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General Electric

TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE

23rd September 2021 by Alex Dunnagan

The deal

TaxWatch has written to the Public Accounts Committee (PAC), the National Audit Office, and the Treasury Committee, requesting that inquiries be held into an out of court settlement between HMRC and General Electric (GE).

Following a lengthy tax dispute regarding a tax avoidance scheme that saw billions of dollars transferred around the world, it was revealed in the trade press on 15 September that the two parties had reached an out of court settlement, with HMRC settling for a deal that involved no cash payment and just £82m added to GE’s deferred tax charge, and agreeing that there had been no wrongdoing by GE.

GE revealed in their 2020 accounts that if HMRC were successful in their claim, they could face a liability of $1.1bn, before accounting for interest and penalties, stating:

The United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2004-2015 that could result in a potential impact of approximately $1.1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties.1

Civil penalties for the deliberate non-payment of tax can be up to 100% of the tax owed, doubling the potential liability.

A GE spokesperson said the company is “pleased to have reached an agreement with the U.K. tax authority, resolving this dispute in its entirety with no fault attributed to either party.” The spokesperson added that “as part of the settlement, GE has agreed to a reduction of interest expense that results in a deferred tax charge in discontinued operations of about 10 percent of the potential impact previously disclosed in [its] filings.”2 [emphasis added]

The All Party Parliamentary Group on Anti-Corruption & Responsible Tax took to Twitter to criticise HMRC, stating that “Sweetheart deals like this one see the taxpayer lose out on millions in lost tax revenue.” HMRC’s press office responded to the tweets, stating that “HMRC does not do sweetheart deals. All settlements must be fully in line with the Litigation and Settlement Strategy.”

Although HMRC are claiming that this is the best outcome they could have expected, given the seriousness of the allegations, the deal raises a number of questions as to how HMRC ended up settling for such a small amount.

The case

As detailed in our report, Around the world with $5bn, GE moved $5bn between the US, Luxembourg, the UK & Australia in just four days as part of a complex “hybrid arbitrage” tax avoidance scheme, that allegedly generated a tax benefit for GE in the UK of up to £760m over a period of 10 years.3 These multi-billion dollar transactions allowed GE to claim deductions against tax in three different jurisdictions – a so-called “triple dip” scheme.

The UK has long had rules in place to prevent these kinds of schemes from having any effect. However, in this case HMRC cleared the transactions and agreed that it would not apply anti-avoidance legislation after receiving assurances from GE that the structure was not designed to avoid UK taxation, and that any tax benefit arose in Australia. However, after receiving information from the Australian Tax Office, which revealed that GE had told the ATO that the scheme was designed to avoid taxation in the UK, HMRC started proceedings against GE in the High Court asking the court to annul the agreement on the ground that GE’s failure to inform them of the nature of the scheme amounted to misrepresentation. Although the allegations included doctored documents by GE, initially HMRC argued that GE’s failure to inform them of the nature of the deal amounted to an innocent misrepresentation. Later, HMRC sought to change their claim to allege fraudulent misrepresentation.

In April, HMRC suffered a setback 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.

In support of HMRC, TaxWatch took the preliminary step to intervene in the case.4 TaxWatch’s submission argued 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.

After considering HMRC’s application to appeal and TaxWatch’s submissions, in July the Supreme Court agreed to hear the case in a full hearing.5 But before the Supreme Court could hear the case HMRC and GE settled the substantive case out of court.

Unanswered questions

The deal raises serious questions about HMRC’s conduct in relation to this case. The Court of Appeal recently held that HMRC was not able to introduce the allegations of fraud in this case as the evidence they relied upon had been uncovered over six years ago. This issue would not have arisen in the first place if HMRC had alleged fraudulent misrepresentation at the start of proceedings when it inexplicably alleged only innocent misrepresentation.

Why did HMRC wait years before introducing their claim?

HMRC was appealing this decision to the Supreme Court, which had agreed to hear the appeal having taken into account submissions from TaxWatch in support of HMRC. TaxWatch had also applied to the Supreme Court for permission to intervene in the case to make submissions in the public interest on a point of law that would have enabled HMRC to introduce the allegations of fraud regardless of the outcome of its arguments with GE. HMRC was opposing our intervention, despite the fact that our intervention would benefit HMRC.

