The extent of corporate tax avoidance, and the anger it provokes, widened considerably yesterday with revelations that a leading investment bank has been using a trust based in the Channel Islands to avoid company and staff taxes on payments, including bonuses.
The bank, JP Morgan, is expected to reach a £500m settlement with the Government over a Jersey-based trust, to which more than 2,000 current and former staff will contribute, according to a report in the Financial Times. The trust fund has been running for 20 years, and is thought to contain anything between £2bn and £9bn. Amazingly, US citizens who worked at the bank were barred from participation in the scheme because of US tax laws.
The news coincided with nationwide protests yesterday at more than 40 branches of Starbucks, the US-owned coffee-shop chain which has become infamous, and subject to boycotts, for paying what has been called "single-shot taxes on Venti-size sales". Several branches were forced to close as demonstrators occupied them in protest at the firm – which has had revenues for the past 14 years of £3bn, yet paid only £8.4m in corporation tax throughout that time, including no tax for the past three years. Starbucks has said it will pay £20m over the next two years in reparations, an offer widely derided.
There has yet to be a similar offer from the other firms known to have paid little or no corporation tax such as Google, with UK sales of £2.5bn, but tax paid of only £6m; and Amazon, which reported in the US revenues from the UK of £3.2bn, but declared a turnover of only £147m on which it paid corporation tax of less than £2m. The scale of their avoidance can be gauged by the rates of tax paid by other leading retailers: Lush (42 per cent); John Lewis (35 per cent); M&S (27 per cent), and Next (26 per cent). The rate paid by Amazon is less than 1 per cent. The Independent on Sunday last week revealed that Premier League football clubs paid only £3m in corporation tax, despite making more than £150m profit, a rate of 2 per cent.
The JP Morgan scheme used an employee benefit trust (EBT), which enables companies and staff to avoid paying employer's national insurance contributions and income taxes. Many are now being wound up after laws were passed clamping down on their use. An HM Revenue & Customs spokesman said: "The Government has legislated to remove any doubt that arrangements involving third parties, including EBTs, are ineffective as a way of avoiding tax." A spokesman for JP Morgan told the FT: "Our employee trust has always been transparent... and its independent trustee has consistently paid taxes in accordance with UK tax law." He added: "In addition to taxes paid by the trust, JP Morgan has paid, on average, more than £1bn of corporation and payroll taxes to HMRC annually over the past decade."
Richard Murphy, director of Tax Research UK, said the settlement "proves for two decades the tax industry has been out of control, selling abusive schemes that are now beginning to unwind". He added: "[It is time] to bring them back under control; we need to introduce a general anti-abuse principle which stops this industry in its tracks... JP Morgan is part of a massive tax-avoidance area which HMRC has been working for several years to close and recover the tax. There may be hundreds of millions of pounds more to get."
Richard Bacon, a Tory MP and a member of the Commons Public Accounts Committee (PAC), agreed that something must be done. He said: "The Government has been doing the same thing for decades, adding 700 pages each year to the tax pages, expecting that to get rid of loopholes, but they just create new words for clever accountants and lawyers to play with. The problem is we have a very complicated tax system; we need much greater simplicity and lower tax rates."
The Government is currently consulting on a general anti-abuse rule (GAAR) targeted at artificial and abusive tax-avoidance schemes, with a view to bringing forward legislation next year. For Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, simplicity is key. She described "complexity" as a "key problem with the current tax model", adding that the GAAR should "help to act as a disincentive" against "abusive, extreme tax avoidance arrangements".
For Mr Murphy, however, this is not enough. "It is only intended to tackle the most abusive of pre-packaged tax-avoidance schemes eg, film partnership abuse and the likes of K2 of which Jimmy Carr was a member. That's important, but it deliberately goes nowhere near the sort of corporate tax-avoidance that Starbucks, Google, Amazon and many others have done," he said. "As such, it falls far short of public expectation and could even provide an excuse to those avoiding [paying tax] by saying, since it does not impact on their behaviour, it must be acceptable. That's worrying."
