Eurobond tax scandal: Tax avoidance figure is just 'the tip of the iceberg’, Margaret Hodge tells HMRC

Public accounts committee grills tax officials over botched figures

Senior tax officials were criticised by MPs yesterday because their estimate of £35bn lost every year in unpaid tax is just “the tip of the iceberg”, as it does not include the use of legal avoidance schemes such as the one most recently reported in The Independent.

Officials from HM Revenue and Customs were interrogated by The Committee of Public Accounts at a hearing in Westminster over its failure to claw back tax from big businesses. Margaret Hodge MP, chair of the committee, listed all the legal tax avoidance schemes used by household names that would not be included in HMRC’s calculation of the tax gap and said, “at the moment, therefore, your tax gap is clearly the tip of the iceberg”.

A joint investigation between this newspaper and Corporate Watch revealed last week that more than 30 companies, including major high street chains, the Channel Tunnel rail link and Camelot, are using a tax-avoidance scheme by which UK companies load up with debt from their overseas owners and use the interest to slash their taxable UK income.

Payments are sent to the owners tax free because the loans are made through offshore stock exchanges such as the Channel Islands that qualify, under HMRC regulations, for the Quoted Eurobond Exemption. Without the exemption, the owners would have to pay a 20 per cent “withholding” tax which would cancel out most of the savings from the interest deductions.

Last year HMRC considered restricting the exemption to stop it being used for such “intra-group” lending, but  decided to keep it open after lobbying by financial and accountancy firms. It estimated the loophole was costing the UK economy £200m a year, but analysis of the Channel Islands Stock Exchange and UK company accounts suggests a figure of over £500m.

Ian Swales, a Liberal Democrat member of the committee, asked HMRC: “The Independent last week was full of examples of intra-company loans being charged at 16 per cent. Do you believe that’s a good arm’s length rate for an intra-company loan?”

Britain’s most senior tax man, Jim Harra, the Director General of Business Tax, replied: “We would look at each case on its own facts to determine what a good arm’s length rate would be.”  He pointed out that this newspaper had reported some examples where HMRC had restricted the interest deduction.

Mr Swales later asked: “What do you do where a UK company suddenly buys shares in an offshore country, lends the money back to the UK and, miraculously, the amount of interest they pay is roughly the amount of the UK profits, as quite a number of UK companies have done? Why do you allow that to happen?”

Interjecting to speak about the companies exposed in The Independent as benefitting from the legal loophole, Ms Hodge said: “It’s all of them: BHS, Maplin, Pets At Home, Ask, Zizzi, Pizza Express, half of the health companies who get money from the taxpayer for health. It goes on and on and on.”

On the question of why the Government had not acted to close the Eurobond loophole, Mr Harra said: “The Government has not decided it’s not going to do anything about it, but the Government has decided it would not be right to implement the proposals put forward in that consultation because it is clear it would not have had the desired effect and would not have yielded the £200m that we anticipated that it would.

“We monitor how it is used and we were concerned that intra-group  financing of the kind you described was not how it was envisaged that this exemption would work. Though we are clear that unless and until some  reform is made that that is the effect that the rules have.”

Among Mr Harra’s justifications as to why he doubted closing the loophole would save the millions HMRC initially anticipated, was that companies would use other tax-avoidance schemes. He said: “There are a wide array of other ways whereby withholding tax is not applied, what the measure would have done is just put some administrative obstacles in the way.”

Edward Troup, Tax Assurance Commissioner, said HMRC could not guess what would be owed by those who use loopholes to avoid tax as it can only collect what the law allows.

HMRC also admitted in the hearing that it has only collected £440m from Swiss accounts for the current tax year, despite George Osborne basing the year’s borrowing on a tax office estimate that they would collect £3.1bn.

Tax trick: how it works

The quoted Eurobond  exemption was set up in 1984 to make British companies more attractive to foreign investors. It allowed  companies to pay interest to an overseas lender tax free, if the money was lent through a stock exchange such as the Channel Islands or the Cayman Islands.

However, savvy British companies soon realised the exemption could be used by their foreign owners to legally send their profits through tax havens, thus reducing or entirely wiping out their UK tax bills.

Instead of investing their money in the shares of the companies they buy, an offshore owner will lend them money, often at extremely high interest rates, through an offshore stock exchange.

The companies can then take the annual interest off their profits before they have been taxed in the UK,  potentially eliminating their tax bill. Without the exemption, 20 per cent of interest payments could be deducted by HMRC, greatly reducing the overall  tax saving.

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
Arts and Entertainment
The Lord of the Rings and The Hobbit director Peter Jackson with his star on the Hollywood Walk of Fame
film
News
people
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
Arts and Entertainment
Mark Wright has won The Apprentice 2014
tvThe Apprentice 2014 final
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Receptionist

Negotiable: Recruitment Genius: This law firm is seeking a happy, helpful and ...

The Jenrick Group: Production Supervisor

£26000 - £29000 per annum + Holidays & Pension: The Jenrick Group: Production ...

The Jenrick Group: Project Engineer

£33000 - £35000 per annum + Pension and holidays: The Jenrick Group: Project E...

The Jenrick Group: Maintenance Technician

£35200 per annum + Pension and holidays: The Jenrick Group: Maintenance Engine...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'