Is tax planning a means for companies to get out of paying what they owe, or simply the most efficient interpretation of the rules? Accountants on the front line give Nick Martindale their views on a fair system
The news that high-profile individuals, including an unfortunate figurehead in the person of comedian Jimmy Carr, were avoiding millions of pounds in tax by channelling money through off-shore schemes caused public outcry and brought condemnation from David Cameron.
But when it comes to corporation tax, there are billions rather than millions at stake in the tax avoidance arena. Should the outrage be similarly multiplied?
When news broke in early June that mobile phone giant Vodafone paid no UK corporation tax last year despite having its headquarters in Newbury, it provided a predictable feeding frenzy for the media. Vodafone’s chief executive Vittorio Colao launched a robust defence, saying there was nothing illegal in what it had done – write off its corporation tax contribution against capital expenditure of £575m Ð and the business had paid some £700m in payroll and other taxes.
Ian Young, international tax manager, ICAEW
Tax is clearly a cost to business but it be can’t be treated in the same way as any other expenditure
Ian Young, international tax manager at ICAEW, says this is just one example of how a company can, quite legitimately, minimise its tax liability. “Tax is clearly a cost to business but it be can’t be treated in the same way as any other expenditure. Corporates are making decisions about how they run and structure their businesses in the context of the economic situation, competitors, how they think the market is going to change and the tax systems in which they operate.”
The CBI has been riled by the current witch-hunt against corporations perceived as not paying their fair share of tax, prompting it to produce its Tax and British Business: Making the Case report, which found that British companies paid more than £163bn in taxes to HMRC in 2010-11, constituting more than a quarter of the total tax revenue of £551bn. The report highlighted a number of reasons why UK corporations may genuinely pay less corporation tax than expected. As well as offsetting capital expenditure, which is designed to reflect the reality of operating in certain parts of the economy (such as telecoms), these included group relief, where losses can be transferred among businesses; losses from previous tax years being carried forward; and tax credits for investing in innovation or research and development.
Both the CBI and Young broadly welcome the tightening up of regulations around tax avoidance, including proposals for the new General Anti-Abuse Rule (GAAR). “We’ve had a disclosure regime in place since 2004 and the major banks have signed up to a code of conduct about the way they behave in relation to the tax system,” says Young. “The government has also had an enforcement programme for the last five or six years and HMRC has a good record of taking cases to court and winning the argument.”
Ultimately, a simpler tax system would be welcomed by businesses and the accountancy profession, says Young, who admits that the complexities of the current system can cause problems.
Where clients have heard about a scheme to reduce their tax liability, advisors should take caution. “You have to identify what appetite your client has to enter into what could be a risky situation,” he says. “If they’re investing in unquoted trading companies to get the tax relief, are they comfortable if they lose all their money? There are difficult issues that need to be addressed when you are advising clients in what are otherwise quite straightforward circumstances.”
Stephen Herring, BDO
The vast majority of UK companies pay their fair share of tax and are intrinsically inclined to avoid anything that might create unpleasant surprises further down the line, says Stephen Herring, a senior tax partner at BDO. "A lot of larger companies are very conservative, and telling bad news if something doesn’t work is far worse than the good news if it does," he points out.
Yet in a global market, failing to fully examine the potential to minimise tax liabilities could leave UK organisations at a disadvantage. "If someone is buying a new subsidiary in another country, part of how much they can bid will be dependent on the after-tax returns," he says. "So if a UK company is bidding against a German and Dutch one it has to anticipate the right mixture of debt and equity to reduce the incidence of tax."
The GAAR should stop "egregious or outrageous tax proposals that have no commercial basis whatsoever," he says, such as the recent case involving Eclipse Film Partners No 35 LLP.
But Herring argues businesses should also do a better job of defending their position in looking to minimise their tax bills. "Tax planning is right, proper and necessary and it’s not benefiting the management as much as the shareholders, which are pensions, SIPP investments, investment trusts, ISAs and insurance policies.
"It benefits all of us that management is properly looking to reduce its tax liabilities," he adds. "Are we really asking managers to say that they had five routes available for taxation and that they took the most expensive?"
Vince McLoughlin, Russell New
The current mood around tax means organisations risk being stigmatised for looking after their own best interests, believes Vince McLoughlin, a partner at West Sussex-based Russell New.
"If the law allows you to arrange your affairs in the best way, then doing so should not be seen as anything other than sensible planning," he says.
"If the belief is that the law is wrong then change it, but don’t criticise individuals and companies for benefiting from it."
A fairer and simpler tax system would remove the need for companies to go to extreme lengths to reduce their liabilities, he adds. "The majority of taxpayers – both individuals and companies – are prepared to pay taxes and accept that it is a necessary cost in a developed society," he says.
"If HMRC can create an environment in which companies believe they are paying a reasonable amount of tax, that they will not be attacked for any attempt to carry out an investment proposal and that HMRC understands how businesses operate, then the tax avoidance industry will essentially operate by self-regulation."
