Collecting Tax is about Political Will – Part 2
In part 1 of this feature, Boots, Heathrow Airport and Manchester United were given as examples of tax avoidance. These companies were purchased with debt, and the debt was loaded onto the balance sheet of the company so that tax relief could be claimed on the interest paid. This tax avoidance is, in reality, the taxpayer paying part of the purchase price for buying the company, but getting none of the profits!! However, loading the company that has been bought with debt, and then offsetting the interest on the debt against tax, is quite benign compared with artificially creating debt and then offsetting it against tax. But that is exactly what numerous multinational companies are now doing!
In France, tax relief is set at 85% of the interest paid, and will reduce to 75% from 1st January 2014. In Holland, there is only 100% tax relief on interest paid if the debt is less than double the equity, which is the value of all the company’s assets after allowing for all the debt and/or liabilities. In Germany, tax relief on interest paid is limited to 30% of EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation).
Therefore, for any tax savvy company trading in a number of countries, including the UK, it makes total sense to load all their debt onto the UK Company, and get 100% tax relief on interest paid. But the aggressive tax avoidance – or plain greed – does not stop there, because there has to be serious doubt about the legitimacy of some of these loans. The favoured modus operandi of these companies is to ensure that the money borrowed by the UK company is actual lent by a non-UK company – owned by the same company!!
When UK companies pay interest to non-UK companies, it is normal to withhold 20% of the amount as payment to Her Majesty’s Revenue and Customs (HMRC). However, when the company does not lend money direct, but as quoted Eurobonds listed on a recognised stock exchange in a tax haven (such as Guernsey) then the 20% withholding tax does not apply. This is exactly what has been done by six water companies (Thames, Anglian, Northumbrian, Yorkshire, Sutton & East Cheam and South Staffs) to the tune of £3.400,000,000*(3.4 BILLION!!)
These debts are inter-company debts, not ‘real’ debts to a third party, and should not be eligible for tax relief. To add insult to injury, the interest rate is far higher than the same UK companies would be charged at a normal bank (if such a species of bank now exists!!) The worst of these is Northumbrian, who charged itself 11% interest, to be picked up by the UK taxpayer.
In total, the water companies have accumulated £49,000,000,000 (49 BILLION) of debt, with some £3,000,000,000 of interest payments in 2012. Additionally, there was nearly £1,000,000,000 paid in dividends to the shareholders. Unless there are wells in our gardens, we are all forced to pay these charlatans for our water. This is Thatcher’s legacy.
All political parties agree that Government expenditure has to be reduced for the years ahead, creating further austerity and inflicting further misery on the average citizen. Yet none of them will consider collecting tax as an alternative, since this requires political will. Excuses about needing international agreement are simply that – excuses. The French, Dutch and Germans did not need an international agreement to allow less than 100% tax relief on interest paid, and neither does Britain. This can be done quickly if there is political will, but where is it? And why won’t the government do it? Austerity could be ended overnight…
Michael Gold
*http://www.accountancyage.com/aa/news/2244254/uk-water-companies-accused-of-tax-avoidance
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