HMRC has been accused of reclassifying how non-residents are taxed in a new policy paper to appease the multinational companies who use tax avoidance schemes.
In response to the HMRC’s policy paper alteration, tax barrister Jolyon Maugham questioned: “Why on earth is HMRC acting as public relations agency for Google, or Facebook, or Amazon?”
In the Taxing the profits of companies that are not resident in the UK policy paper, HMRC explained how a company which is not a resident in the UK has to pay corporation tax if it has a permanent establishment in the UK.
In retaliation to the multinational controversy, HMRC stressed that multinational businesses are not single companies, but a group of companies, where only some of which will be operating in the UK. HMRC explains that where different arms of the company operate separate facets of the company, the UK service company will be taxed on the profits of its business.
“This is not tax avoidance," HMRC said. “It is simply the way that Corporation Tax works, i.e. it applies to individual companies.”
Maugham claimed this statement contradicts HMRC’s own definition of tax avoidance used when calculating the tax gap. According to HMRC's tax gap definition, avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law.
However, HMRC favourably compares how they tax non-resident companies to how UK companies are treated in other countries. “UK companies do not pay Corporation Tax to another country on the profits from sales in that country, unless they trade through a permanent establishment there,” the policy states.
'Just a blatant lie'
Fair Tax campaigner Richard Murphy contested HMRC’s assertion: “The USA does not operate corporation tax in this way and we all know that and so to pretend that US companies are not getting a preference as a result of this structuring is just a blatant lie."
HMRC’s clarification comes shortly after it was criticised for settling a £130m tax repayment deal with Google following a nine year investigation into the multinational company’s tax affairs.
HMRC reiterates that multinationals have been taxed in different countries this way since the 1920s. HMRC concludes: “Where HMRC believes that the definition may be met and there may be additional UK tax due, we will thoroughly examine the details and all relevant factors to ensure the multinational group pays the tax due under the law.”