The government’s policy of having different rates of tax for smaller and larger enterprises is antiquated, says McLoughlin, who expects a single, uniform rate to be introduced in the next five years.
He has concerns, however, over the introduction of the GAAR. "The risk is that, in order to make it work, many planning opportunities that even the greatest moralist would deem to be acceptable will be caught under a general rule," he warns.
Mark Simpson, Simpson Burgess Nash
The UK tax system has always lacked a set of underlying principles and has evolved in a piecemeal fashion with too much political interference, says Mark Simpson, director, tax saving, at Manchester firm Simpson Burgess Nash.
As a result, larger companies – and the pre-crisis financial institutions in particular – have, over the years, devoted vast resources to devising schemes to radically reduce their tax bills, he says. This has been made easier by the increasingly globalised nature of organisations and business as well as the emergence of ecommerce, which has made it easier to operate in low-tax jurisdictions.
"The danger of this is that it is to some extent becoming the case that the bigger a company you are and the more profit you make, the lower your effective tax rate, which is morally unacceptable," he says.
The financial crisis, though, has changed not just public awareness of tax avoidance but also the attitude of the vast majority of the accounting profession to what Simpson describes as the "unacceptable nature of large-scale tax avoidance using artificial, non-commercial arrangements".
Simpson has high hopes that the introduction of the GAAR will provide a platform for a more credible tax system, and help accountants deal with the relatively few requests from clients to advise on such morally dubious schemes.
"I would be delighted to be able to tell clients that from April 2013 there is no point considering such schemes as they would almost certainly be caught by the GAAR," says Simpson.
Chris Morgan, KPMG
Chris Morgan, head of tax policy at KPMG, makes the point that there is a "massive black line" between tax avoidance and tax evasion. "The thing that’s being blurred is the distinction between mitigation that works and avoidance, which is where you try and do something which is totally legal but either there’s a piece of legislation that says it doesn’t work or a court says you made the wrong interpretation," he says.
Accountants have an important role in advising clients on the implications of the approaches they wish to take in this area, says Morgan. "If a company is saying it is not going to do any planning at all, how do you get benefit for the public for that?" he asks. "Equally, if a company says shareholders want it to push it as far as possible, how would it then communicate that in such a way that it’s not seen as acting against the interest of society?"
The introduction of the GAAR is a good idea in principle, says Morgan, but the dangers will lie in individual decisions made by courts over what constitutes abusive transactions. "If you could get a ruling upfront, as you can do in many other circumstances, you’d have certainty as to whether or not the rule would apply," he says.
There is a risk that companies assessing whether to invest in the UK or overseas could be put off by the vagaries around the GAAR until sufficient cases have come to court and been challenged on appeal, he adds.
Andy White, Carter Backer Winter
The government has launched a "deliberate and concerted campaign to characterise tax avoiders as pariahs," says Andy White, a tax partner with mid-tier accountancy firm Carter Backer Winter.
"This has been achieved by tacking the word ‘abusive’ in front of the phrase ‘tax avoidance’ and by calls for citizens to pay ‘the right amount’ of tax, as if that were something that could be defined," he says. "If the government were to concentrate more on having a cohesive tax policy and not over-complicating the system, they may have more success."
There are, however, a number of practices which some organisations use to minimise their tax payments, he admits. Chief among these is the use of offshore group companies. "This might be by setting their head offices offshore or by ‘transferring’ income offshore," says White.
"Favoured techniques for the latter might be for an offshore subsidiary to own the intellectual property of the group and for UK companies to pay royalties or licence fees, which are tax-deductible. Another is for the UK company to be financed by large loans from offshore group members, on which tax-deductible interest is payable."
Legislation already exists to counter such abuse, in the form of transfer pricing and thin capitalisation, he says. "What is unclear is why this legislation is apparently not being used fully," says White. "HMRC needs to be sufficiently resourced to be able to distinguish those companies that are abusing the legislation from those that have little or no UK tax to pay because they are making legitimate use of the various reliefs offered by the tax code."
Brian Lindsey, HW Fisher & Company
Many companies that pay different rates of tax do so simply by virtue of the sector they happen to be in, with those involved in research and development likely to benefit from tax breaks, points out Brian Lindsey, corporate tax partner at HW Fisher & Company in London.
"Just because companies pay taxes at a different rate doesn’t mean they are arranging their taxes in a particular manner to reduce their tax liability," he says.
There are, however, organisations that have decided to take advantage of the tax rules as they stand, and accountants have to be sensitive to this. "We wouldn’t countenance any form of evasion but clients would like us to ensure they are paying the correct amount of tax, based on what the legislation says, so we will always advise on what allowances are available," he says.
He admits, though, that the current climate means there is a greater emphasis on what is perceived as fair, and clients are increasingly having to factor this into any decisions they make.
The introduction of the GAAR should provide a greater degree of certainty in the long run, he says, although in the short term there is the potential for greater confusion.
"All parties would prefer a simpler system that would not put us out of work," he adds. "But every time there is a new Budget the legislation gets more complex. A system with fewer rates of tax where everyone knows where they’re heading with their tax position would be helpful."