Corporate Tax Avoidance

Charlie Elphicke Excerpts

Monday 7th January 2013 Commons Chamber

[Ian Swales]

That is an interesting idea and I thank the hon. Gentleman for the suggestion. HMRC needs to look much more closely at companies that have that type of business model. I agree that we need to start making some presumptions.

[Charlie Elphicke (Dover) (Con)]

Is it not the case that for physical goods, Amazon would have to account for VAT in the UK? The issue is that for electronic goods, it accounts for VAT in Luxembourg, so Luxembourg is eating our VAT lunch.

[Ian Swales]

That could well be the case, and I shall speak about that later, too.

The person who wrote to me saying that they could not get a VAT number for the iPad they bought for business purposes was told that Amazon was unable to provide one. Had that been made clear to the buyer, they would have gone elsewhere to get a lower net price. Who knows, they might even have gone to Comet.

Amazon’s turnover in Europe is €7 billion. The gross VAT on that, even at Luxembourg’s lower rate of 15%, would be more than €1 billion. Where is it paid? That would be €2,000 a head for every man, woman and child in Luxembourg, but I would guess that is not paid at such a rate. I would also guess that Amazon’s UK order fulfilment subsidiary pays little or no VAT. I ask the Minister urgently to investigate how the business model operates.

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[Charlie Elphicke (Dover) (Con)]

It is a pleasure to speak in this debate, and I congratulate my hon. Friend the Member for Redcar (Ian Swales) on securing it. I wish to discuss an area that has not been so deeply explored this evening, although it is the area where we are not as powerless as we are in so many areas of this debate because of international obligations. I wish to focus on companies in receipt of money from taxpayers under Government contracts.

I have undertaken a study of technology companies that benefit from taxpayers’ money under Government contracts and have found that Oracle, Xerox, Dell, CSC and Symantec paid no corporation tax whatsoever last year, despite earning more than £474 million from Government contracts and having a UK turnover of £7 billion. Overall, my study of 10 technology companies in receipt of more than £1.8 billion of taxpayers’ money found that they paid just £78 million in taxes on UK earnings of just over £17.5 billion of turnover. On the basis of group profitability—we are looking at the consolidated international group here—the 10 technology companies would have made more than £3.3 billion in profits in the UK, resulting in a tax liability of £879 million. The UK tax actually paid was just £78 million, so, according to my research, the tax gap was £801 million.

We are seeing big business tax avoidance on an industrial scale. To me, it is unacceptable, unethical and irresponsible. Hard-pressed families are struggling to get by and to pay their taxes—and they do pay their taxes—so it is quite wrong that highly profitable businesses abuse our tax system. We urgently need reform. No Government contracts should be awarded to businesses that are fleecing our tax system, and the Government should examine how much UK tax companies pay when deciding who gets plum Government contracts. If taxpayers’ money and a Government contract are being awarded, we should look at the taxpayers’ money we are paying out and the tax money that we get back when we assess the value for the nation of awarding a particular contract. If, for example, a Government contract for £500 million is awarded to a computer company, it should be asked what tax it pays. If it pays zero tax in the UK, and another company is paying £40 million in tax in the UK and says that it will do the work for £520 million, the balance of best value shifts. We should consider the question holistically, rather than simply thinking about how much the contract should be let for.

[Ian Swales]

The hon. Gentleman refers to a point that I made. Does he agree that if we are asked to give a Government contract to a company that makes no profit, we should take a view about that company’s long-term future? We should play it at its own game and ask whether, if it does not make any money, it will be around for the long term.

[Charlie Elphicke]

My hon. Friend makes a powerful point, but we all know the reality. We all know that companies are using Luxembourg sandwiches and parking profits in Bermuda while claiming that they are sending them back to the States, as the IP suddenly is not in any intellectual property territories outside the United States. I find that unacceptable.

Let us take Oracle as an example. The company had a turnover of about £1.4 billion and a global operating margin of 32%, so its UK projected profits should have been about £446 million. Its declared profits in the UK, however, were basically nothing and it did not pay any tax whatsoever. I regard that with concern, because its Government contract earnings were about £42 million.