The Chancellor, George Osborne, said in his Autumn Statement that the coalition would get tough on tax dodgers, promising HMRC an extra £154m over the next two years to crack down on tax avoidance and evasion. But politicians, economists and campaigners said the whole system, and the loopholes it's created, needed to be overhauled.
Margaret Hodge, chair of the PAC, said: "The Government must treat this with urgency; they have talked the talk, now they must walk the walk. There are things they can do straight away; they don't have to use the taxpayer's pound to buy services from companies who avoid tax, and they don't have to wait for the press to name and shame the culprits; they could do that themselves."
Catherine McKinnell, Shadow Exchequer Secretary to the Treasury, said the Government needed to ensure HMRC "have the resources they need to do the job. Pressing ahead with around £2bn of cuts and the loss of 10,000 staff over the next three years risks being a false economy."
Protesters whip up a storm at 40 Starbucks outlets
Tax-avoidance protesters descended on more than 40 branches of the coffee chain Starbucks yesterday as chaotic scenes led to the closure of two of the stores. The demonstrations, organised by the activist group UK Uncut, took place at locations including Birmingham, Aberdeen and Bristol.
The protests come after the US-owned coffee giant said it would pay some £10m in UK corporation tax for each of the next two years, following revelations that it paid just £8.6m in 14 years of trading in Britain and nothing in the past three years. UK Uncut yesterday dismissed Starbucks' offer as a "PR stunt". It said it also wanted the "day of action" to highlight the disproportionate impact of spending cuts on women.
Sarah Greene, a UK Uncut activist, said: "It is an outrage that the Government continues to let multinationals like Starbucks dodge millions in tax while cutting vital services such as refuges, crèches and rape crisis centres... The Government could easily bring in billions by clamping down."
One of the most high-profile protests took place at Starbuck's "flagship" café in Conduit Street, London. Around 100 protesters tried to stage a peaceful sit-in and turn part of the shop into a makeshift crèche. But within 15 minutes police stormed the outlet, ordered everyone to leave or risk arrest, and closed the branch. Demonstrators moved to another Starbucks, where they continued a sit-in on the street after police barred entry.
Journalist Charlotte Raven was among the handful of mothers who attended the protest with her children. She said she was angry at the Government's failure to bring firms such as Starbucks to heel while threatening children's services that her family relies on.
An untaxing guide to the big issue
What is the difference between tax evasion and tax avoidance?
Tax evasion is illegal; for example, not declaring income or inappropriately claiming expenses. Tax avoidance is about using the law to reduce your tax bill. Starbucks paid no corporation tax in Britain over the past three years, despite UK sales of nearly £400m last year. This was via legal mechanisms.
Who pays corporation tax? The corporation, its owners or the people who buy its products or services?
Corporation tax will be paid by the company's owners, or shareholders. Some people argue, however, that because the tax affects the cost base of a company, it could also be partially borne by its consumers.
What is the problem with the current tax model?
In a nutshell, it's too complicated. For campaigners, it is "skewed in favour of big business", because they can afford to hire accountants, lawyers and bankers to find legal loopholes. Others claim the problem lies in the fact that companies' profits are taxed across up to 100 jurisdictions, with different tax rates. A company's corporation tax bill depends on how much profit it makes in each country.
If most tax avoidance is because of loopholes, why do governments create those loopholes?
Governments do not create loopholes intentionally. Some tax avoidance occurs because of uncertainty in the law – Britain, for example, has one of the longest tax codes in the world, comprising about 15,000 pages – while in other cases companies seek specialist help to find ways to reduce their tax legally.
Can we ever get rid of tax avoidance? If not, why not?
While we have 194 countries in the world, and differing tax and accounting systems, there are always likely to be loopholes. But avoidance can be mitigated, by providing disincentives to avoid tax, and penalties if companies are found guilty of it.
What is the Government proposing to do, and will it work?
The coalition is consulting on a General Anti-Abuse Rule, targeting artificial, abusive tax-avoidance schemes, with a view to legislating next year. Some say this will not quash most tax avoidance, or the kind that Google, Amazon and Starbucks carried out, as it will focus only on extreme cases.