Tax avoidance takes centre stage in UK Election (part 1)

With the UK elections less than two weeks away, the awkward subject of taxation and those privileged few who are allowed to avoid it has taken centre stage, with both main parties vowing to do more to tighten up the UK tax system and ensure everyone pays their fair share.

Labour leader Ed Milliband threw down the gauntlet by saying he would abolish the non-dom loophole – a proposal which was received with overwhelming public support, forcing the Conservatives, who have avoided addressing this issue in five years of coalition government, to offer vague promises of tightening up UK tax law if they are elected.

So-called non-doms are people who may spend most or all of their time in Britain, do most of their business in Britain and have their family homes in Britain, but are not considered British for tax purposes, thereby avoiding a large chunk of tax on their worldwide income.

Yet the incumbent Conservative-Liberal coalition government and the preceding labour government did little to address the phenomenon of tax avoidance, which a Tax Research LLP report said cost the UK £19.1 billion in the 2013-2014 tax year. The report, commissioned by the Public and Commercial Services Union, put the cost of tax evasion – which, unlike avoidance, is unlawful – at £73.4 billion, more than three times government estimates.

Even at the height of the financial crisis, the main political parties appeared loathe to address the issue – perhaps because both received large amounts of money from “non-doms”.

Former Conservative party deputy chairman Lord Ashcroft remained a non-dom for ten years after being made a Lord, his large donations to the party outweighing any concerns about his non-domiciled status. Lord Rothermere, the non-dom owner of the Daily Mail, uses his paper to push such public policy as cracking down on benefit fraud, yet sees no reason to become a UK resident and pay his full share of UK tax. Likewise the Barclay twins, owners of the daily Telegraph.

Successive governments have fretted that if they were to change the status of non-doms – these “wealth creators” so important to the UK economy – and subject them to the full weight of UK taxation, they would simply leave the country, taking their money with them and causing an economic meltdown in the City of London.

But if the richest Americans are for the most part American citizens and pay their taxes in the United States, and the richest Germans likewise – unless they can hide income in offshore banks or Delaware corporations – how is it acceptable for a large chunk of the UK’s richest residents to sidestep UK taxation by simply declaring they are not from the UK at all, at least for tax purposes?

The attitude of the UK government also implies that such wealth creators are an endangered species, limited in number, and need special rules to ensure they keep on creating this wealth. And if they left, there would be no one capable of taking their place. Perhaps the rest of the UK’s citizens should just tug their forelocks and keep quiet.

Successive UK governments have put very little into tackling tax evasion and avoidance, despite the massive cost to the economy. At the same time they have made massive resources available for cracking down on benefit fraud which costs UK taxpayers a much smaller £4 billion per year.

Meanwhile, in a lengthy saga extensively documented by UK satirical magazine Private Eye, the UK tax office under its former head David Hartnett – now, incidentally, working for HSBC, which is embroiled in a tax avoidance scandal of its very own – let telecoms giant Vodafone off the hook for more than £4.5 billion, reportedly over a series of lavish lunches.

Intriguingly, when the Public Accounts Committee under Margaret Hodge asked whether lawyers had been present when the deal to slash Vodafone’s tax bill was struck, he answered in the affirmative. However the PAC failed to ask whether the lawyers represented the UK tax office, nor to ascertain whether Hartnett was acting in accordance with the legal advice he had received.

UK Foreign secretary Philip Hammond caused mild uproar in March 2015 when he threatened to cause Russian leader Vladimir Putin “strategic embarrassment” by revealing the extent to which his oligarch cronies had siphoned off the country’s wealth and stashed it in the UK.

Underlying the threat was the suggestion that corrupt Russians have parked much of their ill-gotten gains in London’s real estate market, sending skywards prices that were already far beyond the reach of most Londoners.

Such a revelation should surely cause more embarrassment to a UK government which, far from cracking down on abuse of the UK’s light tough regulatory environment, seems to have done everything in its power to facilitate such abuse.

UK journalist and former tax inspector Richard Brooks documented much of the misuse of UK companies in a 2013 investigation published in the satirical UK fortnightly Private Eye, yet UK business secretary Vince Cable continues to deny that evasion is facilitated by the fact that offshore companies can be directors or owners of UK LLPs.

A further issue is that companies can continue to act as directors of UK LLPs. That is problematic, because if these corporate directors are incorporated in, say, the BVI, Gibraltar or Belize and their directors are not named individuals – and they are not required to be in many such jurisdictions – then the question of ultimate ownership remains open, as the true owners can continue to hide behind opaque corporations.

But that is another story. (to be continued)

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