Google deal: in defence of the taxman

Google came under a barrage of criticism for paying less than its “fair share” of tax and HMRC has been accused of being soft or incompetent for the “sweetheart deal” it negotiated.

Publicly available information is not sufficient to judge whether this is a “good” or “bad” deal for the UK. Critics have no way of knowing if HMRC interpreted and applied the law correctly and neither do we. But we need to look at some context.

When writing to the chancellor of the exchequer on the matter, John McDonnell, the shadow chancellor, noted that there had “been much comment and discussion about the rights and wrongs of this case specifically, as well as the general principle of large companies being able to negotiate settlements such as this with the UK’s tax authorities”. Settlements are clearly viewed with suspicion in some quarters. The term often used to describe such settlements – “sweetheart deals” – has clear undertones of impropriety and favouritism. Settlements have been portrayed as a luxury afforded to large multinationals to negotiate down the amount of tax due.

In fact, there is nothing untoward or suspect in settlements; settlements are a legitimate feature of a tax system and facilitate its smooth operation. Given the number of taxpayers under HMRC’s charge, the number of issues on which a single taxpayer and HMRC can disagree, the limitations of time and resources, and the genuine uncertainty surrounding such issues, it is only reasonable for HMRC to seek to reach agreement.

But why do HMRC and taxpayers disagree so often on the tax due under the law? This is partly because some taxpayers push the law to the limit, but also because tax law is uncertain and the associated processes that are used to establish a tax charge, such as valuation, are not exact sciences. The notion that one can plug a series of figures into a tax computation machine and it will spit out the “right” amount of tax due is fanciful. Different people can have wholly respectable but differing views on the interpretation of the law and its application to the facts. It is for this reason that judges overturn each other’s decisions – and even the five judges sitting in the Supreme Court at times disagree with each other.

Criticism of this specific settlement was sparked by the “derisory” amount of tax paid by Google. We cannot judge if this was due to the wrong or soft application of the law by HMRC, but we know that the current law is inappropriate for taxing multinational companies such as Google. It is not at all surprising that it produces this result.

Going public

Some critics have called on the government to publish the information necessary for the public to assess these settlements, a move that would require a change in the law. This is a questionable idea. One would require voluminous information to properly assess the “correctness” of a multinational’s tax charge, not to mention very significant expertise, time and resources.

Google: played by the rules. Reuters/Neil Hall

More importantly, to properly understand why a company pays a certain amount of tax would require information at a level of detail which runs into confidentiality and competition issues. Making less than this amount of information publicly available is unlikely to be very useful and may easily lead to misinterpretation and misinformation.

What question would we be asking: whether the law was interpreted and applied correctly or whether the “fair share” of tax was paid? If the latter, one has to decide whose idea of fairness ought to apply. Again, two reasonable individuals can disagree on what is fair. And while critics have argued that this kind of transparency is necessary to restore trust in HMRC, this call and its accompanying criticism does the exact opposite – it sends a message to the public that HMRC cannot be trusted to do their job properly.

Checks and balances

This is not to say that HMRC will never get things wrong. They will, but we should deal with that by ensuring that internal and external checks are in place to pick up mistakes. Internal checks have been bolstered in the past few years. This, together with the knowledge that all eyes were on the tax affairs of the big multinationals – but especially Google, Amazon and Starbucks – would make it surprising, if HMRC did not do its job properly when reaching this settlement. Of course, that does not necessarily mean that they did. However, we should keep internal process under review and if necessary improve them further. We should also think more carefully about the need for ad hoc or regular external reviews by the NAO or other independent bodies.

An SDP MP and the Labour Party have asked the European Commission to investigate whether this settlement breaches state aid rules, which forbid government support that gives a company advantages over its competitors. There are serious questions to be raised about the commission’s state aid investigations into the tax affairs of multinationals, but that is beyond the point of this comment. Certainly, the UK cannot rely on the commission to investigate the tax affairs of multinationals operating in the UK who appear to pay less than their “fair share”.

Surely, it must be more sensible and sustainable in the long term to ensure that the internal and external review processes in the UK are up to scratch. We must also improve the tax law itself. These steps, and not the current criticism of HMRC, will lead to a better tax system and restore the public’s trust in it.

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