The recent media furore resulting from the revelations in the leaked Panama Papers has again thrown up the big question of what constitutes tax evasion and, indeed, tax avoidance.
Firstly, it’s vital to make the proper distinction between evasion and avoidance: If you are hiding untaxed profits in an offshore account, deliberately concealing your profits from the tax authorities, then that constitutes tax evasion, which is a criminal act for which the perpetrators can be prosecuted. Avoidance is perfectly legal, regardless of what people think about it ethically.
Banking secrecy is not a crime, despite what the media might be suggesting. Just because people choose to keep their money in offshore accounts does not mean they are doing anything unlawful or dodgy – in respect of their tax liability or anything else for that matter.
For the moment all we have is information about people using Panama for their banking affairs, not that they are avoiding or evading tax.
It is also inaccurate and wrong to suggest that David Cameron’s £200,000 gift from his mother is tax avoidance. The Prime Minister has not broken any taxation rules by accepting the money, as there is no tax on gifts of cash, regardless of what certain newspapers have suggested, clearly in total ignorance of the capital gains tax laws. And under the UK’s inheritance tax laws, tax-free gifts are permitted if the donor survives for seven years after making the gift. Parliament says that this should be the case, so it is hardly tax avoidance to take advantage of those rules.
Despite the hard-hitting front page editorials following the Panama fall-out, every newspaper’s financial pages tell readers to make the most of the seven-year gift rules as part of sensible inheritance tax planning.
Perhaps the editorials should concentrate on the need for informed specialist tax planning to enable people to make some sense of an over-complicated tax system, rather than berating people who have done nothing wrong?
The media’s ill-informed take on the Panama situation, and indeed commentators’ reactions to the corporate taxation positions of major international businesses such as Google, have come as no huge surprise to me.
As a business tax adviser I have often found that journalists and politicians have a poor grasp of the way tax works.
When Google recently announced it was settling its past tax liability of £130 million, some raged that this sum was nowhere near enough, while others tried to ‘guestimate’ the internet giant’s UK taxable profits over the period. This is a pointless exercise, as my understanding is that the settlement was a technical issue relating to employee shares and options, so it had nothing to do with Google’s international structure.
The issue with the international group structure, which is not in dispute for previous years, hinges on whether or not it forms a ‘permanent establishment’, the concept which determines what proportion of company profits, if any, should be chargeable to tax in other countries. Under this rule, aspects such as sales and marketing through agents may be tax-exempt in certain circumstances.
Specifically, a dependent agent, i.e. one employed, in this case, by Google, does not create a taxable presence in the UK if those agents are only able to negotiate sales but are not allowed to conclude the contracts.
Google has always argued that its contracts are concluded in Ireland, which is where the taxable profits arise, however much of the negotiating is done in the UK by its agents.
While it has been suggested that Google’s contracts are actually concluded in the UK, we must assume that HMRC is satisfied that this is not the case.
Some people find this offensive, but, to use a football analogy, nobody suggests that a player is cheating by getting as close to being offside as he can, without actually being offside.
Let’s not forget that for every Google investing in the UK but able to take advantage of the permanent establishment rules, there are UK corporations investing into other countries and doing the same – paying UK corporation tax rates at 20%, rather than at those countries’ higher rates.
So, as far as we are aware, Google is complying absolutely with its UK tax obligations. Anyone who thinks that it should be paying more tax should remember that the same argument could be levied at the many UK multinationals investing outwards into other countries with higher corporation tax rates.
We should also bear in mind that Google has 2,300 employees in Britain earning on average £160,000 a year and all paying tax under the PAYE system. With income tax rates of up to 45% and National Insurance contributions (employer’s and employees’) up to another 25%, Google is paying a substantial amount of tax in respect of those people. So it’s not as though the company is not making a fairly major contribution to the UK economy.
As Google consumes services in this country, it also pays VAT at 20%. VAT, National Insurance contributions and income tax are by far the three largest components of the UK’s tax take, so, while corporation tax is not insubstantial, it only makes up around 7 per cent of the total.
And despite comments to the contrary, companies are not morally obliged to pay tax. They are simply under a legal obligation to pay the tax levied under the law of each state in which they operate.
As Google and others have pointed out, if the rules on permanent establishments are not fit for purpose it is up to national governments, not the companies doing business here, to change them.
Both professionally and on a personal level I have had substantial input in feeding back to HMRC the tax sector’s reaction to recent anti-avoidance provisions.
As a member of the CIOT, and of the ICAEW Tax Faculty, and as an independent corporate tax consultant, I have asked HMRC to consider whether such measures are practical to operate, whether they will have the required impact and whether they are in fact fair.
In last year’s Budget, for example, the Chancellor made several changes to entrepreneurs’ relief ‘to counter avoidance’ but his revised rules went far beyond their intended targets and prevented business owners from passing businesses on to their families. I was very involved in discussions with HMRC about this apparent attack on family businesses and it was gratifying to see that, thanks to our hard work, the rules were subsequently changed to hit only the intended targets.
All of this proves that we are more likely to have a coherent and sensible tax system if we put aside the hysteria about so-called avoidance – which often isn’t – and engage professionally with HMRC to get our tax legislation right.