Why did HMRC agree to a settlement which exonerated GE before the appeal was heard?

The behaviour alleged by HMRC would clearly constitute a criminal offence if proved, so why was there no criminal investigation into the scheme? It emerged in the proceedings in the High Court that the matter was referred to HMRC’s Fraud Investigation Service three times but they failed to conduct a criminal investigation.

These kinds of settlements between large multinationals and HMRC have been the subject of intense controversy in the past, and following a highly critical report by the Public Accounts Committee in 2011, HMRC committed to more transparency and revised its Litigation and Settlement Strategy.6

Given the very large amount of money at stake in this case, and the broader consequences that this settlement may have for the tax system, we believe it is of the utmost importance that Parliament and the NAO reviews this settlement.

 

1GE 2020 form 10-K General Electric, pg 89, https://www.ge.com/sites/default/files/GE_AR20_AnnualReport.pdf

2HMRC Settles $1B General Electric Tax Fraud Lawsuit, Law360, 15 September 2021, https://www.law360.com/articles/1421663/hmrc-settles-1b-general-electric-tax-fraud-lawsuit

3Around the world with $5bn – HMRC’s allegations of tax fraud at General Electric revealed, TaxWatch, 04 August 2020, http://13.40.187.124/ge_hmrc_tax_fraud_allegations/

4TaxWatch intervenes in GE tax fraud case, TaxWatch, 21 May 2021, http://13.40.187.124/taxwatch_intervenes_ge_fraud/

5GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, http://13.40.187.124/ge-tax-fraud-case-to-be-heard-by-supreme-court/

6Public Accounts Committee – Sixty-First Report, HM Revenue & Customs 2010-11 Accounts: tax disputes, Public Accounts Committee, 14 December 2011, https://publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1531/153102.htm

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.

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.”

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.

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.

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.

Around the world with $5bn – HMRC’s allegations of tax fraud at General Electric revealed

4th August 2020 by George Turner

4th August 2020

Introduction and summary

HMRC have alleged that General Electric fraudulently obtained a tax advantage in the UK worth US$1bn by failing to disclose documents relating to the group’s financing arrangements.

The allegations revolve around the financing of certain GE companies in Australia, which HMRC allege that the company routed via the UK in order to gain a tax advantage. In using UK companies as part of the transaction, GE required clearance from HMRC to ensure that they met UK tax rules. This was granted on a partial basis in 2005.

In documents before the High Court, HMRC allege that their approval for the transaction was only given on the understanding that the funds would be used to invest in businesses operating in Australia.

However, according to HMRC’s case, the tax authority would later discover that after leaving the UK for Australia the AUS$5bn used in the transaction was not invested in any business. The transaction was in fact part of a complex and contrived tax avoidance scheme that would circulate money between the US, Luxembourg, the UK and Australia before being sent back to the US just four days later. The transactions had no commercial purpose other than to create a “triple dip” tax advantage in the UK, the US and Australia.

HMRC allege that GE deliberately supplied misleading documentation in order to gain clearance for their transaction. This included omitting key passages from the minutes of a board meeting at GE in order to hide the tax avoidance scheme which GE knew would not comply with UK tax rules.1

HMRC are now seeking to annul the 2005 agreement they came to with GE over the scheme. Corporate filings in the United States have disclosed that if HMRC are successful, the tax bill for GE could total US$1bn before any interest or penalties, which are likely to be substantial.2

General Electric told TaxWatch that they believe that the transactions will be ruled permissible on their technical merits.

The company denies that it deliberately misled HMRC about the nature of the transactions.It claims that any information omitted from the documentation given to HMRC was not relevant to the tax issues being considered.

GE is therefore asking the High Court to make an order preventing HMRC from going back on the Clearance Agreement.3

Although it is not uncommon for HMRC to accuse companies failing to provide all relevant facts concerning a particular transaction, this appears to be the first time that HMRC has accused a major company of engaging in fraudulent misrepresentation in order to gain a tax advantage.

