MORE SMOKE AND MIRRORS

If you were looking for a classic bit of spin, then David Cameron’s promise to reduce or remove the so called ‘Green levies and subsidies’ of energy bills comes close to being it. This is classic misdirection, it makes DC look good, and distracts people’s attention away from the recently agreed guaranteed (and well above the market rate) energy price for the planned nuclear plants, something that should permanently skew the alleged ‘free market’ for energy.

It also effectively ignores the excessive profits that have been generated by the ‘big 6’ a situation that has been aggravated by a lack of effective regulation. One way of the other we are all paying the price for effectively having a pretty much unregulated energy market. This is one of the legacies of the last Labour government, who spent 13 years in office sitting back and watching this situation develop. 

Excessive profits and Tax evasion - surely not?

The ‘big 6’ energy cartel members, coincidentally ramp up the energy bills as our winter approaches, yet this is only part of the ‘corrupt’ legacy that surrounds the few remaining energy giants. The independent on Sunday (27.10.2013) and Corporate Watch (a not-for-profit research group) have revealed that more than 30 UK companies have cut their taxable profits by racking up interest on debt from their owners.

This minimises or in some cases entirely wipes out their UK corporation tax bill.  As most of the owners are based abroad, 20 per cent of the interest payments would usually have to be sent straight to HMRC, minimising the overall saving. As a result of swift footwork by the accountants, the money is lent via offshore stock exchanges this means that it qualifies for a regulatory loophole called the "quoted Eurobond exemption", no tax is withheld.

Scotia Gas, 50 per cent of which is owned by SSE, the energy giant which is about to put its prices up by more than 8 per cent, has avoided an estimated £72.5 million pounds in tax. UK Power Networks and Electricity North West, responsible for running large sections of Britain's electricity network, have both saved more than £30m. Scotia Gas is the second-largest gas distribution firm in the UK, serving 5.8 million people in Scotland and in the South and South-east of England.

Half of it is owned by SSE, the rest is owned by the Ontario Municipal Employees Retirement System and the Ontario Teachers' Pension Plan. After they bought the networks from National Grid Plc in 2005, the new owners lent the majority of their money – about £530m at a 12.5 per cent interest rate – through the Channel Islands Stock Exchange rather than investing it in shares in the company.

Scotia has since paid interest of £537.3 million pounds on these loans. The £268.7 million pounds  of this that went to the Ontario pension funds cost the UK an estimated £72.5 million pounds in tax revenues. SSE Plc pays full UK corporation tax on the interest it receives as it is based in the UK but will have signed off the scheme.

More than 30,000 people contacted the Citizens Advice Bureau in the 13 days after SSE started the latest round of price hikes. It announced its increase on 10th October and was quickly followed by British Gas, Npower and Co-operative Energy. The massive rise in those contacting the charity represents a 55 per cent increase on the number of consumers normally seeking advice about the best power deals.

The Ontario Teachers' Pension Plan also owns National Lottery operator Camelot and Bristol Airport, both revealed to be using the tax-avoidance scheme last week. It is among several foreign pension funds investing through this legal loophole. Two of Britain's 14 privately run electricity networks – Electricity North West and UK Power Networks – also use the loophole.

A portion of every Briton's electricity bill payment is given to their local power network to pay for the running and maintaining of cables in their area. UK Power Networks, which owns and maintains power cables and lines for eight million people in London, the South-east and East of England, has avoided an estimated £38 million pounds since 2010 from paying £164.4 million pounds via the Cayman Islands to firms controlled by Li Ka-shing, a Hong Kong tycoon and Asia's richest man.

The Cheung Kong group also owns Northumbrian Water, among several water firms that use the quoted Eurobond exemption. Electricity North West owns and operates the region's electricity distribution network, connecting 2.4 million properties to the National Grid. It has avoided an estimated £30 million pounds in tax after sending £107.2 million pounds to its owners, JP Morgan Infrastructure Investments Fund and Colonial First State, since they bought it in 2007.

The Eurobond exemption was introduced in 1984 to encourage third-party investment into UK companies. But analysis of listings on the Channel Islands Stock Exchange and UK company accounts shows firms across the economy are using it to minimise tax bills by borrowing from their owners. More than £2 billion pounds a year has left the UK as interest payments to owners, avoiding an estimated £500 million pounds compared with if loan amounts had been invested in companies' shares.

