News

Holiday let tax rules allow owners to escape thousands of pounds in tax

9th August 2023 by Sarah Walton

The tax treatment of furnished holiday properties appears inappropriately generous and could encourage owners to lock away much needed housing stock to save thousands of pounds in income and capital gains taxes. The regime, dating back to the 1980s is in desperate need of review and reform in light of the recent platforms such as Airbnb making these investments much easier to manage passively.

Our research into this area shows how investors in holiday lets get the best of both worlds, with their earnings being treated as quasi businesses for income tax, but escaping national insurance contributions altogether, and also a lighter capital gains tax rate equivalent to a business that is taking on much more risk. Worked examples demonstrate that the tax savings are very considerable and represent a real incentive for tax driven behaviour beyond what was intended at the time when the rules were first designed.

We also explore an interpretation of the rules being promoted to the owners of second homes to convert these to holiday lets. This suggests owners can significantly reduce capital gains tax on any price escalation during the whole time of ownership including when the property was a private holiday home. HMRC debunked this interpretation when TaxWatch first highlighted the issue recently, but are now reviewing the technicalities. There is clearly current ambiguity which needs to be resolved. We call on HMRC and the Treasury to restrict the capital gains tax benefits to only the period where the Furnished Holiday Let (FHL) regime applies.

The full report can be found here.

The research shows, in just one corner of the tax system, how the complex rules, developed organically over many decades, incentivise and facilitate UK tax compliance and avoidance problems. The savings these rules permit are separate to the work of the Treasury Select Committee’s recent report on tax reliefs, which TaxWatch contributed to .

We also call on the Treasury to respond to the recommendations from the now abolished Office for Tax Simplification particularly in regard to personal use of properties within the FHL regime.

Post publication update

We have had a further response from HMRC confirming that BADR is available on the total capital gain on disposal of an FHL property, if it satisfies the BADR qualifying requirements on cessation of the business. This applies even in circumstances where the property has not been used as an FHL for the whole period of ownership. This further reinforces TaxWatch’s recommendation that this loophole in the legislation should be closed, as there can be no policy rationale for this beneficial treatment for property owners. We have submitted an FOI to HMRC with the aim of identifying the ongoing costs of this loophole.

‘Our tax system is too complicated’ concludes Treasury Committee report on tax reliefs

26th July 2023 by Sarah Walton

The Treasury Select Committee (TSC) today published a report¹ about the complicated world of tax reliefs. Last year TaxWatch provided written evidence to the Committee on this enquiry and in December last year, TaxWatch’s then acting director, Alex Dunnagan, gave oral evidence.

The report calls on the Government to regularly review tax reliefs and removal of those that no longer fit their policy objectives, cost significantly more than expected or are vulnerable to abuse.

It focuses on concerns about the number and complexity of tax reliefs, along with lack of scrutiny of their cost and effectiveness. They recognise that part of the problem arises due to governments introducing new reliefs, often following lobbying from interested parties, which then prove difficult to remove even if there are known problems with their operation. The scale of this issue is demonstrated by the fact that 105 of the 339 identified non-structural reliefs (i.e. those designed to promote certain behaviour) were estimated to cost £195bn in 2021-22. This equates to 72% of the health and social care budget (£272bn) in the same year.

Tax reliefs were also identified as creating opportunities for abuse, most clearly highlighted by evidence around R&D tax reliefs. Recent data (published since the TSC report was compiled) has suggested that levels of fraud and error in these reliefs are, in fact, much greater than previously estimated. Alex pointed out that, in addition to poor tax policy design issues, HMRC did not have sufficient resources to police the potential abuse of reliefs. In particular he referred to issues dealing with tens of thousands of R&D relief claims submitted every year.

The report refers to the closure of the Office for Tax Simplification (OTS) and the difference between their remit, which was to review the existing tax system, and a new focus by the Treasury and HMRC on tax policy design, which will only consider new tax policies.

