02-22/debates/03EF4CEF-04DE-4374-BE48-BADAF2F06D4C/Finance(No2)

HMRC Investment Announced

11th April 2022 by Alex Dunnagan

A step in the right direction, but more to be done

£161m investment in HMRC compliance work – set to bring in an additional £3bn over next five years
New 50 strong HMRC team tackling R&D fraud to be in place by 2023

Fraud within the tax system costs the UK tens of billions of pounds a year,^[1]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/ with HMRC recently put under intense scrutiny on their record of tackling the problem. ^[2]HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/ Arguments can be made about the strategy HMRC pursues in tackling tax fraud, but ultimately, everything the department does comes down to resources available as a result of government decisions on investment.

While most media coverage of the Chancellor’s Spring Statement last month focussed on the cost of living crisis, one announcement that appears to have flown under the radar is an extra investment in HMRC’s compliance work and a new team tackling the abuse of R&D. Though these actions won’t see the eradication of tax fraud in this country, they are certainly a positive move.

HMRC Compliance

HMRC is set to see an additional £161m of funding for its compliance work, which is expected to generate more than £3bn in additional revenues over the next five years. With such a healthy return on investment, why isn’t more being spent on compliance?

The March 2021 Spring Statement revealed that refocusing attention on covid fraud would lead to less tax being collected until 2023-24 as staff were moved from other areas of compliance work. ^[3]Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020.

The 2022 Spring Statement sets out additional compliance resources for HMRC and suggests that the £161m investment will bring in an additional £3bn. HMRC is expecting an additional £18 in tax revenues for every £1 spent.

It was announced in December last year that the DWP is set to receive £510m for additional compliance work to tackle fraud and error, with the expectation that this will “deliver savings” of £3.15bn by 2026-27.^[4]See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/ The amount of fraud in the benefits system is far smaller than that in the tax system, and the predicted return on investment is £6 for every £1 spent – 1/3 of the ROI for tax compliance. The question the government needs to answer is: why is more being spent on benefits compliance, which results in a lower return on investment?

New R&D team to tackle abuse of reliefs

In the run-up to the Spring Statement there were a number of rumours that the Chancellor was about to overhaul the way in which R&D reliefs worked.^[5]Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014 In his Mais lecture of February 2022, Sunak stated that that “in spite of spending huge and rapidly growing sums, clearly it [R&D] is not working as well as it should.”

However, when it came to the statement, very little new was actually announced. There was talk of legislation on overseas R&D expenditure and the inclusion of cloud computing costs, but for the most part the message was that we should wait until Autumn for further developments. The Chancellor said, “the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.” This is not the first time we have been told to wait and see. The Autumn Budget 2021 referred to combating the abuse of R&D tax reliefs “later in the Autumn”. It appears the can has been kicked further down the road.

In November 2021, a treasury report on R&D Tax Reliefs referred to “the creation of a new cross-cutting team focussed on abuse.” ^[6]R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf The Spring Statement also mentioned this “new cross-cutting HMRC team”, but failed to give any further detail. TaxWatch approached HMRC for more information, and we were told that the aim was for the team to be set up by 2023. An HMRC spokesperson said:

“We are committed to tackling error and fraud within R&D Tax reliefs. We are creating a 50-strong team, working right across HMRC, to further support the ongoing work in this area.

“This new team and the other measures announced in the Autumn are designed to tackle abuse and boundary pushing while limiting the impact on compliant businesses.”

It’s likely that these 50 will be moved from elsewhere within HMRC, rather than being new staff altogether. Details should become clearer throughout the year, and there is a realistic possibility that this new team will somehow involve the fraud investigation team.

The creation of this new team is a step in the right direction. If the team functions well and is able to target the right cases for inquiry, we may start to see HMRC begin to make serious progress against the egregious abuse within the R&D system. Watch this space.

References[+]

References
↑1	The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/
↑2	HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/
↑3	Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020
↑4	See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/
↑5	Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014
↑6	R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf

Organised Crime in the Department of Health and Social Care supply chain

7th March 2022 by Alex Dunnagan

TaxWatch is calling on the Department of Health and Social Care (DHSC) to investigate the fraudulent use of Mini Umbrella Companies in DHSC’s procurement process.

TaxWatch has written to the Department of Health and Social Care (DHSC) multiple times asking what has been done about apparent abuses in the department’s procurement process.

MUCs are used when an agency divides its contractor workforce into a series of small companies, fraudulently claiming that each company is an independent entity. This can cut their annual Employers’ NICs liability by up to £4,000 per employee by claiming Employment Allowance which is intended to help legitimate small businesses. The act of setting up a mini umbrella company is in itself not illegal.