Even more concerning was the fact that a small amount of tax was paid by Microsoft, which is interesting as it has about £700 million from Government contracts and paid £19 million in the UK on a turnover of £2.35 billion. It has a global operating margin of 40%, so if we apply the consolidated operating margin to the UK we can see that its projected profits in the UK would be about £945 million. Its projected tax would have been about £246 million. I am not saying that Microsoft should not have some wriggle room for the fact that its IP was generated outside the UK, but when we award Government contracts we should take into account how much tax will be paid in the UK by the person to whom it is awarded. There are difficulties with that under European procurement rules, but we could have a box on the procurement form asking how much corporation tax and how much in PAYE the company anticipated paying in the UK in relation to that contract. That would enable us to assess best value in awarding Government contracts. We could and should consider that.

I am particularly concerned about IBM, which turns over about £4 billion in the UK but has a global operating margin of 16%, which means that its UK projected profits should have been about £642 million. Its declared profits in the UK, however, were about £327 million. Again, the tax gap is substantial and rather than the projected UK tax take of £167 million, only £41 million of tax was paid. We have a shifting and sliding in that the amount of tax we are getting is rather less than one might expect, even if we take into account the question of IP being based elsewhere and not being generated in the UK. We need to consider that more deeply and should consider the whole question of royalties paid for IP as well as licensing fees.

We should see how we can make the corporation tax system in this country flatter and much simpler by getting rid of a lot of the deductions that enable our tax system to be flouted. That would bring the rate down and give the UK a system with even lower tax than we already have.

I pay tribute to the work that the Government have done; I am merely trying to advance the argument, the discussion and the debate. We have a Chancellor who has started to take real and positive action in the OECD to start the discussion on how to change the international rules. We have a Prime Minister who is leading an international summit in Northern Ireland and making tax, including international tax, a key priority. The Government have taken tax very seriously, and rightly so. Over the past 15 years, the amount of income tax paid by the working nation has gone up by about 80% whereas the amount of tax paid by business has gone up by just 6%.

The previous Government were very keen on the whole prawn cocktail circuit; they were keen to be close to big business and to let it off the hook. It is well known that the former Prime Minister and his adviser, now the shadow Chancellor, were keen that the Revenue took a softly, softly approach to big business. I think we all feel that it has gone too far, and it is time to take international as well as domestic action and to be much firmer on big businesses that do not pay their fair share.

We have a deficit to clear. We need the revenue, so we need to be firmer, but we also need a system that has a level playing field, where there is a lower, more globally competitive rate that makes it more attractive for businesses to set up and trade in Britain whether they are domestic or foreign. The way forward is to start an honest and open debate about bringing in a flatter tax system in the UK and taking the rate of corporation tax right down, so that hopefully it will be even lower than in Ireland.

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[Simon Hughes (Bermondsey and Old Southwark) (LD)]

This has been a really good debate. I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for going to the Backbench Business Committee and persuading it, with the support of some of us, that this is a debate we ought to have. We are on the centre court at the beginning of a new year, and I think that the Exchequer Secretary and his colleagues will be aware that this issue will remain an important one for the Treasury and the Government for the second half of this Parliament.

We have heard valuable contributions from among others my hon. Friends the Members for Bognor Regis and Littlehampton (Mr Gibb), for Stevenage (Stephen McPartland) and for Dover (Charlie Elphicke) and the right hon. Member for Oldham West and Royton (Mr Meacher), who is not currently in his place. We have paid tribute to others who have been part of the culture change, such as ActionAid’s tax justice campaign, people such as Richard Murphy and journalists such as Ian Griffiths and others who have ensured that we confront the issue.

My constituents, like yours, Mr Speaker, and others, will see posters reminding them that they have until 31 January to complete their tax returns if they have not done so already—MPs included. We all understand that there is a civic obligation to pay tax as individuals, but we all expect, particularly in times of austerity, that there should also be a corporate obligation to pay due tax, and that is what the debate is about. If we are encouraging people to be entrepreneurial and to start their own businesses, it is not a great encouragement for someone who wants to set up a coffee shop, a book shop or a garage, for example, to think that they will have to pay tax while some great international company might put them out of business or prevent them from gaining a foothold in the market by avoiding paying. It is about justice between small and medium-sized enterprises and big international enterprises.

There is a UK obligation, because some of the companies that offend most use tax havens that are UK Crown dependencies. Bermuda, the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands, Guernsey, Jersey and the Isle of Man feature regularly as places where the system is abused. There is clearly both a national obligation—we can do things ourselves—and an international obligation to act, and I am grateful that the Prime Minister understands that, as do others, and that it will be on the agenda for the G8 summit in Fermanagh later this year.