Debt, hybrids and arbitrage

The tax avoidance scheme at the heart of this case is a hybrid arbitrage scheme. The principle behind hybrid arbitrage schemes is relatively simple, although in practice the schemes are usually very complex.

Different countries often have different tax rules governing any particular transaction or corporate entity. Companies seeking to engage in tax avoidance can exploit these differences to create transactions that generate a deduction against taxable profits in one jurisdiction, but no corresponding taxable income anywhere else. The result of this could be that a transaction is taxed no-where, or that a company achieves two tax deductions on the same transaction.4

Tax arbitrage schemes typically involve so called “hybrids”. Hybrids are the tax equivalent of the proverbial elephant in the story of the blind man and the elephant. They are financial instruments or corporate entities, that appear to be two different different things under the rules of different tax authorities. So for example, one tax authority may consider a financial instrument to be a loan, and another may consider the same instrument to be similar to holding shares (equity). This can result in a mismatch in the way that the instrument is treated for tax purposes, as the tax treatment of debt is entirely different from equity.

The Australian Arbitrage

In late 2004, GE executed a series of multi-billion dollar transactions that exploited a mismatch between Australian and UK tax law.

The Australian arbitrage centred around an Australian Partnership, GE Commercial and Consumer Finance LP. This partnership borrowed funds and paid interest to a UK company, GE Capital Finance Limited. The partnership was a “hybrid entity” because it was considered to be a taxable entity in Australia, but for UK tax purposes the partnership was a so-called “transparent entity” which did not have its own tax liability. Any profit or losses it made were attributed to its partners, which were two other UK based GE companies, IGE USA Investments Limited and GE Capital Investments Limited.5

The effect of this hybrid arrangement was that two tax deductions were made on the same loan, one in Australia, one in the UK. The Australian Partnership deducted interest payments on the loan it received from the UK against profits made in Australia. For UK tax purposes the loans created a loss for its UK based partners and so was tax deductible in the UK against UK profits also.6

In addition to this, the money loaned by GE Capital Finance in the UK to the Australian Partnership had itself been borrowed from a GE company based in Luxembourg.7

The interest being paid to Luxembourg resulted in a double deduction of interest in the UK on the same loan. This double deduction was partially offset by the fact that interest payments made by the Australian Partnership would be coming back into the UK. However, the overall effect of the transactions was that GE would be able to deduct interest payments from their profits in the UK on a loan taken out by an Australian entity.

UK anti-arbitrage rules

Tax arbitrage has been known about for a long time. In the early 2000s the use of arbitrage schemes by Roger Jenkins, a Barclays employee then thought to be Britain’s richest banker, earned him the title, “King of the Double Dip”. In 2004 an internal report by the then Inland Revenue estimated that the Treasury was losing upwards of £638m a year on Barclays’s tax avoidance schemes, many of which involved cross-border arbitrage.8

In order to combat arbitrage schemes, the UK government introduced new anti-arbitrage laws in 2005. These allowed HMRC to disallow a tax deduction claimed by a company in the UK where there was no corresponding taxable receipt somewhere else, or where the company had claimed another deduction for the same expense.9

The new rules applied only, however, if the main purpose of the arbitrage was to gain a tax benefit in the UK. If the arrangement was designed to gain a tax advantage elsewhere, then the rules would not apply.

In order to be effective, HMRC was required to issue a notice to companies that they were going to apply the rules to any particular transaction. However, companies could seek clearance from HMRC and an agreement that it would it would not seek to apply the rules to the structure at any point in the future.

The 2005 legislation not only applied to new transactions, but to schemes already in place at the time the legislation was passed and any future benefit that might be generated from these schemes.

