Tax avoidance. Everyone knows it happens, but few understand exactly how. It’s long been obscured beneath a thick film of offshore companies, secretive tax havens and discreet private banks and law firms. The cat is now out the bag however – or perhaps that should be the 400lb tiger.
A treasure trove of information leaked from the Panamanian law firm Mossack Fonseca has revealed how hundreds of thousands of companies and individuals have used ‘offshore services’ to cut their tax bills. In this feature originally published on September 29 2014, MT veteran Chris Blackhurst dug deep to find out exactly what we can do to tackle tax avoidance.
The adviser to the giant household-name company looked at me and sighed. 'They just don't know what to do; they're in a total mess about it.'
What was upsetting his client especially, he said, was that the company felt singled out for especially harsh treatment. That's not true, I replied, rattling off half a dozen other corporate names that had been the subject of anti-tax-avoidance protests.
Besides, I added, it's very simple. If they really feel that badly, all they need to do is to pay more tax. My companion shook his head: 'They can't just do that. Their whole business is structured to keep down tax, their shareholders wouldn't approve and, also, as they see it, they're doing nothing wrong, they're operating completely within the rules.'
Welcome to the moral issue of our time. Arguments rage back and forth, companies and celebrities are named and shamed, political and religious leaders fulminate, but we're still no nearer a solution.
Every day, seemingly, a well-known company or individual is exposed as not paying a fair share, as having gone to great, sometimes bizarre, lengths to avoid tax.
One of the latest ploys - a film-financing wheeze judged by HMRC not to be a legitimate investment opportunity but actually a way of reducing tax - disclosed an A-list of dishonour, taking in such luminaries as Bob Geldof, Gary Lineker, Ant and Dec, Wayne Rooney, Anne Robinson, Victoria Beckham ... In total about 1,000 names had signed up. They were asked to repay up to an eye-watering collective £1bn in tax relief immediately, ahead of the scheme being tested by a specialist tribunal.
Arcadia boss Sir Phillip Green saved £285m in tax by putting his company in his wife's name
Someone who knows exactly what it's like to be on the receiving end of society's opprobrium over his tax affairs Sir Philip Green. The British retail billionaire is fond of carrying about with him a piece of paper. It's from HMRC and is addressed to Lord Grabiner, chairman of Green's Arcadia group of companies. In summary, it says that as far as the Revenue is concerned, Green pays all the tax he is obliged to in the UK.
Whenever the conversation turns to his tax affairs and threatens to become nasty, Green whips out the letter. It is correct: Green does pay the tax he is required to pay on his salary. But that is all: Arcadia is owned by his wife, Tina, who lives in Monaco. In 2005, those Arcadia shares netted Tina a £1.2bn dividend. By putting the company in his wife's name, Green saved £285m in tax.
He runs Arcadia full-time; he lives in the UK during the week, flying back to Monaco by private jet at weekends. Legally, his tax affairs are entirely above board.
That is a message sometimes lost in the fog over his tax arrangements. What he has done is to structure his entire lifestyle towards minimising the tax he pays. If Green does not have a problem with it, should we?
The truth of Green is that he is lucky: he can shape his life like that, and he enjoys it. Others would not go to those extremes; others might pay the tax.
But that's their choice. And, as Green says, he does pay tax - he pays it on his salary. Plus, he also employs more than 40,000 people in the UK, all of whom pay tax.
If Green were not a person, a Brit, living in the UK, but a faceless international private equity house that owned Arcadia, would we still react in the same way - would the anonymous private equity group attract the same fury? His shops have been attacked by demonstrators - would theirs? He's constantly portrayed by the media and politicians as a serial tax avoider - would they get the same treatment?
I ask these questions because Green raises them himself. He feels hard done by, that not enough attention is paid to his point of view - one that he is fully entitled to have.
Are we right to blame him, when he does not write the laws? We live in a democracy, we elect the government, and it's that government that devises the tax regime, not Green. Arguably, it's ministers we should be denouncing and putting in the stocks.
