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The tax scams that shore up the profits of the rich

This article is over 11 years, 10 months old
David Cameron has condemned Jimmy Carr’s tax scam as morally wrong but the Tories have entrenched tax benefits for the rich, writes Simon Basketter
Issue 2309
The tax scams that shore up the profits of the rich

Avoiding tax isn’t just for comedians and ageing boy bands—it is the way British capitalism operates.

The City of London is itself one big tax haven. Dodgy accountants and David Cameron talk about the importance of “being tax competitive”.

What they really care about is making it easy for the rich to pay less tax through “light touch” regulation—which allows tax scams to flourish.

Here’s how one scheme works. Fat cat income and bonuses are paid into an offshore trust (see right). The trust then lends the cash back. There is no tax payable on a loan. This is only one of a myriad of mechanisms that the rich use to avoid paying tax.

First New Labour and then the Tories cut tax on profits. But it’s not enough for the rich. Out of the top 100 companies on the British stock market, the FSTE 100, 98 use tax havens.

At least £25 billion in tax is avoided every year according to the TUC. Rich individuals avoid £13 billion while the 700 largest corporations make up the rest.

A study last month by HM Revenue and Customs found that firms are using avoidance schemes to cut their income tax rate to an average of 10 percent.

Companies only pay tax on their profits. This means that it’s possible to structure your company so that, on paper, you are making almost nothing.

That’s how one third of Britain’s 700 top businesses got away with paying no tax at all in 2007, according to the National Audit Office.


That year Debenhams received around £9 million in government money and paid nothing in tax. It did this by having a complex chain of ownership, structured to take account of “liabilities” which its owners control.

Debenhams can always make a loss—because the private equity firms that own it can juggle the interest rate on the loans they used to buy it up.

Another technique for avoiding tax is transfer pricing. Here, purchases and sales take place within the same company. Items are sold from high-tax countries to low ones, so cutting the amount of tax paid.

Tax havens come in to enable the rich to move their cash around but still have easy access to it. This is why just 90,000 people live on the British Channel Islands—yet 800,000 companies are registered there.

It’s estimated that there are 400,000 firms and around one trillion pounds worth of assets registered in Jersey alone. All are untaxed. Similarly, the British Virgin Islands have 30,000 people and 457,000 companies.

And according to the US government, some 75 percent of the world’s hedge funds are “located in” the British Caymans. There are some £4.5 trillion of US bank deposits located in British “crown colonies”.

British bosses sit at the heart of a global scam. The idea is to make poor people pay too much tax, rich people pay too little, and really rich people and companies pay hardly any at all.

Even a Jimmy Carr joke is funnier than that.

Tories protect the bosses

The Tories introduced a scam allowing companies to move more money to tax havens and pay just 5.5 percent tax on it in the last budget.

They are also introducing territorial taxation for companies. This means that once money is declared in one place it can’t be taxed in any other. This will encourage offshore tax avoidance.

On top of this, planned new rules on tax avoidance could hand more control to private accountants. The plan will have more tax experts looking at which tax exemptions are illegal, rather than HM Revenue and Customs.

Tax campaigner Richard Murphy has compared this to “putting the foxes in charge of the hen house”.

Lib Dem Vince Cable says he wants to make companies more transparent. His proposals mean that companies will have to say how much they pay their bosses. But the plans won’t force firms to pay bosses any less.

Laws make sure the poor pay

Most workers simply pay tax. But for the wealthy and for companies, tax law is designed to cut the amount they have to pay. British tax law is the longest and most complex in the world.

The complete Tolley’s Tax Guide—the handbook of tax law—is 11,520 pages long. That’s more than double the 4,998 pages of the 1997 edition. The section on corporation tax on profits alone is now 1,897 pages.

Nicholas Shaxon writes in his book Treasure Islands, “Imagine you are in a supermarket and you see well-dressed individuals passing through a special checkout.

“There is also a large item added to your bill, extra expenses, which subsidises their purchases. Sorry, says the supermarket manager, if we didn’t charge you more they would shop elsewhere. Now, pay up.”

Amazon in Luxembourg

Shopping giant Amazon generated sales of £7.6 billion over three years—but did not pay any corporation tax on the profits. In 2006 ownership was transferred to Luxembourg.

Vodafone and Apple are also based there, making it the download capital of Europe. And it is, on the basis of bank transfers, rather surprisingly the richest country in the EU.

Cameron keeps it in the family

Cameron’s father was an early adopter of tax avoidance schemes. Cameron senior was the chairman of Close International Asset management and other tax avoidance firms that ran funds in Guernsey, Jersey and Panama.

Cameron’s father-in-law, Viscount Astor, has a home on the Scottish island of Jura. It is a favourite holiday spot for the Camerons. The home is owned by a company registered in the Bahamas.

Millionaire cabinet members including Andrew Mitchell, Philip Hammond, and Jeremy Hunt all avoid tax too. George Osborne has a £4 million trust fund, most of which is invested offshore.

The very rich pay very little

There were 71 billionaires in the UK in 2010. The total tax they paid in 2009-2010 was estimated to be £174.5 million. That’s a tax rate of 0.17 percent.

In 2006, the last time there was a breakdown of the figures, two billionaires made up some 65 percent of the payments.

If billionaires stuck their money in an ordinary savings account and received two percent interest, they would pay around a billion pounds in tax on the interest alone. That’s 250 times more than they pay now.

Nice “work” if you can get it.

A helping hand for hedge funds

Nearly all hedge fund managers pay a 10 percent tax rate on their income. There are 15,000 earning more than a million a year.

Income from private equity and hedge funds is classed as “carried interest”, which keeps it away from the tax collectors. This technicality was brought in after payments in gold or antiques were made taxable.


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