A recent HMRC publication on Umbrella Companies stated that:

“MUC fraud is perpetrated by organised criminals [emphasis added]. It presents a threat to the UK Exchequer and creates an uneven playing field for those employment businesses and umbrella companies who follow the rules. Workers in MUCs usually do not know who their employer is and may not be aware of their entitlement to employment rights. They can be moved regularly between MUCs to help maximise profits from the fraud.”^[1]Call for Evidence: Umbrella Company Market, HM Treasury, HMRC, Department for Business, Energy & Industrial Strategy, November 2021, … Continue reading

The scandal first emerged in 2015 when the BBC Today Programme revealed Anderson Group, then one of the recruitment industry’s most high profile companies, was found to be promoting an abusive scheme.^[2]BBC uncovers ‘aggressive’ tax avoidance scheme, BBC, 29 May 2015, https://www .bb c .co.uk/news/business-32914372

HMRC’s Fraud Investigation Service has taken action in order to combat MUC fraud, including working with government departments to raise awareness, and stresses that it is the responsibility of the business using temporary labour to undertake necessary and proportionate due diligence checks.^[3]Mini umbrella company fraud, HMRC, 10 May 2021, https://www.gov.uk/guidance/mini-umbrella-company-fraud

In May of last year, a BBC Radio 4 File on 4 documentary revealed that more than 40,000 people from the Philippines have been recruited to front MUCs in the UK.^[4]Britain’s Ghost Companies, File on 4, 11 May 2021, https://www.bbc.co.uk/sound s /play/m000vwtm File on 4 went on to reveal that some staff at G4S run Covid test centres have been employed by subcontractors using MUCs. We know of no legitimate purpose for the usage of these MUCs by those subcontractors.

As the G4S contract for these centres will ultimately have been provided by the DHSC, then it is the responsibility of the DHSC to seek assurances from those in the supply chain that fraudulent activity will not be conducted. HMRC guidance states that any business utilising temporary labour should “be aware of the potential dangers posed to their business by mini umbrella company fraud in their supply chain”.

The Department of Health & Social Care clearly states in its terms for a short-form contract that the supplier, in this case G4S, must

“comply with the Income Tax (Earnings and Pensions) Act 2003 and all other statutes and regulations relating to income tax, the Social Security Contributions and Benefits Act 1992 (including IR35) and National Insurance contributions”.^[5]Short-form contracts, Department of Health & Social Care, March 2020, … Continue reading

In this case the G4S appears to have sub-contracted some of the work to agencies that appear to have used MUCs. G4S said that when this usage of MUCs came to its attention, HMRC was notified, and that all payments to agencies included appropriate NICs. ^[6]Anna Meisel and Angus Crawford, Thousands recruited to front UK firms in ‘tax dodge’, BBC News, 10 May 2021, https://www.bbc.co.uk/news/uk-57021128

We have written to the DHSC several times over the past six months, though have received no response.

A G4S spokesperson said: “To deliver these services, G4S works with employment agencies which are Recruitment and Employment Confederation accredited and members of the government’s Crown Commercial Service (CCS) Framework.”

It said their payments to agencies include all of the appropriate national insurance contributions – and all staff working on the G4S contracts pay their national insurance contributions correctly.

Photo by Ricardo Resende on Unsplash

References[+]

References
↑1	Call for Evidence: Umbrella Company Market, HM Treasury, HMRC, Department for Business, Energy & Industrial Strategy, November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037093/Umbrella_Company_CfE_Final.pdf
↑2	BBC uncovers ‘aggressive’ tax avoidance scheme, BBC, 29 May 2015, https://www .bb c .co.uk/news/business-32914372
↑3	Mini umbrella company fraud, HMRC, 10 May 2021, https://www.gov.uk/guidance/mini-umbrella-company-fraud
↑4	Britain’s Ghost Companies, File on 4, 11 May 2021, https://www.bbc.co.uk/sound s /play/m000vwtm
↑5	Short-form contracts, Department of Health & Social Care, March 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/876546/DHSC_short-form_contract.pdf
↑6	Anna Meisel and Angus Crawford, Thousands recruited to front UK firms in ‘tax dodge’, BBC News, 10 May 2021, https://www.bbc.co.uk/news/uk-57021128

TaxWatch launches annual report on state of tax administration

11th February 2022 by Alex Dunnagan

TaxWatch is today launching its annual report which seeks to provide an independent analysis of the performance of the government in carrying out the vital role of administering and enforcing the tax system.

