The claim

“Taxpayers’ money should not be funding tax dodgers…And I am determined that it comes to an end.”
Danny Alexander, 25 September 2012

The background

Tax avoidance has become a hot topic recently, although campaigners have for years been attacking companies that minimise their contribution to the public purse through the use of complicated offshore structures.

This week Danny Alexander promised to stop firms who dodge their fair share of tax winning government contracts.

The chief secretary to the Treasury told the Lib Dem conference: “I have discovered that there is nothing that prevents the very small minority of firms that don’t play by the rules from winning government contracts.

“That is not right. That is not fair. And I am determined that it comes to an end. So I have tasked HMRC and the Cabinet Office to come up with a workable solution to this problem and we will set out more details later this year.”

Will the crackdown succeed and which companies will lose out?

The analysis

As Danny Alexander said, thousands of companies are contracted by the government to provide everything from military hardware, hospitals, cleaning services and accountancy advice.

An outsourcing boom that began under Labour has gathered pace with an increased role for private providers in the NHS, welfare-to-work, prisons and many other areas. (Read more about this in our series: Who Runs Your World?)

A significant number of firms currently in receipt, collectively, of millions of pounds of public money have faced accusations of tax avoidance, usually based on their use of shell companies registered offshore.

These are the Russian doll-like structures where UK-registered companies own or are owned by other firms registered in jurisdictions with lower taxes and higher levels of corporate secrecy.

It’s well-known that moving money between different jurisdictions can lower a multinational’s tax exposure. A number of pressure groups have recently claimed to find evidence of widespread use of tax heavens by companies with public contracts.

The campaign group Ethical Consumer found that 13 of the 20 biggest names in government outsourcing, including the security giant G4S, services company Serco and financial services firm KPMG, have a presence in notorious tax havens.

A number of private healthcare providers contracted to supply NHS services have been accused of tax dodging by the anti-corporate campaign group Corporate Watch.

The group’s researchers said Spire, which treats NHS patients in its 37 private hospitals in the UK Spire, made an operating profit of £123m in 2010. But the company was allegedly able to declare a loss, and avoid paying some tax, after writing off £65m as interest repayments to a Luxembourg-registered fellow subsidiary of its parent company Cinven.

A spokesman for Spire denied any wrongdoing, saying: “The business was originally acquired via a combination of shareholder loans and other debt from third parties (such as banks), the interest on which is allowed to be deducted from taxable profits of the company.

“That net interest payable is deductible against taxable profits is a tax treatment available widely to all UK companies be they private equity-backed or otherwise. That the shareholder loans originated in Luxembourg makes no difference.”

Corporate Watch said another company, Care UK, which runs NHS services like GP surgeries and walk-in centres, avoided tax by using loan notes issued on the Channel Islands stock exchange – perhaps bought by a subsidiary of the same parent company, Bridgepoint Capital.

Care UK told us: “Neither Care UK nor its majority shareholder Bridgepoint have introduced any kind of tax avoidance scheme. Bridgepoint has never taken any cash payment since majority acquiring Care UK in 2010, whether in the form of dividends or interest on loan notes, and has no intention of doing so. The owners of Care UK have not taken, are not taking and will not take cash out of Care UK.

“Care UK does not avoid tax by using loan notes listed on the Channel Islands Stock Exchange. The listing is there simply to prevent the holders of the loan notes being required to pay a cash tax charge on interest that has itself not been paid in cash; the listing makes no difference at all to the total amount of tax that will be paid in relation to the loan notes, which will be a full UK tax charge.”

The owners of another provider, General Healthcare Group (GHG), were said to have created a situation where they would be able to avoid paying UK stamp duty if they sold the company, as its hospitals are owned by subsidiaries in the British Virgin Islands (BVI).

A spokesman said: “The properties in GHG are not directly owned by BVI-incorporated entities, they are all owned by UK incorporated and UK tax resident companies.

“To date, any properties sold have been asset sales by the UK-incorporated entities that own them, and tax on capital gains has been paid where applicable, for example UK tax has been paid on the sale of the Harrogate property last year.