GE seeks clearance for the Australian Investment

Court documents show that GE became aware of the proposed rules in early 2005, and became concerned that they might apply to a number of structures used by the company, including the Australian scheme which became known as the Australian Investment.10

The company sought a meeting with HMRC to discuss the forthcoming rules, and an initial meeting was held on 01 April 2005 between Dave Hartnett, then a commissioner at HMRC, William Morris at GE, Steven Edge, a senior partner at the law firm Slaughter and May, and other officials from HMRC and GE.11

Following this initial meeting, a series of meetings were held between representatives of GE and HMRC officials over a period of six months as GE sought clearance under the new anti-arbitrage rules.12 According to a recent judgment at the High Court, GE were seeking clearance for 107 loans amounting to £21.2bn. The Australian Investment was just one part of the clearance application by GE.13

Court documents demonstrate that from the outset, officials at HMRC were highly sceptical that the Australian Investment could escape the UK’s new anti-arbitrage rules.14

During negotiations, HMRC repeatedly made clear to GE its position that there was no commercial reason for GE, a US headquartered corporation, to make investments in Australia via its UK subsidiaries using a hybrid structure.15 Therefore the main purpose of the structure in their view was to gain a tax advantage in the UK. As such, HMRC would only allow clearance for the structure if GE agreed to give up any tax advantage resulting from the scheme.

The settlement

Despite HMRC’s reservations GE did eventually reach a settlement and gain a partial clearance for the Australian Investment without fully giving up the benefit it gained from the tax avoidance scheme. There is a very little detail given in the court documents regarding how this deal came about, a point which GE highlights in their defence.16

To understand why HMRC might have come to a deal, it has to be understood that throughout the time that the discussions were taking place (a period of just over six months), HMRC was labouring under the impression that the purpose of the transaction was to finance the acquisition by GE of financial services companies operating in Australia. Specifically, HMRC believed that the funds would be used to fund real economic activity in Australia.17 In particular the documents mention a company called the Australia Guarantee Corporation a company which GE had purchased from Westpac, an Australian bank. Australia Guarantee Corporation was Australia’s oldest home grown financial services company, and provided a range of financial services including car loans and personal loans.

This is important because as far as HMRC are concerned, the acquisition of a business by a UK company would not usually raise concerns.

Anti-arbitrage rules would only apply to this kind of transaction if a hybrid was involved in the purchase, and if the main purpose of the transaction was to gain a tax advantage in the UK.

Although GE were open about the fact that a tax arbitrage was taking place,they argued that if the Australian Partnership (the hybrid entity) did not exist, it would make little difference to the UK tax position. This is because the alternative would be for the UK companies to buy shares in the Australian operating companies directly, and to fund these acquisitions with debt. Interest payments would continue to be deducted from taxable profit in the UK. The inclusion of a hybrid entity, and the additional tax deduction gained from it was therefore only relevant for Australian tax purposes.18

A compromise position seems to have been reached in which HMRC would accept GE’s argument but disallow some of the interest deductions on the basis that had the UK companies invested directly in the Australian operations they would not have done so using only borrowed money. As a result HMRC did not allow GE to claim 100% of their UK interest costs (on the Luxembourg loan) against their UK tax bill.

The missing minutes

To support their case in the current dispute, HMRC cite a range of documents provided by GE during clearance discussions which they say suggested that the funds raised by the UK subsidiaries would indeed be used to acquire financial service companies based in Australia or to provide working capital for GE companies operating in Australia.

For example, in one document provided to HMRC setting out some of the financing arrangements, the “utilization of funds” was described as:

“business acquisition and funding for Australian business assets”.

In one email sent by Roy Clark of GE to Ken Almand of HMRC, the email stated:

“Just to remind you of what we said at the meeting, references to ‘business assets’ means assets such as photocopiers for lease, mortgage advances, power stations etc. ‘Business acquisition’ means the purchase of shares of operating companies”19

In another email sent by Roy Clark on behalf of GE on 28 October 2005 an extract of the minutes of a board meeting at IGE USA Investments were attached .20 These minutes outlined the tax advantage in Australia of structuring the transaction in the way proposed.

At the time, Ken Almand set out his understanding of the minutes in a file note:

“The Board minutes are undated. They suggest that the Australian partnership structure has Australian tax advantages and that the acquisition was a long term equity investment”21

However, as HMRC would later discover, before sending the documents someone had removed key passages from the minutes which suggested an entirely different purpose to the transactions.

