Richard Brooks: Britain sends out welcome as world haven for tax dodgers

Tax avoidance pre-dates income tax: 17th and 18th century buildings with bricked-up openings can still be seen on British streets, legacies of attempts to dodge the window tax preferred at a time when assessing a gentleman’s income was thought too intrusive.

But it wasn’t until the turn of the 20th century, over 100 years after the introduction of income tax to fund the Napoleonic wars, that the term “legal avoidance” was first coined to describe arrangements – such as moving investments abroad – that might not break the law but certainly frustrated it.

Even then tax avoidance was a minority sport. But after the Second World War, as wealth spread beyond a narrow band of aristocrats and industrialists and tax rates hit eye-watering levels, tax avoidance became an industry in its own right. While the Beatles sang “one for me, nineteen for you”, the accountants clustered in London’s West End were inviting the era’s biggest names, including actress Julie Christie and young broadcasting star David Frost, to sign up for arrangements involving offshore trusts and companies that would keep their income out of the taxman’s clutches.

By the 1970s, Britain’s most famous tax avoidance factory, Rossminster in Mayfair, was combining the legal, accountancy and banking services required to sell thousands of wheezes – under such esoteric names as the “exempt debt” and “commodity carry” schemes – to stellar customers including Roger Moore and Engelbert Humperdinck. The then chairman of the Inland Revenue lamented to Labour’s Chancellor Denis Healey that tax avoidance was now a “national habit”.

Later Conservative governments’ slashing of the extreme tax rates of the 60s and 70s would, alas, not break the habit. Instead, the late 20th century age of economic liberalisation created the perfect conditions – the freedom to transfer money offshore, the ease of lending and borrowing huge sums and the invention of exotic “derivative” financial products – for Britain’s biggest companies to join the tax avoidance party.

Multinationals could now deploy the techniques honed in the Mayfair tax salons but for far higher stakes, using the services of the major accountancy firms that once shied away from what had been considered the tawdry business of tax dodging.

The beancounters’ qualms were soothed by the handsome fees on offer and they were eagerly selling schemes every bit as contrived as Rossminster’s.

Ernst & Young, for example, developed a widely deployed arrangement known as the “tax efficient off-market swap” which would have cost the Exchequer around £1bn had the courts not overturned Prudential’s use of it.

Over in the City, Barclays Bank ran a whole department dedicated to “structured finance”, creating scores of “tax arbitrage” schemes playing off Britain’s tax laws against other countries’ and reaching what one US senator termed the “MEGO” (“my eyes glaze over”) level of complexity. It took some enforced soul-searching in the wake of the Libor-rigging scandal to eventually shut this department last month.

The other great trick perfected by the accountants in the 1990s saw multinationals break up their businesses and shift the most profitable parts into tax havens.

Led by British corporate giants such as spirits group Diageo and major American operators in Britain such as Gap and Nike, techniques including selling products from Luxembourg (Amazon) or paying royalties to the Netherlands (Starbucks) are now the staple of the high-end tax avoidance.

Yet, as corporate tax avoidance was reaching this endemic level, the war against it was being surrendered.

New Labour Chancellor Gordon Brown’s famous “light touch” 
applied, he would boast, “to the regulation of financial services 
and indeed to the administration of tax”. And where “light touch” infamously gave financial services 
the Northern Rock fiasco, so it produced major failures in tax administration.

By 2011, after HMRC had spent over a decade pursuing “relationships” with large companies at the expense of rigorously policing the tax laws, Parliament was surveying dubious “deals” for Vodafone and Goldman Sachs and concluding that the Revenue was “not being even-handed in its treatment of taxpayers”.

A tax system in this position is in grave danger of losing public confidence.

So, as further difficult questions emerge, such as why Starbucks 
has been allowed to operate 
almost tax-free for 15 years, the coalition Government has 
desperately tried to appear to be doing something.

What is has announced so far, however, will achieve little. A “general anti-avoidance rule” will hit only a small fraction of contrived schemes of the Jimmy Carr variety. On corporate tax avoidance, support for international talking shops falls far short of re-writing the international tax laws and shutting the tax havens within Europe that lie at the heart of the problem.

What real action there is actually exacerbates the problem. David Cameron might have told a Davos audience last month that companies “setting up ever more complex tax arrangements abroad to squeeze their tax bills right down, well they need to wake up and smell the coffee”, but in the last two years George Osborne has greatly relaxed the rules governing the diversion of profits offshore by British multinationals.

Internal financing companies located in tax havens – exactly the “complex tax arrangements abroad” referred to by Cameron – will, for example, be taxed at between zero and five per cent. For the richest individuals, meanwhile, the attractions of the anachronistic “non-domiciled” tax status have also been enhanced.

Tax dodging in Britain has far from run its course, but it is entering a new chapter. Unless the coalition has a change of heart very soon, it will be one in which Britain becomes the world’s 21st century tax haven of choice.

• Richard Brooks is a former tax inspector and author of The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business, published by Oneworld priced £12.99.