Standing up to Hodge and the tax avoidance bandwagon

The reality – that tax avoidance is largely a personal tax issue – is being ignored by those in a wider quest for political hits

Political point to be gained
James Dowling
On 18 February 2013 17:53

Whatever one thinks of the behaviour of their employers, it was hard not to feel personally sympathetic for the plight of the executives from Amazon, Google and Starbucks who appeared before the Public Accounts Committee on November 12th. Committee Chair Margaret Hodge excoriated them in public, accusing them of dodging their social obligations and being personally ignorant of the detail of the issues at stake.

More recently, when the senior tax partners for the Big Four accountancy firms (KPMG, Ernst and Young, PwC and Deloitte) gave evidence on January 31st, the Public Accounts Committee chair suggested they should be denied public contracts for their role in helping their clients avoid tax.

Chief Secretary to the Treasury Danny Alexander this week responded to this in kind –  announcing new rules forcing all companies bidding for public contracts to declare any infringements of tax rules going back ten years, something which fails to recognise the extent to which practices regarded as acceptable a decade ago are now beyond the pale in mainstream corporate life.  

The public climate has clearly moved on. While mainstream opinion has long since turned against the marketing of contrived tax avoidance schemes, the assault on the use of antiquated transfer pricing rules (the stick with which Starbucks and Amazon were hit) to manage tax bills is new and has clearly taken corporate Britain by surprise.

Directors of UK bluechip companies will need, in future, to consider how legitimate their tax affairs appear as a key part of their duty of stewardship for the firms they run. It is clearly not enough simply to be able to say you are within the rules any more when the system itself is viewed as increasingly not fit-for-purpose.

So far, so good. All this seems to vindicate Osborne’s initiative, before the Autumn Statement, to ask the OECD to look into whether the transfer pricing regime requires reform. Their response, this week, was met with a positive commitment to reform the rules for the modern world by the governments of Britain, France and Germany. In bringing this to all our attention, Margaret Hodge has clearly done us all a service.

That narrative, however, breaks down when you look at the wider extent of the activities of the Public Accounts Committee. Hodge recently declared her intention to continue pushing on this issue until the Government changes course. I am not alone in having a sneaking suspicion that nothing will ever be enough. Hodge is part of a wider press and political bandwagon which feeds a general perception that corporate Britain is out to ‘freeride’ at the taxpayer’s expense, regardless of the wider social consequences.

The reality – that tax avoidance is largely a personal tax issue – is being ignored in a headline rush to find the latest corporate tax offender and hopefully gain credit for squeezing yet a further concession from the Government. Many of those pushing this agenda know fully what they are doing – they include former Treasury Minister Lord Myners, as well as Simon Hughes, the Liberal Democrat Deputy Leader – and are happy to ignore the facts (for example, that corporation tax applies to profits, not turnover) in a wider quest for political hits.

Part of corporate Britain clearly has a case to answer. Due diligence is required – urgently in some cases. However, it is also being put in a situation where it cannot win – with the media cooperating in a witch-hunt for wrongdoing and publicising it regardless of the extent to which it is representative of the wider tendency.

The Government’s response has in some cases been woeful. Although the OECD work is long overdue, the wider tenor has too often fed the impression that corporate Britain is in it up to their necks. Alexander’s contracting announcements this week fall squarely into this category. This bandwagon risks overshadowing and, indeed, imperiling the real gains in corporation tax policy since the election.

Looking towards the Budget, ministers should be prepared to show leadership. Their inevitable avoidance announcements should be explicitly aimed at a very small minority of individual and (fewer still) corporate offenders who are exceptions from the vast majority who pay their way and happily comply with their obligations. And business is entitled to expect Government’s explicit recognition of the good work they do.

James Dowling is a former Treasury official. He is now a public affairs consultant working for Fleishman-Hillard, specialising in financial services and a member of the Conservative Party. He writes for commentator in a personal capacity

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