Considering that other stock exchanges such as the Cayman Islands and Luxembourg also qualify for the exemption, the reality is that the total amount of tax being avoided is likely to be much higher. Incidentally HMRC, who are busy shedding jobs and cutting services to the bone, know that the exemption is being misused and even considered restricting it last year, but they backed down after lobbying from the financial industry. 

TAX TO GO?

News that Starbucks is planning to change the way it operates so that it pays corporation tax in the UK will be a small crumb of comfort to ordinary tax payers. Starbucks despite having around one-third of the UK coffee shop market, has only paid corporation tax only once in the past 15 years. In its simplest form Corporation tax is paid by foreign companies on profits made in the UK. UK-based companies pay corporation tax on their taxable profits wherever they are made. Starbucks, sold nearly £400 million pounds worth of goods in the UK last year, but paid no corporation tax at all, because it transferred some of the money to a sister company in the Netherlands in the form of royalty payments, it bought its coffee beans from Switzerland and paid high interest rates to borrow money from other parts of the business.

Starbucks is throwing in the towel in relation to paying Corporation tax; this may be timely as the House of Commons Public Accounts Committee has produced a report calling for HM Revenue and Customs (HMRC) to "more aggressive and assertive in confronting corporate tax avoidance". Interestingly enough HMRC revealed that in 2011-12, £474.2 billion pounds worth of total tax revenue accrued to HM Revenue and Customs (the Department) which was £4.5 billion pounds higher than for the period 2010-11. Oddly enough there was a decrease in corporation tax revenue of £6.3 billion pounds.

The House of Commons Public Accounts  Committee also heard evidence from heard evidence from Google and Amazon. Amazon has a reported turnover of £207 million pounds for 2011 for its UK Company (Amazon.co.uk), on which it has shown a tax expense of only £1.8 million pound, yet showed a European-wide turnover of €9.1 billion for its Luxembourg based company (Amazon EU Sarl) and a tax of €8.2 million. Amazon.co.uk is a service company in the UK providing services to Amazon EU Sarl for which it receives payment. That company is owned by a holding company, which is a subsidiary of Amazon's group companies.

Amazon subsequently provided a copy of the unaudited accounts for Amazon Europe Holding Technologies S.C.S for 2011 showing a profit of €301.8 million and no tax payments.  Amazon also provided information showing that for 2011, £3.35 billion pounds worth of sales were from the UK, 25% of all international sales outside the USA.  Yet Amazon has over 15,000 staff in the UK, invoices UK customers from the UK, hires UK staff in the UK, has inventory physically in the UK for UK customers and to all intents and purposes has the majority of its economic activity in the UK, rather than in Luxembourg, but pays virtually no corporation tax in the UK.

The inability of HMRC to properly curb aggressive tax avoidance schemes which are costing the UK billions of pounds was flagged up by the National Audit Office (NAO) The NAO revealed that HMRC was dealing with a backlog of 41,000 cases involving individuals and small companies, with up to £10.2 billion pounds at stake. I am sure that the news that Con Dem Chancellor George Osborne plans to introduce a general anti-avoidance rule and hold talks with other G8 developed countries about clamping down on tax avoidance will make us all sleep soundly in our beds – perhaps not!

ALL IN IT TOGETHER...

The House of Commons Public Accounts Committee has rightly criticised "cosy" deals between HM Revenue and Customs (HMRC) and big businesses over the way they settle their tax bills. Serious concerns have been expressed by MP’s about just exactly how some of the large tax settlements were reached. MPs believe that potentially there may be some £25 billion pounds worth of outstanding tax issues with some of the UK’s largest companies and they want HMRC to be much more open about its dealing with large firms.

Not surprisingly HMRC has said that the MPs had misunderstood the facts. If the MPs are correct and I see no reason why they should not be as whistle-blower from inside HMRC passed them some interesting information (according to Radio 4 on Tuesday morning). Perhaps they should do some digging to find out how many former HMRC employees have moved to potentially lucrative employment in the private sector.

Coincidentally the tax campaign group UK Uncut is taking HMRC to the High Court (today - Thursday 22nd December) to seek a judicial review to try to get them to reclaim millions of pounds in uncollected tax from Goldman Sachs. It's all a little awkward for David (‘Call me Dave’) Cameron as it either touched a raw nerve or at least exposed the lie at the heart of his much trumpeted “We are all in it together” – apparently not!