Few scandals have recently aroused more howls of outrage than revelations of how many large companies are making billions of pounds of profit in Britain while paying little or no tax. David Cameron, having put this “tax avoidance” at the top of the G8 agenda last summer, was at it again on Thursday. Margaret Hodge, chairman of the Commons Public Accounts committee, never stops protesting about a practice she calls “immoral”. Last week, grilling the business tax director of HM Revenue & Customs, she asked why HMRC hadn’t brought some “show cases” against the firms responsible, to highlight what a scandal this has become.
Certainly, the sums lost to the Treasury are mind-boggling. Google, based for tax purposes in Dublin, earned £11 billion from Britain between 2006 and 2011, but paid only £10 million in tax. Starbucks, based in Holland, in 2011 earned £395 million in the UK, but paid only £6 million in tax. Amazon, based in Luxembourg, had UK sales of £3.35 billion in 2011 but paid only £1.8 million in tax. Equally clever at avoiding UK tax are our largely foreign-owned water companies, such as Thames, which in 2011 made a £550 million profit and paid no tax at all. Ever longer grows the list of leading companies avoiding UK tax in this way, from Apple and Vodafone to BHS and Pizza Express – so that estimates of what the Treasury is losing are as much as £120 billion a year, equal to a fifth of the Government’s entire income.
Astonishingly, however, entirely missing from all the outrage is the simple explanation of how and why this racket has come into being. It all stems from the “four freedoms” laid down in the founding treaty of the European Union, especially the freedoms of “capital” and “establishment”, which entitle firms to move all their income to the country where they want their tax base to be, to give them the smallest tax liability. This has completely destroyed the sovereign right of national governments to levy tax in a country where income is earned. Google, Amazon, Apple and the rest can thus quite legally channel all their earnings wherever tax rates are lowest.
In 1992, a further massive loophole was opened up by the Maastricht Treaty, which, in preparation for the single currency, extended the “freedom of capital” to countries outside the EU, including tax havens such as the Cayman Islands or Jersey, with even lower tax rates. This is how, for instance, our water companies manage to pay so little tax, despite making profits averaging at 30 per cent a year. They have also learnt the cleverest trick of all, which is to borrow huge sums from their tax-haven-based owners, at artificially high rates of interest, which can then be offset as a business expense against their profits, shrinking their tax liability still further.
Even more disturbing is the way no one ever publicly admits that this is what makes such a colossal racket perfectly legal. Mr Cameron keeps strangely quiet about it. When Mrs Hodge was asking the HMRC’s man last week why it doesn’t bring “show cases” against these firms, he made no mention of the EU dimension, despite knowing that HMRC has already put this to legal test in a historic case in the European Court of Justice in 2007. The UK comprehensively lost. The greatest financial damage inflicted on us by our membership of the EU has thus become the most embarrassing “elephant in the room” of all.
Christopher Booker, an English journalist and author.