Yet people will decree that tax-avoiding A-listers are doing something worse than the builder or plumber who casually says he will do the job cheaper for cash, or the waitress we encourage to put the tip straight in her pocket.
Perhaps the reason for many people is jealousy. Most working men and women are on Schedule D or PAYE. Their tax comes directly out of their wages and there is absolutely nothing they can do to avoid it.
U2 singer Bono's tax affairs had some calling him a hypocrite
There is, though, more to our anger than that. We can't abide hypocrites. So when a goody-two-shoes celeb, a Bono (U2's publishing arm is resident in the Netherlands for tax purposes) or a Bob Geldof, is shown to have shielded his wealth from the tax authorities we go especially mad.
No matter that they may be generous with their money elsewhere. Green likes to point out that he is a major philanthropist, which he is, and for which he receives acclaim. He'd rather decide where his lucre goes, and which worthy causes should benefit, than give it to the government to spend.
But most of us do not have that choice, we're not able to determine where our cash goes, and for all Green's charitable giving, it is not enforceable, unlike tax collection - he could just as easily donate nothing.
Musicians, whose words of rage often replicate our own feelings of powerlessness against the system, particularly rile us. So, when it turns out that the Arctic Monkeys, Sheffield chroniclers of working-class life, and George Michael, who sang about life on the dole, have taken advantage of the Liberty tax-avoidance scheme, involving the parking of cash in Jersey, we do not spare them.
In trying to justify his membership, Michael hits a discordant note: 'I would feel enormously unhappy about paying 50% to another Tory government.' George, whether we're peeved or not with the government, we must grin and bear it, and pay up - so why can't you?
It's no coincidence that tax avoidance has garnered more headlines in recent years (tax evasion, which is illegal, is rarely discussed, mainly because it is nothing like as common, due to the authorities having got so much better at closing it down and the introduction of severe penalties). It's not that tax scams have suddenly come into existence - they've been around ever since barons demanded tithes from peasant farmers for flocks of sheep - it's more that we now live in an age of austerity.
We might like to moan about public sector waste - indeed, some avoiders use it as a justification for not paying their full taxes - but, in truth, we know that the government is struggling. We're aware that we live in an overcrowded island with a health service that can no longer cope and an infrastructure that is creaking. We've also got a welfare system that needs funding (no coincidence either that benefit scroungers enjoy the same pariah status as those at the other end of the wealth spectrum, the rich who shelter their money in offshore havens).
These are tough times, where heavy cuts to public services are being executed and folk are losing their jobs.
This is also a period of gross inequality. The sums that stars are earning, the vast bonuses paid to City bosses and bankers, have got so large they're beyond the ken of the rest of us - and, worse, some of them want even more by not paying their taxes! Greedy whatsits.
UK companies are thought to avoid £12bn a year in taxes
The rich getting richer is a recurring theme wherever spleens are vented on tax. In 2007, the last occasion the research was conducted, there were 400 UK-based individuals on the Sunday Times Rich List earning, or capable of making, £10m a year. But a Freedom of Information Act search found that only 65 paid income tax - the remainder used a range of tax-avoidance techniques. According to the list, 350 people had fortunes of £200m or more - enough to earn them £10m a year through interest, rent, dividends and profits. In addition, 70 or so City traders, company directors and famous names were in the 'eight-figure club', people who were paid £10m or more.
But, nevertheless, only 65 paid income tax (during the eurozone crisis, we liked to point an accusing finger at fiscally lackadaisical Greece, where, according to official figures, only a handful of people are millionaires, but the UK has a similar issue). Since then, the earnings figures will have climbed, as will the number of people in that salary bracket. But will more of them be paying income tax?
We're more furious than ever, but our anger is not new. In 1994, Gordon Brown, then the shadow chancellor, told the Labour party conference that those who avail themselves of tax loopholes were the 'something for nothing elite' and the 'undeserving rich'.
Once it was in power, Labour, Brown pledged, 'would take action against the tax abuses and avoidance on the part of the few, which result in higher demands on the overwhelming majority'. It was, said Brown, 'indefensible that a very wealthy few are allowed to work or live in the UK without making a fair contribution through taxation'.