The TSC call for a number of actions, including designating non-structural reliefs as public spending so they can be properly scrutinised as such. They also recommend five year reviews of each relief with a view to removing those that no longer serve policy requirements. While we support all of the recommendations, the volume and nature of the work involved would require significant resources and political commitment. Bearing in mind the closure of the OTS, it seems likely that this is not going to be top of anybody’s priority list.

TaxWatch have identified that it is not just in the area of reliefs where old tax policies linger without review of their purpose or effectiveness. We will shortly be publishing an analysis of issues around property taxation that we believe should be substantially reformed.

1Tax Reliefs, House of Commons Treasury Committee, 18 July 2023, https://committees.parliament.uk/publications/41067/documents/200054/default/

Video Games Tax Relief costs five times as much as forecast

27th January 2023 by Alex Dunnagan

Video Games Tax Relief (VGTR) cost a record £197m last year, more than five times as much as it was anticipated to cost when it was introduced.¹ A total of £830m in subsidy to the video games industry has been paid since the relief was introduced, with numbers increasing every year as the following chart reveals:²

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2021-22

Despite being billed as a relief set up to help independent developers produce culturally British games, it is large firms that benefit, as revealed by HMRC’s commentary on statistics for VGTR in the creative industry:

“In the year ending March 2022, the majority of claims tend to be for smaller amounts, with 49% of all claims being for £50,000 or less; however, these claims are only responsible for 1% of the total amount paid out. Claims over £500,000 account for 88% of the total amount paid out.”⁴

Worse still, is the fact much of the tax relief has been taken by large multi-national companies, for here there is a huge risk they will game the system and ‘offshore’ the subsidised intellectual property, resulting in the profits, and tax on them, being collected elsewhere. This point was made by TaxWatch’s Acting Director when he gave evidence about Video Games Tax Relief in front of the Treasury Select Committee on Monday 19th December 2022.

Rockstar Games illustrates this risk. The Edinburgh-based company developed Grand Theft Auto V which is thought to have generated revenues of over $5bn, only to then sell the intellectual property to their US-based parent company Take-Two Interactive at more or less cost price.⁵ Take-Two Interactive distributed, and continues to distribute, the game globally, and ultimately makes the (taxable) profits.

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 2022, 1,500 games received this certification.³ 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.

Rockstar’s latest accounts reveal it obtained £79.8m in VGTR in 2021-2022, a sum that is more than twice the value of the original costing of this tax relief to the whole industry and 41% of all of the VGTR paid out last year. The amount obtained by Rockstar has risen each year, taking the total the US-owned company has claimed to a staggering £285m – or 31% of this tax relief over the years.

	2016	2017	2018	2019	2020	2021	2022	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£9,399,572	£11,789,662	£54,928,373
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£64,359,515	£81,036,506	£324,039,753
VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£68,376,369	£79,837,384	£284,818,768
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£73,831,443	£93,170,605	£379,592,183
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£0	£0	£67,500,000

Together these show it is time for the UK Government to review the effectiveness of this corporate subsidy, and it is not just TaxWatch who is asking pertinent questions for during the Treasury Select Committee session Danny Kruger MP (Conservative) asked the CEO of UK Interactive Entertainment, the trade body for the games industry:

“…wouldn’t it be nice if some of the profits, which are the ultimate purpose of a commercial enterprise, were taxed in the UK? Do you not think that there would be some value in that?”⁶

We agree.

1Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022
“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

2Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

3This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2022 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
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, http://13.40.187.124/cultural_test_tax_relief/

4Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

5The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, http://13.40.187.124/reports/gaming-the-tax-system/

6Oral Evidence: Tax Reliefs, HC 723, House of Commons Treasury Committee, 19 December 2022, https://committees.parliament.uk/oralevidence/12468/pdf/

BFI refuses to disclose information regarding GTA V tax credit scandal

13th August 2019 by Alex Dunnagan

The BFI refuses to disclose information regarding the Grant Theft Auto V tax credit scandal, claiming that it would not be in the public interest to do so.