HMRC allege that the full minutes revealed that the UK transactions were part of much larger and more complex set of transactions which were entirely circular. Over just four days, billions of dollars were borrowed from a commercial bank, then moved between General Electric companies in the US, Luxembourg, the UK, Australia and back to the US before being returned to the same bank it had came from. According to HMRC, these transactions had no commercial purpose other than to move companies GE already owned into the hybrid structure and create the tax deductions in Australia, the UK and the United States.

Another point that the deleted passages would have revealed, is that the loan taken out by GE’s UK subsidiaries, which amounted to AUS$6bn, was vastly higher than the value of the underlying assets they were supposed to finance ($529,100,000). The effect of this was to increase interest deductions within the hybrid scheme.

It appears that HMRC obtained the full minutes of the IGE board meeting from the Australian Tax Authority. In addition, HMRC also managed to obtain a document which it says shows that the planned transaction was designed to create a “triple dip” tax deduction. This document was created before the transaction took place but not presented to HMRC at the time. HMRC also learned that GE told the Australian Tax Office that the main purpose of the transaction was “to gain a tax advantage in the UK not Australia”.22

From HMRC’s point of view, all of this confirmed what they had suspected from the beginning, that the purpose of the so called Australian Investment was nothing more than to take advantage of a tax arbitrage opportunity in the UK, and reduce their tax liability.

In fact, HMRC argue that the transaction may well have fallen foul of an anti-avoidance rule on the statute book since 1996, which disallows interest deductions on loans taken out for tax-avoidance purposes. The existence of these rules is another reason that HMRC believe that GE had an interest in not fully disclosing the purpose of the transactions.

General Electric’s Defence

General Electric deny any wrongdoing and do not accept that they gave a false and misleading account of the transaction to HMRC.

They say that HMRC are focusing on a few selective documents given to them as part of the clearance talks, which have been taken out of context. Even in context GE deny that the documents have the meaning being ascribed to them by HMRC. GE also deny that the transactions were not allowable under the UK’s pre-existing unallowable purpose rules.

Much of GE’s case relies on what was said in meetings between HMRC and GE during the clearance negotiations, and in particular the 01 April 2005 meeting between David Hartnett, Will Morris and others.23 GE claim that in these meetings they made clear what the purpose of the transactions were, and that the Australian investments were already in the hands of GE prior to the transactions taking place. HMRC have asked GE to provide details of what was said in these meetings, and by whom. GE say they will present this evidence at the trial.24

The company makes the point that HMRC presented almost no evidence regarding these extensive discussions, and there is little mention in HMRC’s case about how the Clearance Agreement was reached.25 If HMRC was so sceptical about the Australian investment from the outset, why did it come to an agreement? GE is inviting the judge to infer that this was because HMRC was happy with the transactions and accepted that they did not fall foul of the anti-arbitrage rules, having been made aware of the facts in the discussions.

When it comes to the missing minutes and other documents such as those obtained from the Australian Tax Office, GE do not deny that they failed to disclose these documents. However, they claim that they were not relevant, and that it was clear that the minutes of the contested meeting sent to HMRC were an “extract”. They also say that HMRC never requested a full copy of the minutes.26

In addition to this litigation, there is also a case before the tax court where GE are contesting HMRC’s assessment of their tax liability. GE expect that the tax court will find in their favour, and told us: “We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits.”27

The importance of the case

Although the allegations made by HMRC in this case are serious it is important to emphasise that there is a limit to how far the allegations go. The fraudulent misrepresentation allegations are only raised in the context of a contract law dispute around the Clearance Agreement reached between GE and HMRC. All that HMRC are seeking from the legal action is to void the agreement.

It may seem surprising that HMRC can accuse a company of a tax fraud involving huge sums of money, and limit that accusation to a dispute about a clearance agreement.

As a matter of law, HMRC has complete discretion to deal with tax fraud by criminal prosecution or by civil litigation or contract settlement; and in civil litigation it is up to HMRC to decide whether to plead fraud at all, regardless of the facts of the case.

When HMRC first filed their particulars of claim in January 2019, there was no mention of fraud, with HMRC arguing that the clearance should be set aside on the ground that GE had made an innocent misrepresentation, a material non-disclosure, or a mistake.28

The fraud allegation was only introduced by lawyers acting for HMRC once proceedings had already started. GE challenged whether HMRC should be allowed to do this on a procedural basis.

