Tax revenues fund the bulk of the UK’s schools, universities, healthcare services, pensions, transport, security, legal system, and social infrastructure. These are the markers of a civilised society, but they are under relentless attack from corporations and wealthy elites. So why isn’t tax avoidance more of an election issue?
The amount of tax avoided and evaded is hard to estimate, but HMRC admits to an annual tax gap (including tax avoidance, tax evasion and arrears) of around £34 billion. A former World Bank official has estimated it to be around £100 billion a year. And some critics estimate the gap to be around £120 billion a year.
Whichever way you look at it, the amounts are large enough to make the proposed £12 billion a year austerity cuts unnecessary.
Heart of tax avoidance
The power of corporations and wealthy elites is at the heart of tax avoidance and needs to be checked. Examples are not hard to find. HSBC enabled thousands of its clients to avoid taxes through offshore bank accounts. The House of Commons Public Accounts Committee said that accountancy firm PricewaterhouseCoopers manufactured tax avoidance schemes on an industrial scale to enable its clients to avoid UK taxes. Their Clients included household names such as Amazon, Deutsche Bank, Ikea, Accenture, Heinz, Dyson, JP Morgan and many more.
A key objective of tax avoidance schemes is to report higher profits and boost performance related executive pay. Companies such as Microsoft, Google, Apple, Starbucks and others have been adept at shifting their profits to low or no tax jurisdictions through complex corporate structures.
A favourite tactic to reduce taxable profits is using internal loans that bear no relation to borrowing needs and are used to shift profits away from the UK. The economic essence is that the UK subsidiary makes payments to another member of the same group of companies in a country with lower taxes such as Switzerland or Luxembourg.
The House of Commons Public Accounts Committee has held a number of hearings, but these have not been followed by any investigation by HM Treasury. HMRC occasionally challenges some schemes, but no major company has been prosecuted or fined. When reminded of the total lack of any retribution against major accountancy firms for designing, marketing and implementing avoidance schemes, the government response is:
PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte are members of the Institute of Chartered Accountants England and Wales, a professional regulator. HM Revenue & Customs (HMRC) is working with ICAEW and other professional regulators to strengthen their role in upholding professional standards.
This buck-passing overlooks the fact that no accountancy has ever been disciplined by any professional body for crafting tax avoidance schemes even when they have been declared to be unlawful by the courts.
Rather than tackling tax avoidance, government has been engaged in impression management. For example, in April 2013 the government introduced legislation to ban companies and individuals who took part in failed tax avoidance schemes from being awarded government contracts. So far, no such business has been barred.
The poor suffer more
The failure to tackle tax avoidance has serious consequences for distribution of wealth and even survival. As it stands, any citizens have to either forgo hard-won social rights or bear a greater burden of taxation to finance infrastructure. In the age of reverse socialism, the poor bear a higher burden of taxation than the rich. The most recent government statistics show that direct and indirect taxes account for 47% of the gross income of the poorest 10% households. In contrast, the richest 10% households paid an average of 35% of their gross income in direct and indirect taxes.
Organised tax avoidance undermines confidence in fairness, democracy, justice and the rule of law. As politicians seek votes they should be asked to explain their policies for curbing it. This could include denial of all government loans, grants, subsidies and public contracts to tax avoiders.
Deposit-taking licences of banks and auditing licences of accountancy firms should be suspended for tax abuses. Habitual offenders should be shut down. Company directors should be held personally liable for the taxes lost due to predatory practices.
Tax returns of major corporations and wealthy elites should be made publicly available so that public sunshine may persuade some to end their darker practices. Politicians should be asked to change the system so that corporations pay tax in places where their economic activity actually is, rather than the contrived place of their control, often a tax haven where they have virtually no trade.
The general election is an opportunity to call the powerful to account and that process should include a focus on tax avoidance.