BFI refuses to release any information relating to GTA V being certified ‘culturally British’
Disclosure would supposedly ‘prejudice the commercial interests of Rockstar North’
Following an appeal from TaxWatch stating that disclosure is in the public interest, BFI are holding a review into the decision

The BFI has responded to a Freedom Of Information (FOI) request from TaxWatch, refusing to release documentation relating to GTA V being certified ‘culturally British’.

The BFI’s decision follows an investigation into how the multi-billion dollar game claimed £42m in tax credits from the UK government.

As part of their research, TaxWatch asked the BFI how a game set in a fictitious representation of Los Angeles involving murder, car-jacking, and drug-running could be certified as ‘culturally British’. This certification allowed the developers to claim the tax credits.

The BFI has stated that they do not believe that it is in the public interest to disclose this information.

Commenting on the BFI’s refusal to release the information, Alex Dunnagan researcher at TaxWatch said:

“It is ridiculous for the BFI to say that it is not in the public interest to reveal how they have come to the conclusion that GTA V is culturally British.

“The decision by the BFI resulted in tens of millions of pounds of public money being used to subsidise the most financially successful game in history – with subsidy being granted after it had already made billions in revenues for the US multinational behind the title.

“It is only right that the public is able to scrutinise decisions like this, and to understand how their money is being spent.”

TaxWatch has appealed, with the BFI now undertaking a review into the decision.

Activision Blizzard’s Bermudian Billions

4th August 2019 by George Turner

Activision Blizzard, the publisher of hit games Call of Duty, World of Warcraft, and Candy Crush, moved €5bn to companies in Bermuda and Barbados between 2013-2017.

The report World of Taxcraft details how the corporate structure of Activision Blizzard, which includes subsidiaries in Bermuda, Barbados, Malta and Ireland, manages to move cash into tax havens.

The offshore structure has attracted the attention of tax authorities around the world, which are currently in a series of disputes with the company. Overall the company is facing tax demands of over $1bn from tax authorities in France and Sweden, demands that the company says it will vigorously contest. In addition, the company has set aside £8.5m in relation to an investigation by the UK tax authority, HMRC. The company has also recently settled a dispute with the US authorities for $345m.

The company says it is now seeking to engage pro-actively with tax authorities to ensure it pays the right amount of tax.

The report also looks at the UK government’s attempts to deal with tax avoidance schemes that use royalty payments to move money into tax havens. Activision Blizzard paid royalties of €5bn to companies in Bermuda and Barbados between 2013-2017.

The report concludes that companies will continue to be able to use these kinds of schemes because the UK government’s proposed rules to deal with this kind of avoidance will not apply to transactions made with a number of tax haven jurisdictions, including Barbados.

Speaking on the publication of the report, George Turner, Director of TaxWatch said:

“With the revelation that Activision Blizzard is currently under investigation by a number of tax authorities around the world, and facing a potential liability of more than $1bn in taxes and penalties, the company is taking tax avoidance in the video games industry to the next level.

“I expect many players of Candy Crush would be outraged to find that the payments they make though the game are sent to a company in Malta, even though King, the Activision company behind the game, is managed from London. Players of the hit mobile game are seeking a little bit of light relief from their daily grind. The last thing they want to do is to be a participant in Activision’s tax games.”

“Our research has found that between 2013 and 2017, Activision Blizzard paid €5bn in royalties generated from games such as World of Warcraft and Call of Duty to companies based in Bermuda and Barbados. This shifting of profits using royalty payments to tax haven companies is the same scheme used by Google, which has been heavily criticised by MPs.

“The UK Government is aware that this kind of structure is an abuse of the UK tax system, and introduced new legislation in 2018 to make the UK sourced element of these royalty payments subject to income tax in the UK. However, for some unknown reason the government have excluded payments made to a number of tax havens, including Barbados, ensuring that the new rules will be almost completely ineffective.

“The government needs to change the rules to close down the loopholes they left in the original legislation, and end these royalty based tax avoidance schemes once and for all.”

The full report can be found here
A PDF version can be downloaded here

This research has been featured in The Sunday Times, along with Gamesindustry.biz, among other video game industry publications.

