WHO WILL CURB TAX AVOIDANCE? < style="font-family: helvetica,arial,sans-serif; font-weight: bold;">
by  < style="font-family: helvetica,arial,sans-serif; font-weight: bold;">
Prem Sikka
Professor of Accounting,University of Essex, UK
(Published in the Herald, 2 May 2005, p. 18)


With the general election on the horizon, major political parties are making numerous claims about taxes. Some want to use taxes to redistribute wealth whilst others want to cut corporate taxes and claim that higher income taxes are imminent. None are willing to discuss that Britain may be losing more than £100 billion of tax revenues each year due to aggressive tax avoidance by major companies and a rich elite.< style="font-family: helvetica,arial,sans-serif;">

Since 1979, the bottom 20% of the population has experienced no real gains in its disposable income. At the other end the picture is entirely different. Britain is a tax haven for steel magnates, shipping tycoons, premier league footballers, film stars, financial dealers and others who live and trade in Britain and benefit from the social infrastructure financed by ordinary taxpayers, but the law permit them to pay little or no income tax. In 1997, the richest 1,000 had wealth of £99 billion. By 2004 that figure stood at £250 billion. Around 65,000 rich individuals are sheltered by the archaic ‘domicile’ and ‘residence’ laws and pay little or no income tax. Despite forty years of hot-air, no political party has plugged this tax loophole. 

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The Office for National Statistics states that for the last decade, corporate profits have increased at an average of around 10% each year i.e. they double every 8-9 years. Yet that is not reflected in the taxes paid by companies. In 2004-2005, companies paid £32.4 billion in corporation tax compared to £21.5 billion 1989-90, not even keeping pace with inflation. Corporate share of total UK tax take has dropped from 11.5% in 1997/98 to 7.7% in 2003/2004 and amounts to less than 2.5% of the British GDP, the lowest ever. With the aid of accountants, lawyers and bankers, major insurance companies, banks, utilities, oil, tobacco, train, airlines and media companies have become very adept at devising tax avoidance schemes and booking their profits in tax havens and avoid UK corporate taxes, which are at an all time low rate of 30%.

In the face of tax avoidance by major companies and millionaires, the tax burdens have shifted to ordinary citizens and less mobile businesses. The Inland Revenue’s official statistics show that the UK income tax take of £48.8 billion for 1989-90 increased to £123.7 billion for 2004-2005. The lower income tax rate of 10% is now payable at taxable income of only £2,020 and the number of people paying it has increased from 2.28 million in 1999 to 3.4 million now. Over 3.3 million individuals, the highest ever, pay tax at 40%, the highest possible rate, at a modest taxable income of only £31,400. In age of reverse socialism, debt-ridden graduates, people on minimum wage, supermarket workers, nurses and teachers pay a higher proportion of their income in tax than many millionaires and major corporations. This hardly leaves people enough money to buy homes, pensions or pay fees to give their children decent education.

< style="font-family: helvetica,arial,sans-serif;">Tax havens provide secrecy and facilities for global tax avoidance. Some $11.5 trillion of the world’s wealth is stashed in places like Jersey, Guernsey, the Isle of Man, Gibraltar, Bermuda, the Bahamas and the Cayman Islands. This yields some $860 billion in annual income, which if taxed could provide $255 billion of tax revenues each year to alleviate poverty in developing countries. Yet successive governments have done nothing to close down tax havens. The much trumpeted millennium goals for eradicating poverty in Africa do not discuss tax avoidance even though multinational companies are avoiding more than $50 billion of taxes each year in developing countries.< style="font-family: helvetica,arial,sans-serif;">

Conservative governments did little to crackdown on organised tax avoidance. Labour now requires accountancy and law firms, peddling tax avoidance schemes, to register details of the schemes with Inland Revenue. Violators can be fined the princely sum of £5,000, which amounts to less than 30 seconds of income for major accountancy firms. European Union and the UK government have promised to crackdown on individuals using tax havens by deducting tax at source (called withholding tax) but curiously corporations and trusts, the common vehicles for tax avoidance, are exempt from this. The result is a lot of favourable publicity but little increase in tax take.

Rather than banning transactions whose sole purpose is to avoid taxes, successive governments have rewarded the tax dodgers. Companies avoiding UK taxes are rewarded with public contracts. Major accountancy firms at the heart of the tax avoidance industry have collected more than £500 million fees from the Public Finance Initiative (PFI) deals alone. The same firms and their clients act as government advisers and given an ‘inside’ track on writing laws. The same corporate elite funds political parties, individual politicians and thank tanks to organise their own tax obligations off the political agenda.

< style="font-family: helvetica,arial,sans-serif;">The situation has now reached a crisis point and ordinary people can’t go on financing the hidden social welfare system for corporations and millionaires. Ordinary people don’t mind paying their fair share of taxes, but should not be asked to subsidise multinational corporations and the rich. Politicians will do nothing until people confront them with the facts.< style="font-family: helvetica,arial,sans-serif;">