How top companies pay to keep the taxman at bay

Creative accountants, loopholes and international confusion all help in the battle to keep profits from the Treasury
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Britain's corporate tax avoidance industry is booming, notwithstanding the fall in the corporation tax rate from more than 50 per cent to its present 33 per cent since the Conservatives came to power.

While some companies adopt a highly moralistic approach to payment of their national dues, others take the view that paying tax is "a mug's game". A number go so far as to suggest that it is the duty of directors to pay as little tax as possible since that is in the best interests of shareholders.

A glance down the list of Britain's leading companies reveals that many pay a lot less tax than might be expected. For some, notably the water companies and other groups committed to significant investment programmes, this can be explained by the capital allowances available.

However, tax specialists point out that these allowances - which provide relief of only 25 per cent compared with the 100 per cent available when Baroness Thatcher first came to power - offer only limited assistance.

Far more useful for the tax planner are past losses. These can be offset for tax purposes against profits for years to come. Since the recession hit many companies hard, there will be no shortage of losses to be utilised in this way.

Multinational companies appear to have many more options. In the words of David Williams, technical tax partner at accountants Smith & Williamson, they can go a long way with "the intelligent use of tax treaties", as the agreements between different countries are known.

However, other specialists point out that the authorities have recently cracked down on "treaty shopping", as the practice of seeking to declare profits in more lenient tax regimes is known.

Moreover, Britain's comparatively low rate of corporation tax means international companies are increasingly keen to declare profits hererather than elsewhere.

Multinational corporations operate webs of inter-related companies dotted around the world. But John Whiting, tax partner at Price Waterhouse, points out that simply registering a company in the Dutch Antilles or similar low-tax territory is not likely to deter the authorities. They will look at where the business is carried out to decide whether tax is due.

Even so, international groups obviously present the authorities with more difficulties. Until recently even companies operating entirely within the UK could cause difficulties for the Inland Revenue because tax offices dealt with companies according to where their registered offices were. Accordingly, a company with a large number of subsidiaries could find its affairs being handled by several different inspectors.

Since 1 April 1994, though, there has been a "large groups office" specially designed to deal with the more complex companies.

It is presented as a service to the company in that it reduces the administration, but it also - in the words of a former inspector now working at a Big Six firm - enables the Revenue to see the bigger picture.

Although the Revenue says it is too early to comment on its effectiveness, the compliance unit, of which it forms a part, last year recovered pounds 6.1bn - equivalent to 3.5p on the basic rate of income tax.

The shift towards a more aggressive policy on non-compliance is also making individual inspectors more wary of attempts to deprive the Revenue of funds. "The inspectors are quicker to spot loopholes than they were in the past," says one tax expert.

Having said that, though, investigations can take a long time. Several years after a company has published accounts showing its presumed tax charge the Revenue can decide that it owes more or even less than the sum stated.

In the end, though, it is the complexity of the tax system that makes it worth companies - and individuals - paying a lot of money to avoid paying more to the Government.

As one accountant said when asked why some apparently profitable companies pay little tax: "They are just well advised." ( Graphic omitted )