Developers of Grand Theft Auto claim millions in tax credits

28th July 2019 by George Turner

Rockstar Games, the creator of Grand Theft Auto, has made an estimated $5bn in operating profit since the release of Grand Theft Auto V in 2013.
The game was designed and developed in the UK by Rockstar North Limited based in Edinburgh, but TaxWatch can reveal that the company has paid £0 in UK corporation tax over the last ten years.
In fact, Rockstar North Limited has managed to claim £42m in subsidy from the taxpayer over the last three years, whilst senior managers and developers at Rockstar shared in a bonus pool worth billions of dollars.
TaxWatch is calling on HMRC to urgently investigate the tax structure of Rockstar Games and Take-Two in the UK.

A new report from TaxWatch has revealed that the makers of Grand Theft Auto have not paid any UK corporation tax in 10 years, despite the game being made in the UK and generating billions in profit for its US based parent company.

The full report can be viewed online here: http://13.40.187.124/reports/gaming-the-tax-system/
A PDF version can be downloaded here.
The press release accompanying the report can be downloaded here.

Instead of paying taxes on profits made by sales of the game, the company has been able to claim tax credits from the government under the Video Games Tax Relief scheme. Over the last three years, Rockstar North Limited, the company which led the development of the game, has claimed £42m in tax credits.

Video Games Tax Relief was designed to help smaller producers of “culturally British” games not designed for the international market.

Grand Theft Auto V, based on a fictional depiction of gangland California, was granted certification as a culturally British video game by the British Film Institute in September 2015, after the game had already recorded more than $3bn in sales. The certification allowed the producers of the game to claim tax relief on production costs.

Research from TaxWatch has found that the amount of tax credits claimed by the makers of Grand Theft Auto in the last three years is the equivalent of 19% of all tax credits granted to the video games industry since the relief was introduced in 2014.

Commenting on the release of the report, George Turner, Director of TaxWatch said:

“It is outrageous that the UK taxpayer is being asked to shell out tens of millions of pounds in subsidy to the developers of Grand Theft Auto, when at the time that the game’s developers put in their tax credit application Grand Theft Auto V had already generated several billion dollars in sales and profits.

“This is a drive-by assault on the British taxpayer and corporate welfare scrounging at its very worst.

“The Video Games Tax Relief was designed to help developers of games with a cultural content that would struggle to sell in the international market. The fact that such a large amount of that relief is going to the developers of Grand Theft Auto clearly shows that the relief is not working as intended.”

Key facts and figures from the report:

$6bn – estimated total sales of Grand Theft Auto V since 2013
$5bn – estimated operating profit of Rockstar Games 2013-2019
£42m – total Video Games Tax Credits claimed by Rockstar North Ltd between 2015-2017. Equivalent to 19% of all tax credits paid by government to the industry
$3.4bn – total bonus pool available to top managers at Rockstar games from 2009-2019
£0 – total combined corporation tax bill of Rockstar companies in the UK between 2009 and 2018

This report was covered extensively in the UK and international media. In the UK, the report featured in The Sunday Times and The Guardian among others. TaxWatch’s Director was interviewed by BBC News on this research.

BBC to pay out millions to settle historic tax avoidance claims

4th July 2019 by George Turner

The BBC has set aside up to £12m to pay off the past tax liabilities of BBC presenters being pursued by HMRC for tax avoidance using personal service companies, the latest BBC annual report has revealed.

However, the National Audit Office (NAO) has questioned whether the payments are a legitimate use of BBC funds, and has issued a qualified opinion of the BBC accounts as a result.

The NAO highlights the difficulties that the BBC and other organisations have got into when seeking to avoid tax, and the thorny issue of who pays when tax avoidance schemes go wrong.

The BBC started to employ presenters via personal service companies from the late 1990s. A personal service company is a company that is set up to manage the affairs of an employee. Instead of contracting with the employee directly, the BBC contracted with their company.

This benefited the BBC because it would mean that the employee would be responsible for their tax affairs, and the corporation would no longer need to operate PAYE or pay employers national insurance. The presenter could minimise their tax payments by paying themselves a small wage through their company and receiving the rest of their income in dividends. This had a substantial tax benefit.