The report draws together a number of facts and figures from various sources, including HMRC’s annual reports and tax gap reports, Freedom of Information requests, and other publicly available data. It is hoped that the report will become a valuable resource for the media, politicians and the public.

The intention is that the report will be delivered on an annual basis.

Summary of our report

The United Kingdom left the European Union at the end of January 2021, just as Covid-19 was beginning to spread around the world. Brexit saw the UK leave the EU customs union, the single market, and the VAT area. This has required an entire new system of customs arrangements for the UK, necessitating at least £1bn in investment. With the UK Government phasing in border controls on imported goods over 2021 and 2022, the burden is only increasing as time goes on.

Shortly after leaving the EU, in response to the pandemic the UK entered a lockdown, with all but essential workers either furloughed or told to work from home. HMRC officers had to adapt to home work, all while the courts system was placed on a temporary hiatus, causing a significant backlog.

HMRC was tasked with rapidly implementing large-scale coronavirus support schemes, supporting incomes as well as businesses. These schemes, while drawn up and administered quickly in order to protect jobs while the country ground to a halt, unfortunately, have seen wide-scale abuse costing billions of pounds.

The timings of Brexit coupled with the pandemic has resulted in tax administration in the UK facing a difficult task without equal in modern times, causing a huge amount of stress on the system. For that reason, HMRC’s performance over the last year inevitably looks poor.

However, our concern is that after more than a decade of cuts, and with performance already dropping on previous years, the impact of the stress of the last year could cause long term damage to the UK’s tax administration if the government does not invest significantly more funds in tackling non-compliance and improving customer service.

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

The gift that keeps on giving

19th January 2022 by Alex Dunnagan

Rockstar Games UK Limited (previously Rockstar North) has finally published it’s 2020 accounts, more than one year late. In fact, the publication of Rockstar’s accounts are so late that the company’s 2021 accounts are already overdue. The recently filed 2020 accounts reveal that the video game developer was entitled to £56.6m in Video Game Tax Relief (VGTR) in the 12 months to 31 March 2020. This large sum was almost half of the total VGTR paid out that year. The total amount of claims for VGTR is going up ever year, as is the amount paid out, but despite this, Rockstar appear to be capturing more and more of this relief.

The Edinburgh based games studio, which is owned by American video game giant Take-Two Interactive Software, is responsible for the development of the multi billion dollar Grand Theft Auto (GTA) series. As we wrote in Gaming The Tax System, while the UK based company develops the games, they don’t publish them, with a structure set up to ensure that the UK company turns very little profit, and therefore has little to no corporation tax liability.

VGTR – What is it?

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses. The idea at the time being that only smaller publishers would be interested in producing games aimed solely at the British market.

The relief works by adding notional costs to the video games producer’s accounts, reducing the taxable profit or increasing losses. Developers can deduct an extra 25% of qualifying expenditure from their taxable profit. If the game’s production company is loss-making then the developer can claim a cash credit from HMRC.

Rockstar Returns

After filing their annual return nine months late with Companies House, Rockstar’s annual accounts are finally publicly available.

Before looking at the state of Rockstar’s 2020 finances, it’s worth noting that there is a large restatement for their 2019 accounts. It was previously reported that in the year end 31 March 2019, Rockstar’s turnover was £119m and the cost of sales was £56m. These numbers have now been adjusted to show that they were actually £231m and £167m. The reason given is that there was an error in the way that staff incentive payments were accounted for, and that “in the prior period these costs have been netted off in error against intercompany rechage income”, when in fact they should have been recorded. This is quite a significant accounting error. The impact it has on VGTR claims, if any, is not known.

Turning back to the 2020 figures, Rockstar turned a pre-tax profit of £9.63m over the reporting period, but once taxation is taken into account, that number increases by £65.16m to £74.78m. The vast majority of this increase is made up by the effect of VGTR, with the remainder coming from the effects of things such as deferred taxation and changes in valuation allowance. As a result of VGTR, Rockstar was able to pay out £40m in dividends over the year.

	2016	2017	2018	2019	2020	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£33,739,139
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£178,643,732
Of which VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£136,605,015
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£212,590,135
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£67,500,000

The last year for which Rockstar listed taxation as a liability was 2015, when the tax was listed as a cost of -£718k. In the first five years since the introduction of the relief, Rockstar’s accounts show the company accruing £136.61m in VGTR, with total taxation for the period actually showing £178.64m in credit.