Twenty years after that speech and four years after 13 years of continuous Labour rule, the current prime minister has put targeting corporate tax avoidance at the top of the G8 agenda. The progress, so boldly promised by Brown, has been virtually zero.
Worldwide, $21trn is thought to reside in offshore financial centres, away from the beady eyes of the tax inspector. In the UK, companies are reckoned to avoid paying at least £12bn a year in taxes. The most recent survey of FTSE100 companies found that only 33 published a full list of where all their subsidiary companies are, despite this being a legal requirement. Of the 33, all of them had subsidiaries in tax havens, with the average being 79 offshore companies each.
Despite Brown's brave words, the tax- avoidance industry is in as much rude health as it ever was. Partly, it's the daunting challenge of knowing where to begin that confronts new governments. Partly as well, it's the embedded nature of the industry they're challenging.
In the main, tax havens are historical throwbacks. But ending one of the activities on which they so depend - the other is usually tourism - is legally fraught and socially contentious. (It's hard to conceive of this Chancellor ruling against them either, when his family's shares in the Osborne & Little luxury wallpaper firm are held in the Channel Islands.)
Allied to the havens are the advisory firms that make their living steering clients in their direction. The 'big four' accountancy firms alone are estimated to make £2bn a year from UK tax work.
Kevin Nicholson is PwC's head of tax. A tax inspector for three or four years, he crossed to the other side and now oversees in the UK a tax practice of 230 specialist partners and 3,000 employees. In all, in the UK, tax accounts for 25% of the entire firm, generating revenues of £659m. Of that £659m, about half is compliance and processing tax returns; the other half is consultancy, which includes advising on how to lower tax charges.
'We have to decide what we want from our tax system,' says Nicholson. 'The government has not taken time to engage properly with the public as to what it's trying to do. Effectively, we now have two budgets a year - the Autumn Statement and the actual Budget. On each occasion we tinker with the tax system. But we never stand back and look at the system as a whole. What is it we're trying to achieve?'
To that end, as part of its Britain Thinks initiative, PwC recently held a Citizens' Jury: 22 members of the public spent two days debating what should be the guiding principles of our tax system.
They heard evidence from a cross-section of expert witnesses. What the Citizens' Jury achieved, Nicholson says, was 'to put to bed any notion that tax is too complicated for the public to understand or that there's no desire to do so. It was clear over the two days that clarity around how tax is raised and spent was important to the jury and, furthermore, they are likely to support a tax system they understand.'
They came up with their own goals: taxation should be transparent in how revenue is raised and spent; it should be simple to understand and navigate; proportionate to people's ability to pay; fair, with every person and organisation paying their correct sum; certain, so that everyone knows what he owes, in a system that rarely changes; supportive, with consistent advice and help for the public; and the system should not punish people for doing the right thing: it should not discourage work, saving or planning for the future.
Put all that lot together and we would have a system that people respect, that might, just might, dissuade wholesale tax avoidance. Although even that still fails to pay heed to the fact we live in a global marketplace and every country is competing for business.
Ideally, every country should tear up its tax regime and we should all start again. But that is not going to happen. We can aim for greater international cooperation on tax, which is something the OECD is striving to achieve.
That, though, is all we can hope for. Tax avoidance, it is clear, is not going to go away.
There is, though, one possible cause of a change in behaviour: that we also live in an age where reputation is paramount. Nobody, no individual or company, wants to be a pariah; no one wants to be the target of abuse, boycotts and worse. That does not mean, however, the controversy will vanish. Rows as to who is right and who is wrong are set to continue.
15,598: number of British company directors resident in the top 10 offshore tax havens
£4.7bn: the amount individual tax avoidance cost the taxman in 2011-12
£47bn: income tax paid in 2011 by the highest-earning 300,000 people in the UK
$21trn: amount of money held worldwide in offshore accounts
13.5%: size of the UK 'shadow economy' as a share of GDP
Sources: Companies House, MRC, Oriel Securities, Tax Justice Network, Tax Research UK.