The BBC got into these kinds of arrangements in a big way. Previously the BBC has said that 800 of their presenters were at risk of tax investigations by HMRC, 300 of them for their use of personal service companies.

The other 500 were employed as freelancers through other schemes not involving personal services companies which the BBC is now also facing a large bill for. It is not made clear in the BBC annual accounts the nature of these schemes, however, it is possible that these are the kind of loan based tax avoidance schemes now being caught by the HMRC Loan Charge. It is also not clear what the liability is on these schemes. The total tax and litigation provision in the BBC accounts is £40m, this includes other money set aside for other issues and the £12m for liabilities arising from the personal service company schemes.

In the case of presenters that did not use a personal service company, the issue is quite straight forward. The presenters should have been considered as BBC employees and the Corporation should have operated a PAYE system. In these cases the BBC has agreed to pay the bill.

With personal service companies the issue is a little more complicated. HMRC has in these cases said that the liability to pay is with the employee, on the basis that in the end, the decision on whether or not to avoid tax was in the control of the presenter. If their personal service company simply paid them a salary, then there would be no tax avoidance.

The position of the BBC was previously also that it was up to the presenters to pay any tax liability, but, recognising the fact that it had a role in encouraging such schemes, it would set up a mediation process which would allow some presenters to negotiate with the BBC about whether they could claim back any of the money owed.

As disclosed in this year’s accounts, the BBC has now given up on this mediation process and has contacted HMRC about settling the historic tax liabilities of those employed by personal service companies directly. In some cases the BBC is making payments to presenters themselves to pay off their tax liabilities. The BBC has agreed to pay the difference between any tax paid by a personal service company and the liability that would have been due if the presenter was directly employed. This represents all the benefits of any avoidance scheme entered into by the presenter. The BBC estimates that the liability for this will be £12m.

Gareth Davies, the Auditor General, has taken a critical view on whether this is a good use of BBC funds, with the audit statement containing the following qualification:

I consider that the BBC, in committing to make such payments to HMRC, is settling, ex gratia, the tax liabilities of third parties. I therefore consider that this expenditure does not accord with the BBC’s Charter obligations with respect to the principle of regularity and have qualified my opinion on regularity accordingly.

In other words, in the view of the NAO, the BBC is voluntarily paying the tax bills run up by its presenters which are not the BBC’s responsibility to pay.

There is no doubt that this is a difficult issue. On the one hand, the contracts were made with the personal service companies, and then it was up to the people operating the company (the presenter) how they paid themselves (i.e. how much in dividend and how much in salary).

On the other hand, it is clear from the testimony of many of the people involved in these schemes that the BBC was complicit in these arrangements. The corporation drew up the contracts and actively encouraged its presenters to organise their affairs in this way. Indeed, some presenters have said they were forced to use such arrangements. There is no doubt that the BBC benefited from the arrangements.

The BBC position as set out in the latest annual accounts is that they are taking full responsibility for any tax avoidance engaged in by their presenters via the personal service company route. Whether or not the BBC encouraged such practices and regardless of whether they should have, the settlement represents a good deal for many of the presenters involved.

The settlement of tax liabilities represents a significant increase in pay for the presenters that used personal service companies, vis-a-vis their colleagues who were employed directly by the BBC and who would have had their income tax deducted from their payslips.

Photo from Chief Moamba on Flickr used under the creative commons license

Grounds for Concern – Starbucks Tax Payments in Europe, the Middle East and Africa

27th June 2019 by George Turner

Starbucks’s London based HQ for its Europe, the Middle East and Africa (EMEA) division returned $448m to its US parent company in 2018, but paid just $27m in tax after the majority of its non-UK income was exempted from tax. Is that just the international tax system working as it should – or is it a sign that the UK has now become a tax haven for large US multinational corporations and their activities overseas?