Despite only having an operating profit of £33.74m over this five year period, Rockstar was able to pay out twice that (£67.5m) in dividends to shareholders due to the subsidy the company receives from the British Government.

By the end of March 2020, 1,000 games had received “Culturally British” accreditation, ^[1]This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this … Continue reading a pre-requisite for VGTR.^[2]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Studios are able to make interim claims before a game is completed, with the relief related to the production spend. The large claims from Rockstar for the 2019/2020 financial year are likely to be related at least in part to Red Dead Redemption 2, and possibly to the production costs of new games such as a future instalment of the GTA franchise, and potentially updates to GTA Online and Red Dead Online, although there may be other games in the works that we are unaware of. With Rockstar accounting for £136.6m of VGTR by March 2020, a company with fewer than 1% of the games qualifying for VGTR is set to capture over 30% of the total subsidy.

In 2018-19, 535 video games made 345 claims and received £103 million,^[3]A claim may cover several games. with Rockstar accounting for some 37% of this.^[4]We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph. Just as we thought the amount of VGTR hoovered up by a single multinational couldn’t increase, in 2019-20, 605 games made 350 claims and received £121m, with Rockstar accounting for some 47% of this. – despite having not released a game since October 2018.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced.^[5]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading However, we are now seeing just one company claim alone claiming more than that.

In October last year we said:

“Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?”^[6]Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, https://www.taxwatchuk.org/video_games_tax_relief_2021/

Rockstar’s recent accounts show how it’s more necessary than ever for the UK Government to review the effectiveness of this relief. For this US owned company, VGTR is the gift that keeps on giving.

References[+]

References
↑1	This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑2	For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/
↑3	A claim may cover several games.
↑4	We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph.
↑5	“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑6	Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, https://www.taxwatchuk.org/video_games_tax_relief_2021/

HMRC reveals new estimate for Covid fraud recovery

17th January 2022 by Alex Dunnagan

Three-quarters of Covid support claimed in fraud and error won’t be collected

HMRC has revealed that they expect to recover just 25% of a total £5.8bn paid out due to fraud and error in relation to the coronavirus support schemes. ^[1]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

The latest figure has appeared in a document published on 12th January entitled “Myth Busters – HMRC’s responses to inaccurate claims” and sought to spin the figures as an achievement. Under a heading “HMRC has successfully tackled coronavirus help scheme fraud and error” HMRC explains “We recovered £500 million of overpayments in 2020 to 2021. The government then invested £100 million in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraud in the schemes. We expect the taskforce to recover £800 million to £1 billion between 2021 and 2023.”

This equates to a total of between £1.3bn and £1.5bn, or 22% and 26% of the amount lost to fraud and error.

The new figures appear to be a significant revision down from November last year, when Jim Harra, the head of HMRC, told the FT that the organisation will struggle to recover more than half of the losses. ^[2]HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

The published figures suggest that HMRC will be seeing up to a 10x return on investment when tackling fraud and error in the coronavirus support schemes. It is therefore difficult to understand why the department is not being given more cash to tackle the problem and instead is leaving ¾ of the money lost to fraud and error in the hands of people that wrongfully claimed it.

Recent research from TaxWatch showed that the DWP is receiving more than 2x the funding HMRC is getting to tackle fraud and error in the benefits system arising from the pandemic – demonstrating that when an issue is deemed to be important enough, the Treasury finds the money.

This research was featured in The Times, The Daily Mail, and Public Finance, among others. This then lead to Jim Harra being questioned by the Public Accounts Committee on the figures, and to an Urgent Question in the House of Commons on fraud.

References[+]

References
↑1	HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑2	HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

alexd

We need to talk about Corporation Tax

Changes in the Corporation Tax rate

Who pays Corporation Tax?

How much does Corporation Tax contribute to the Treasury?

How does the UK Corporation Tax rate compare internationally?

Conclusions

HMRC publishes its latest Tax Gap – TaxWatch analysis

Committing to a world of good? Etsy’s tax affairs

Amazon – Public money but no public scrutiny

Another record year for Rockstar Games Tax Relief (RGTR)

HMRC Investment Announced

HMRC Compliance

New R&D team to tackle abuse of reliefs

Organised Crime in the Department of Health and Social Care supply chain

TaxWatch launches annual report on state of tax administration

Summary of our report

The gift that keeps on giving

VGTR – What is it?

Rockstar Returns

HMRC reveals new estimate for Covid fraud recovery

Three-quarters of Covid support claimed in fraud and error won’t be collected