tiintax

HMRC have issued a spectacularly ill-timed briefing on Taxing the profits of multinational businesses which purports to explain – to MPs and other stakeholders, in a glossy leaflet paid for our of your and my taxes – how the tax system applies to companies based in more than one country.

Like, oh, Starbucks, for example? In a fine piece of investigative reporting, Reuters reports that Starbucks reduced its UK corporation tax to nil for the past three years by, amongst other things,

• roasting its beans in an Amsterdam subsidiary instead of in the UK
• paying interest on loans to other group companies outside the UK
• paying a royalty for “intellectual property” for the use of its brand name and business processes

Let’s see what guidance the HMRC leaflet gives to our MPs and other policy makers on how this might have come to be and what we can expect them to do about it, shall we?

HMRC is alive to the risk that multinationals may try to structure their affairs so that profits from economic activity carried on in the UK are not taxed here.

Oh, well that’s good, isn’t it?  HMRC is “alive to the risk”?

What are the government doing to counteract that risk, then?

• Cutting their staff numbers by 3300 or eleven per cent of the HMRC workforce?
• Reducing the rate of corporation tax so as to give away £730 million this year alone?
• Easing the Controlled Foreign Company rules to give away £540m this year, £770m in 2014-15 and £840m in 2015-16?  (Figures from the impact assessment on page 93 of this consultation document)

Because HMRC are nice to business, honest.

HMRC seeks to develop open and co-operative relationships with multinational businesses. In the vast majority of cases, we can reach agreement about what the right amount of tax is. Where we cannot reach agreement, we take a robust approach and take large businesses to court, where necessary, to secure the right amount of tax.

Taking large businesses to court?  Well the number of prosecutions is about the number of hens’ teeth – around 50-100 a year it seems, most of which will be clear-cut small-fry tax credit fraud cases and the like – obvious cases, where the offence is easy to understand, the guilt is easy to prove, and the numbers are peanuts but useful to discourage others.  The HMRC prosecutions policy is here, but the bit to notice is that it’s NOT the policy to prosecute in most cases.  The Civil Investigation of Fraud is the more likely process if you’re a multi-national:

It is HMRC’s policy to deal with fraud by use of the cost effective Civil Investigation of Fraud (CIF) procedures, wherever appropriate

Wait a minute, though!  No-one is suggesting Starbucks have done anything criminal, nor anything fraudulent-but-not-quite-criminal!  In fact from the newspaper reports Starbucks seem to have reduced their UK tax take to nil by using entirely legal means, means which are sitting right there in the face of the UK tax code.  They’re not legally or morally bound to pay anything else!  So what does the government mean when it says it will take large businesses to court where necessary?

Well, here’s HMRC’s Litigation and Settlement Strategy.  Most tax disputes are settled by the accountant and the tax inspector arguing the point across correspondence and meetings until either they reach a meeting of minds, a compromise, or, yes, have to go to actions set out in the Litigation and Settlement Strategy.  Assuming there’s some sort of appeal in place that can be litigated, the two sides go to the Courts and Tribunal Service and argue their point in front of the Tax Tribunal

HMRC obviously can’t comment on an individual business’ affairs so can’t really tell us whether they think Starbucks’ tax bill is correct or not, or whether it’s under investigation or not, or even whether there’s any litigation in prospect or not.  Does Starbucks avoid UK tax or not? Let’s give the HMRC leaflet the last word.  My emphasis, though!

Globalisation means that multinationals have the opportunity to structure their business to take advantage of beneficial tax rules in different countries. Provided that this results in profits being taxed in line with where genuine economic activity is carried on, this does not amount to tax avoidance.