Starbucks UK

Starbucks was a name that became synonymous with tax avoidance after Tom Bergin at Reuters revealed the low tax payments the company had been making in an article published in 2012. Tom and his colleagues had noticed that although the accounts of Starbucks in the UK stated that the company had not made a profit since the chain first opened in the UK in 1998, senior company officers had been regularly telling investors that the UK market was profitable for the group. Over that period, Starbucks in the UK had paid a small amount of tax despite its losses, mainly because some costs were not deductible for corporation tax purposes.

The reason for the difference between the losses shown in the UK accounts, and the statements made by senior managers, was in payments the UK company had to make to other Starbucks companies for coffee, the use of the Starbucks brand and interest on loans the company had taken out from other Starbucks companies.

A glance at this year’s UK accounts shows that little has changed. The UK company, Starbucks Coffee UK, continues to make a loss and the company paid £4m in tax due to the fact that it could not count some of its losses against corporation tax.

As before, the story being told in the accounts seems difficult to believe. In 2018, Starbucks filings in the US tell us that globally the company made a 15% profit on every cup of coffee they sold. The UK accounts tell us that selling Starbucks Coffee in the UK continues to be unprofitable. Make of that what you will.

Starbucks EMEA

Following public outcry about Starbucks’s tax behaviour, the company vowed to mend its ways. At one point, the company even said they would voluntarily pay extra tax, and to this day has a policy of not claiming all of the capital allowances it is entitled to.

The biggest change came with the commitment to move the headquarters of Starbucks’s European, Middle Eastern and African Division to London, a move that better reflected the reality of the company’s operations as the divisional management had been working out of the London office.

Moving the EMEA HQ to the UK has led to increases in the amount of cash Starbucks pays to HMRC, as some of the company’s European profits that were previously booked in Amsterdam are now going though UK accounts.

However, the move raised further questions about the structure of the company throughout the region. Last year, the FT reported that Starbucks’s new European HQ in London had an effective tax rate of just 2.8% in 2017. This provoked a furious reaction from Martin Brok, Starbucks EMEA President, who accused the FT of inaccurate reporting.

This was a little harsh, given that the FT were simply taking their numbers from Starbucks’s own annual reports, one of which stated an effective tax rate of just 3.5%. Six months later this document is still available on companies house and has not been amended, despite Starbucks telling the FT that it was wrong.

Starbucks’s argument centred around the large dividend payments received by Starbucks EMEA companies in the UK. Starbucks EMEA limited, the main EMEA company in the UK has two main income streams. It receives royalty payments from other group companies in the region (royalties which will reduce the taxable profits of its non-UK operating companies). It also receives large dividend payments from group companies.

Starbucks EMEA Limited makes a modest profit on the royalty payments and pays corporation tax on that profit, but the dividend income is tax exempt. That means if you include the dividends in the calculation of profit (as Starbucks had done in their accounts) then you get a very low effective tax rate. The tax rate on the profits from the royalty income excluding dividends is closer to (even slightly above) the statutory rate.

Tax Haven UK

So why are dividend payments made to UK holding companies tax exempt? The theory behind this is that dividends are a distribution of profits after tax has been paid, and so any dividends received will have already been subject to tax.

Theory is a fine thing, but the reality may be different. What if, for example, a dividend had been paid by a company that had its profits exempted from taxation, or was located in a tax haven? In that case, there would be no tax imposed on the profits of the subsidiary company, and no tax on the dividend paid to the UK company. Following the Trump Tax Reforms there would be no tax paid when the dividend was sent to the US either. In fact, there would be no taxes paid anywhere.

To prevent this kind of tax free chain from being created, dividends from foreign subsidiaries paid to UK companies used to be included as profits for corporation tax purposes, with a credit given for any foreign tax paid. That meant that if a company had paid taxes on their profits overseas, the credit would mean that no taxes were due in the UK on the dividend received from that profit. If they had not paid any taxes, there would be no credit and the UK would charge tax on the dividend. This served as a disincentive for UK companies to use tax havens, as there would be little point in doing so if the profits would be paid in the UK anyway.