“If the BVI companies sell the shares in their subsidiaries at a gain they would be subject to UK capital gains tax like any normal UK company as they are UK tax resident; if investors sell shares in the BVI companies they will be subject to capital gains tax in their local jurisdiction on any gain as they would be if BVI companies were UK-based.”

Questions have also been raised about the use of tax havens by companies that cannot exactly be described as government contractors but provide public services or are bankrolled by the taxpayer.

RBS, for example, now 82 per cent owned by the state, has more than 400 subsidiaries in tax havens, according to the anti-poverty charity ActionAid.

Earlier this year the Lib Dem MP Simon Hughes accused the private equity-backed owners of Britain’s biggest water company Thames Water of using artificial structures to minimise tax.

He told parliament: “There has recently been a pretty unpleasant history regarding Kemble, Macquarie and Thames Water whereby people have paid far less tax than … I would believe to be acceptable. They have been using various onshore and offshore mechanisms to avoid tax liabilities involving money that should have come back into the Treasury to the general benefit of the taxpayer.”

Thames Water told us: “All the active companies within the Thames Water group are resident in the UK for tax purposes, operate under and comply fully with English law and file annual tax returns with HMRC. Our arrangements are fully transparent and typical of a company of our size and complexity.”

There’s a pattern here. None of the companies mentioned here deny having a presence in territories universally acknowledged to be tax havens. But all of them deny doing anything wrong.

There is certainly no suggestion that anything illegal is taking place. This is all a question of how “the rules” are defined, of what level of tax planning within the law is considered too aggressive.

Mr Alexander hasn’t offered any definitions yet, and the Treasury weren’t able to shed much more light. They told us: “When the Chief Secretary talked about firms that ‘don’t play by the rules’, he was talking about the very small minority that evade tax and/or use aggressive tax avoidance schemes.

“The intention is to deter tax evasion, which is illegal, and aggressive and abusive tax avoidance – arrangements designed to gain a tax advantage that Parliament never intended.

“Companies will be asked to self-certify that they comply with their tax obligations and, as part of that, they could have to identify avoidance schemes they have been involved in that have either failed or been successfully challenged by HMRC. That information will then be taken into account in the procurement process.”

This gives us a little insight into the scope of the crackdown being envisaged. If just a “very small minority” are firms are judged to be stepping over the line, this cannot be a widespread attack on the use of tax havens.

We would already hope that HMRC would investigate firms who actually break the law anyway, and companies have since August 2006 been obliged to identify most tax loophole schemes themselves, so this principle is nothing new.

What about having to come clean about tax avoidance schemes that HMRC have successfully challenged? That’s potentially an incentive for some tax dodgers to change their ways, but we don’t know how many.

Of the 150-odd schemes voluntarily disclosed every year, campaigners say that only a handful are actually shut down by the taxman.

We’re happy to be proved wrong on that, but HMRC has so far declined to share the numbers with us.

The verdict

It’s clear that the use of tax havens is absolutely rife in UK corporate life, but that in itself is not hard evidence of wrongdoing.

Many companies admit to using complex offshore structures but claim they don’t get any tax benefit, which begs the question of why they bother going to these lengths.

It’s just about credible that some firms are less interested in the tax savings than the other benefits the offshore jurisdictions have to offer, like the ease with which companies can be set up and transferred to a different owner, and the minimal reporting requirements that can deny their competitors financial information.

Of course, that pervasive secrecy also makes it hard for investigators to find hard evidence of aggressive tax avoidance. Why can’t we call the corporate bluff and exclude all companies who have a presence in a tax haven from public contracts?

Even seasoned tax campaigners say that’s unrealistic, given the scale of our addiction to offshore.

Campaigner Richard Murphy from Tax Research UK told us: “If you did that, 99 out of 100 FTSE 100 companies would be excluded. These places have permeated the entire commercial infrastructure of our society. Every bank uses tax havens. Half the PFI operations are offshore.

“Then there are the accountancy firms and lawyers who work with the government. The whole business of government would be disabled.” 

By Patrick Worrall