The High Court recently ruled that HMRC were able to amend their claim to fraudulent misrepresentation on the basis of a failure to fully disclose information relevant to the case. HMRC were not allowed to proceed on the basis that GE had positively made false statements of fact regarding the purpose of the transactions and their tax treatment during the clearance negotiations. This was in part because after 15 years HMRC were not able to produce enough evidence detailing the statements that they alleged GE had made. In his conclusions, Mr Justice Zacaroli said:

“while I have rejected the attempts to infer many years after the event that specific positive representations could be implied from limited references in the contemporaneous documents, the essential allegation which lay at the heart of Mr Jones QC’s submissions – that GE failed to disclose the complete picture, and that it did so deliberately – will be permitted to go to trial on the various alternative legal bases asserted by HMRC. I stress that, beyond the conclusion that there is a sufficient pleading for this purpose, and that the prospects of success cannot be shown to be fanciful on an interlocutory application such as this, I say nothing about the merits of the claims of deliberate non-disclosure or fraud.”

Despite HMRC having an arguable case that GE obtained a tax advantage though a deliberate non-disclosure, as revealed in the case documents, at no point didHMRC conduct a criminal investigation or even a civil fraud investigation under HMRC’s Code of Practice 9.29 In fact, it was revealed in the Zacaroli judgment that at no point during HMRC’s 8 year investigation into the matter did they even mention fraud30 even though the facts of this case as alleged by HMRC appear to fit the examples of the kind of circumstances in which it states it will generally consider starting a criminal investigation.

These include “where, pursuing an avoidance scheme, reliance is placed on a false or altered document or such reliance or material facts are misrepresented to enhance the credibility of a scheme”, “where deliberate concealment, deception, conspiracy or corruption is suspected” and “where materially false statements are made or materially false documents are provided in the course of a civil investigation”.31

This will not come as a surprise to many. There has been for a long time a general reluctance on the part of HMRC to use the tools it has to combat tax fraud when it faces complex tax avoidance schemes operated by large multinational companies.

HMRC rarely brings cases of complex tax avoidance by large corporates to court. It has never brought criminal charges against companies or their advisers for dishonest implementation of complex tax avoidance schemes. Speaking in 2005 to Accountancy Age, Dave Hartnett suggested that the reason why HMRC did take a more aggressive approach to tax fraud was that that sort of thing simply didn’t happen in the UK. He said:

‘The dividing line between evasion and avoidance is the line which is
honesty. Advisers in America became dishonest. I haven’t seen that to anything like the same extent in the UK,’32

But according to HMRC’s case against GE, that kind of dishonesty was happening with a major US corporation operating in the UK.This case also speaks to the problem of defining tax avoidance as being “perfectly legal”. Hybrid arbitrage schemes would usually be considered a form of avoidance. However, given the anti-avoidance rules in place dealing with these and other schemes, many tax avoidance schemes rely upon some form of fraudulent misrepresentation in order to operate.33

Many other countries are far less reticent to tackle tax avoidance as a matter of fraud than the UK.34 In the US, the IRS has brought criminal charges against major accountancy firms for devising and marketing tax avoidance schemes. Under European civil law jurisdictions, cases that the UK would consider as avoidance are regularly prosecuted as tax fraud.35

There are now more and more voices in the UK calling for HMRC to change the way it approaches tax fraud, most recently, the All Party Group on Responsible Tax published a paper which called for HMRC to launch a criminal investigation against the promoters of tax avoidance schemes if any scheme they promoted was found to fail the General Anti-Avoidance Rule.36

If HMRC are successful in their case, it may well open the door to HMRC taking a more robust approach to tackling large and complex tax avoidance schemes.

The case of HMRC vs IGE and others is scheduled to go to a full trial in July 2021.