In 2009, this all changed, with the UK introducing a dividend exemption (frequently called a participation exemption), which exempted all dividends paid by foreign subsidiary companies, regardless of whether or not tax had been paid on the dividends. This is just one way in which the UK has turned itself in a tax haven. By giving up our right to tax the profits of UK companies made overseas, we have at the same time told them that we simply don’t care if they shift those profits into tax havens before they get here.

Complex Transactions

So back to Starbucks. The latest accounts given to the press this morning say that the main UK EMEA company, Starbucks EMEA Limited, generated $33m in profits from its UK based EMEA operations. That profit is mainly generated from the royalty payments it received from other EU operations. On top of that, the company received dividends of over $148m which were not taxable. The company paid out $458m to its parent companies, which eventually remitted $448 of that back to the US. The company insists that these large dividends are the result of profit that has been subject to tax overseas before they reached the UK, but how much, and where, is far from clear.

Accounts filed in the Netherlands show that all of the dividends received by Starbucks EMEA Limited that came from a Dutch company, Starbucks Coffee EMEA B.V.. That company had a tax bill of just €570,000 in 2018, and the income it received came from a series of highly complex financial transactions with other Starbucks companies in Switzerland and the Netherlands. One of these companies, Starbucks Switzerland, Austria Holdings, reported a tax bill of just €610,000 in 2018. It is not known how much the other Swiss based company in the group paid in Switzerland.

So where did Starbucks pay tax on these profits remitted to the UK? Given what we know about the profitability of the UK company, and the low taxes paid by its Dutch subsidiaries, and how Starbucks has historically structured its operations, it is possible that the large profits declared in the UK have not been subject to much tax at all. The company insist they have been, but so far they have provided few details of its tax payments outside the UK.

What we do know, is that as long as the UK continues with its dividend exemption, the UK could be used as a tax haven for US companies seeking a conduit to take profits tax free from Europe, the Middle East and Africa, back to the US.

This research featured in The Guardian and the Daily Mirror among others and saw our Director interviewed on talkRADIO.

Photo by Hans Vivek on Unsplash

TaxWatch comments on the Tax Gap in the Independent

25th June 2019 by George Turner

TaxWatch’s Director, George Turner, wrote an op-ed for the Independent setting out why the government’s recent Tax Gap figures should be treated with caution.

The article sets out how the government’s estimates of tax avoidance vastly underestimate the true scale of the problem.

The full article can be accessed here:

Photo by The New York Public Library on Unsplash

HMRC Tax Gap on the rise, but figures leave more questions than answers

20th June 2019 by George Turner

HMRC has this morning published its latest estimate of uncollected taxes, the “Tax Gap”. It shows that on the HMRC methodology the amount of tax uncollected went up by £2bn in 2018 to £35bn. This is in cash terms the highest on record and an increase of 17% from £30bn in the last three years. The increase of £2bn over the last year is enough to fund the entire courts system.

However, the HMRC methodology continues to raise serious questions about the reliability of the tax gap figure. Of most concern is the fact that HMRC explicitly do not count tax losses to profit shifting from multinational enterprises. These are the types of schemes implemented by some large technology companies, and are estimated to lose the UK Treasury many billions a year in untaxed revenue. The result is that the HMRC Tax Gap methodology seriously underestimates the true scale of tax avoidance in the UK.

Commenting on the release of the new Tax Gap figures, George Turner, Director of Tax Watch said:

“Once again HMRC has released an estimate of tax avoidance which does not include the billions lost to multinational companies via profit shifting. As a result, HMRC’s “Tax Gap” vastly underestimates the scale of the issue, and can not be considered to be a credible estimate of tax avoidance in the UK.

“The claim that the UK has the lowest tax gap in the world is highly dubious. HMRC themselves say they are the only tax authority in the world to publish an annual estimate of the tax gap that covers a comprehensive range of taxes. Any international comparisons are not being made on a like for like basis and are therefore pretty meaningless.

“Overall, the publication of the Tax Gap tells us more about the determination of the government to play down the importance of tax avoidance rather than make the investment required to adequately address the issue”

TaxWatch was referenced in Public Finance on the issue.