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Did Vodafone avoid £6bn of tax? As protesters gathered outside its shops last week, both the company and Her Majesty's Revenue and Customs dismissed the claim as an urban myth. That, for the media, was the end of the story. But in accepting this account journalists made an unsafe assumption: that Vodafone and Revenue & Customs are on opposing sides in the tax battle. Over the last few years the government tax office appears to have been mutating into a subsidiary of the corporate avoidance industry.
It's arguable that the UK government does not have a spending crisis; it has a tax avoidance crisis. Official accounts suggest that the tax gap amounts to £42bn. Richard Murphy of Tax Research has demonstrated that this figure cannot be correct, as it contradicts other government statistics. He estimates that avoidance now amounts to £25bn a year, evasion to £70bn, and outstanding debts to the tax service to £28bn: a total of more than £120bn.
That's roughly three-quarters of the budget deficit. It's equivalent to 80% of the UK's revenue from income tax. By comparison benefit fraud, which both the government and the rightwing press emphasised in order to justify the cuts, amounts to £1.1bn a year. No one would claim that all this missing money could be recovered. But even if only 20% were clawed back, the most damaging cuts could be reversed.
So the government is frantically seeking to close the tax gap? You're joking, of course. The comprehensive spending review will cut the revenue service by 15%. It had already been hacked to bits by New Labour. In 2005 Gordon Brown merged the Inland Revenue with Customs and Excise to create HMRC. Between them they had 99,000 staff. Since the merger this has fallen to 68,000. Some of the staff cuts were the result of sensible efficiencies. Others attacked the service's core functions. The money it spends on fighting tax avoidance, for instance, has fallen from £3.6bn in 2006 to £1.9bn today.
Many of the crises HMRC has suffered since then – such as the recent pay as you earn fiasco – are the result of Labour's cuts. A parliamentary report found that people working for the revenue had the lowest morale of any civil servants. HMRC is hopelessly outclassed by corporate ruses: the Liberal Democrat Treasury spokesman Lord (Matthew) Oakeshott compares it to "a fat policeman chasing a speeding Ferrari". Now its staff will be cut again: to 56,000 by 2015. The government announced that an extra £900m would be spent on tackling tax avoidance. It turned out that this was magic money: nothing but a reallocation of funds HMRC already possessed.
This cut, in the midst of an economic crisis, looks like madness. It's like cutting your household bills by deciding to stop commuting to work. While the government's new strategy for reducing benefit fraud, according to the Association of Revenue and Customs, is likely to harvest £3 for every £1 it spends; money invested in HMRC to deal with tax avoidance and evasion brings in £60 for every £1 spent.
Seen as a means of reducing the deficit, the policy makes no sense. It becomes explicable only when you understand it as a response to political opportunity, another application of the shock doctrine. The Tories have seized the chance afforded by the economic crisis to free corporations and the very rich from their obligations to society.
It's not as if they were oppressed in the first place. The last Conservative government cut corporation tax from 52% to 33%. In 1999 Brown cut it again, to 30%. This, he boasted, was "now the lowest rate in the history of British corporation tax, the lowest rate of any major country in Europe and the lowest rate of any major industrialised country anywhere". Labour then cut it again, to 28%. George Osborne has promised to reduce the rate to 24%.
Murphy points out that, thanks to tax avoidance, the effective rate of corporation tax is now 21%. If current trends continue it will be 17% by 2014. This means that big business will soon pay tax at a lower rate than small companies (which can't afford sophisticated avoidance strategies) and at a lower rate than basic income tax. The richest companies in the UK will surrender less of their income than the poorest workers.
Some companies pay less than others. A recent edition of the BBC's File on 4 found, for instance, that the chemist chain Boots, after relocating to a post office box in Switzerland, has legally cut its tax bill from more than £100m a year to about £14m. That's roughly 3% of its profits.
If you expect HMRC to come out fighting, you'll be disappointed. In August its permanent secretary, Dave Hartnett, told the Financial Times: "We are sometimes too black-and-white about the law." From now on, the FT reported, the tax service "will adopt a less combative approach to resolving tax disputes with businesses"; this would be "welcomed by businesses critical of the Revenue's uncompromising approach to litigation and also chime with the coalition's 'open for business' message".
Workers at the Revenue tell me that some offices have been instructed not to chase business debts of less than £20,000, but are still expected to send threatening letters to people who've accidentally been given an extra £200 in tax credits. "The whole system is falling apart. It's predicated on allowing big business to get away with billions, while pursuing the poorest."
So did Vodafone wriggle out of paying up to £6bn in tax? We'll never know. But we do know that even the company appears to have been surprised at how little it got away with paying: it set aside £2.2bn to settle its case with the Revenue but had to pay only £1.25bn. Private Eye makes a strong case for another £5bn which, it says, the company legally avoided by channelling about €18bn through a subsidiary in Luxembourg, where the money was taxed at less than 1%. HMRC agreed that the arrangement could continue without further challenge, raising the alleged shortfall to the UK to £6bn.
HMRC's inability or unwillingness to pursue big tax avoiders means that taxation shifts from the rich to the poor. As corporate payments fall, either the poor must pay more or services must be hit even harder. Regardless of the exact amount Vodafone avoided, the protesters are right to picket its shops (and they might have a go at Boots while they're at it). We are living in a country where the poor bail out the banks, while the rich keep their billions intact.
Rather than make some of our biggest businesses pay tax why don't we just target the poor and take away their benefits :O