Notes

1HMRC’s particulars of claim paragraph 35d

2GE 2019 FORM 10-K, pg96, https://www.ge.com/sites/default/files/GE_AR19_10-K_0.pdf

3GE’s Defence and Counterclaim paragraph 61

4For more information on tax arbitrage and HMRC’s approach to it see HMRC’s internal manual on international tax arbitrage, INTM594510, available from: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm594510

5The transactions are set out in HMRC’s particulars of claim, paragraph 38

6The tax effects of the Australian / UK hybrid entity are set out in HMRC’s particulars of claim paragraph.27

7This was the so-called “SARL Loan” described in HMRC’s particulars of claim, paragraph 19a

8R. Brooks, The Great Tax Robbery, chapter 3.

9Chapter 4, Avoidance Involving Tax Arbitrage, Finance (No. 2) Act 2005, https://www.legislation.gov.uk/ukpga/2005/22/part/2/chapter/4/2005-07-20

10In a response to further information requested by HMRC, GE state that at their original April 1st meeting with HMRC they expressed concern that “the anti-arbitrage rules could impact upon existing GE structures” (response to question 4)

11GE’s Defence and Counterclaim paragraph.14 and Defendant’s Response to Claimant’s Request for further information, response to questions 3 and 4.

12As demonstrated in Appendix 2 – Timeline – correspondence and meetings occurred throughout 2005.

13Judgment of Mr Justice Zacaroli, HMRC vs IGE USA Investments and Others, handed down on 31st July 2020, paragraph 15, [EWHC 2121 (Ch)]

14On 28 October 2005 a file note was composed by Ken Almand of HMRC, stating “Still no evidence as to why the acquisition is held by the UK and still no convincing evidence as to why acquisition was 100% equity funded”, HMRC’s Particulars of Claim paragraph.32b

15See for example, HMRC’s Particulars of Claim paragraph.33

16GE’s Defence and Counterclaim, paragraph 3.4

17HMRC’s Particulars of Claim paragraphs.19 and 38

18See paragraph 19d, HMRC’s Particulars of Claim

19HMRC’s Particulars of Claim paragraph 32b

20Ibid. paragraph 35

21Ibid. paragraph 36

22Judgment of Mr Justice Zacaroli in HMRC vs IGE USA Investments and others [EWHC 2121 (Ch)], paragraph 110, handed down 31st July 2020

23GE’s Defence and Counterclaim Paragraph.18.2

24Defendant’s response to claimant’s request for further information

25GE’s Defence and Counterclaim paragraph 3

26Defence Counterclaim P.29.2

27Correspondence TaxWatch received from GE on 21 July 2020

28Particulars of Claim p.55

29Court documents do make reference to a mandatory referral in this case to HMRC’s Fraud Investigation Service, however, this will have been done under Code of Practice 8, a procedure designed to deal with instances where a company has “sought to take advantage of a scheme or device to reduce a tax liability”.

30Judgment of Mr Justice Zacaroli in HMRC vs IGE USA Investments and others [EWHC 2121 (Ch)], paragraph 134, handed down 31st July 2020

31HMRC’s criminal investigations policy available from: https://www.gov.uk/government/publications/criminal-investigation/hmrc-criminal-investigation-policy

32Alex Hawkes, “The taxman gets tough”, Accountancy Age, (October 19th 2005), available from: https://www.accountancyage.com/2005/10/19/the-taxman-gets-tough/

33A more detailed analysis of the legality of tax avoidance schemes is available from: http://13.40.187.124/is_tax_avoidance_legal/

34For example, tax avoidance by Google was pursued as tax fraud by the French and Italian authorities, see: https://www.thetimes.co.uk/article/google-pays-france-1bn-to-settle-tax-fraud-investigation-wrdnzz3p6 and https://www.reuters.com/article/us-google-italy-tax/italian-tax-police-believe-google-evaded-227-million-euros-in-taxes-sources-idUSKCN0V614L

35Another good example of this is the current cum-ex scandal gripping many European countries, that has seen police raids on major law firms as part of an investigation into tax fraud. Cum-ex fraud is referred to as dividend-stripping in the UK and is pursued as an avoidance issue.

36MPs call for crackdown on advisers behind unlawful tax avoidance, Financial Times, 19 July 2020, https://www.ft.com/content/c17bcb9e-dd56-451f-ab2a-c288c2649d94


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