As I made clear earlier, when intervening on the right hon. Member for Oldham West and Royton, it was not really fair to criticise this Government on corporate tax, because all recent Governments have been very weak on it. The right hon. Gentleman conceded that new Labour had been poor and criticised it equally. I compliment the Government on their investment in additional effort in the Treasury on this issue, on the commitment to implement the anti-abuse rule later this year, on putting the subject on the international agenda and on making the UK more competitive for business to provide a disincentive for trying to fiddle the system. In particular, I congratulate my right hon. Friend the Chief Secretary to the Treasury on picking up on an idea I have lobbied him about a great deal: making sure that the Government look at those companies with which they, and local government, do business and ensuring that we do not give Government money to those who do not pay their taxes properly; it is exactly the right principle that they should not get contracts from the Government either. Of course, there have also been bilateral agreements with other countries.

Let me flag up one main area and one subsidiary area —in relation to the tax treatment of interest payments—which I ask Ministers to look at. Traditionally, interest has been seen as the cost of doing business while dividends are seen as the distribution of profits. For that reason, under accounting rules, interest payments are deducted from operating profits before corporation tax is paid, while dividends are distributed after tax has been paid. Debt can be used to strip out cash generated by companies and to move it offshore before it is taxed. There is also a large problem with private equity funds buying companies, making those companies take on a lot of debt, and using the cash to pay off the loans that they took out to buy them in the first place, so that they can end up owning a company for a fraction of its real price. Companies receive a huge tax advantage from the ratcheting up of debt.

In the finance sector, that is called creating a more efficient capital structure, and people will say that they are just working within the structure put in place by the Government. However, it has a huge effect on the businesses concerned and on the economy as a whole, as well as on the Treasury. It is not about efficiency, because the companies affected are often left seriously weakened and at risk. Many operate on the margins and are unable to withstand any financial shocks. That magnifies the impact of recent downturns. Comet is a recent example of the consequences of excessive borrowing. The increase in debt gives companies far less freedom to invest in new machinery or to make other capital investments, and that holds back growth.

[Charlie Elphicke]

If we believe in deleveraging the economy and deleveraging business, should we not put equity and debt on a similar footing?

[Simon Hughes]

That is a valid point.

As well as tax treatment of interest payments being an unfair incentive to avoid paying due taxes, shareholder loans are a particularly iniquitous example of these practices. That is my second and subsidiary point. Where owners of a company are receiving interest payments, they can manipulate the interest rates in order to remove their tax liability. The current transfer pricing rules are supposed to stop that, as they prevent a company from lending to a subsidiary at a higher rate than the market rate, but what is the market rate in a negotiated transaction between two parties that are, as it were, two sides of the same coin?

I want to give three examples of companies involved and then conclude with some proposals to add to those of my hon. Friend the Member for Bristol West (Stephen Williams) and others. I have often cited in this House the water industry in general and Thames Water—the local water company here, and a monopoly—in particular. In 2012, it paid £500 million in interest, which accounted for the vast majority of its operating profit of almost £650 million. In the same year, it paid no tax and instead received a tax credit of £38 million. In the previous year, it paid just £500,000 in corporation tax despite showing an operating profit of £600 million. Half its debt has been issued through its finance subsidiary in the Cayman Islands. Put simply, Thames Water raised the debt and gave the cash to Macquarie, which is based in Australia, so that that company could pay off the loans that it took out to buy Thames Water. The level of debt in the company is now equivalent to 90% of its value. Arqiva, which has Government contracts, receives annual revenues of about £1 billion a year, holds £3 billion in debt, and has an interest rate of 13%, which is extraordinarily high for a monopoly infrastructure provider. Boots, now Alliance Boots, has escaped paying £500 million in tax through a complex arrangement of companies.

I hope that in the forthcoming Budget Ministers will look at the tax treatment of interest payments and, specifically, do what countries such as Germany do in limiting the amount of interest payments that can be deducted before tax, adopting the earnings-stripping rule which applies there and elsewhere. I also ask them to consider whether that should be further dealt with if the company uses a tax haven, to address the question of UK dependencies, and to have an annual debate, as part of the Budget, on how to avoid such abuses of the tax system.