How exactly is the UK being deprived of billions in tax?
Company A is in the UK and borrows from abroad. It pays interest on that loan. There are rules in place that limit the amount of interest that can be deducted (thin capitalisation and transfer pricing). The effect is that the interest payable by the company can be asumed to be at a fair rate.
So far so good. That interest is paid to a company in Luxemburg and Luxemburg chooses to tax those profits lightly. So LUXEMBURG receives less tax than it would get if it taxed at higher rates but the UK is completely unaffected. If Luxemburg taxed the interest at 0.1%, 1%, 10% or 50% it makes not the slightest bit of difference to the UK. If Company A borrowed from the US, or Asia or anywhere else in the world it would make no difference to the UK. So long as the amount of interest payable on the loan is a reasonable rate there is no loss of tax to the UK. UNLESS you want to force UK companies to borrow from UK sources. But then other countries might not like that. The UK banking industry might not like the idea of other countries retaliating.
And if you adopted that stance, why stop at interest on loans? Company A might also be buying raw goods from abroad. Profit on that is taxed abroad, "lost to the UK" if you like. Will you insist on UK companies only ever buying from UK sources?
I'm not saying international tax doesn't need to change with the times but it's just too simplistic to think that if only interest on loans wasn't taxed so lightly in Luxemburg, billions would suddenly come rolling into the exchequer.
It's a common theme among tax campaigners "change law x and we'll get billions in tax" but that assumes people won't change behaviour. Take the non-dom tax regime, there's frequently calls for this to be done away with because then billions in extra tax will be raised from all those foreigners living here with massive wealth overseas but think seriously about this. Why are many of those foreigners here in the first place? Because we DON'T tax their overseas income. If we did, would they stay? Or would they go to (say) Switzerland or some other place that wouldn't tax them. I'm not saying it's right or wrong but I do know it's not simple.
That's a fairly detailed understanding of the scheme that you're demonstrating.
If the loan was non-recourse, what was the collatoral being offered by the investor?
What exactly did the film company have to gain from this? It needed money to make a film but didn't get any because it had to give any money it got straight back to the bank?
So....the £5m the footballer borrowed from the bank would never have to be repaid?
And the £5m borrowed wasn't used to invest in the film? It was just handed straight back to the bank?
Is that what you are saying?
That would indeed be an odd set up.
Where have you got your background information from?
My (limited) understanding is that the loans came from ingenious themselves but are repayable and were used to invest in films and will (if the films are succesful) generate taxable income.
There seems to be something of a media campaign on this, the tone of which is that footballers have been "at it" and now are being made to pay.
I confess I don't know the full details but the ingenious schemes seem to have invested in genuine films, many of which have been commerically succesful.
HMG offered tax breaks to people preapred to invest. People invested and got tax breaks.
Now HMG are pursuing them (complete with APNs) and the media are having a field day in the current anti-avoidance hysteria which can barely tell the difference between legitimate planning and robbing a Post Office armed with a sawn-off shotgun.
If bankruptcies follow and Ingenious win their case, what then? Apologies from HMG? Apologies from the media? I doubt it. It'll probably be portrayed as a win by cheating tax avoiders "on a technicality".
If enough people feel the same way morally, then the law is usually changed to accommodate that consensus.
There are lots of people in the UK who think adultery is morally wrong but not enough such that the law is changed to make it illegal. In some countries it's illegal and you can be stoned to death for adultery.
Some people think you should drive past schools at 19mph even if the speed limit is 40mph but if you happen to be doing 39mph you aren't breaking the law and nor are you guilty of 'speeding fine avoidance'. If people want things changed they should campaign to change the speed limit to 20mph and not start chucking bricks at those driving past at 25mph.
As far as tax is concerned, there are some stupid laws which can trip people up so they end up paying more tax than is 'fair' but the taxman is under no obligation to adopt a 'moral' approach and let the person off. I can't work out why taxpayers are supposed to have regard to fairness and morality when HMRC do not.
As for MPs. If I recall correctly, when the expenses scandal broke, they all said they were following the rules and it was the rules that needed changing and (for the most part) no they didn't see any reason to refund any expense or tax they had gained by.
And finally, is it just me or has morality only become important since the government ran out of money and needed more?
Prehaps I should have made clear that it's EACH wealthy individual that is evading £85,000,000 a DAY in tax?
Or perhaps it should have been obvious that I was just making things up and exagerating them for effect to demonstrate some of the sillier things that pass for 'facts' in the current debate on tax?
Wealthy individuals are avoiding £85,000,000 a DAY in tax.
Large companies deliberately slash their profits by paying staff wages to reduce corporation tax.
Some bloke down my pub drives a fancy car and boasts that he pays no VAT on his income.
Amazon has trillions of pounds in profits earned worldwide that should be taxed in the UK
People who want to believe that tax evasion is endemic will believe anything no matter how ludicrous and without facts to back it up if it supports their viewpoint
A 'loophole' is now any law that legally allows you to pay less tax than the absolute maximum you possibly could.
Sighing wearily and saying "it's not actually that simple" means you are supporting tax evading big business.
The creeping increase of the % of list price seems unjust. There's nothing you can do once you have the company car (unless HMG expects you to swap your car every year to a more efficicient model).
It's not unlike VED where the cost can exceed the value of an older car. Again, what do they expect you to do, spend 000s on a newer car to save 00s on road tax?
Little talk of equity, fairness and the spirit of the law from HMG & HMRC!
I'm afraid I don't share your sympathy with Hodge.
You state that she is in a difficult position because on one side of her is HMRC and on the other are MPs and she is caught in the middle?
If tax law is in a mess, what's her solution? Overhaul and reform? Educating the public & MPs about current tax law?
No, her response is to launch vitriolic, ignorant attacks on the accountancy profession and law abiding companies seemingly to grab headlines and stir up the mob.
If that's a reasonable summary it smacks of political cowardice.
My answers
"Thinking it through"
How exactly is the UK being deprived of billions in tax?
Company A is in the UK and borrows from abroad. It pays interest on that loan. There are rules in place that limit the amount of interest that can be deducted (thin capitalisation and transfer pricing). The effect is that the interest payable by the company can be asumed to be at a fair rate.
So far so good. That interest is paid to a company in Luxemburg and Luxemburg chooses to tax those profits lightly. So LUXEMBURG receives less tax than it would get if it taxed at higher rates but the UK is completely unaffected. If Luxemburg taxed the interest at 0.1%, 1%, 10% or 50% it makes not the slightest bit of difference to the UK. If Company A borrowed from the US, or Asia or anywhere else in the world it would make no difference to the UK. So long as the amount of interest payable on the loan is a reasonable rate there is no loss of tax to the UK. UNLESS you want to force UK companies to borrow from UK sources. But then other countries might not like that. The UK banking industry might not like the idea of other countries retaliating.
And if you adopted that stance, why stop at interest on loans? Company A might also be buying raw goods from abroad. Profit on that is taxed abroad, "lost to the UK" if you like. Will you insist on UK companies only ever buying from UK sources?
I'm not saying international tax doesn't need to change with the times but it's just too simplistic to think that if only interest on loans wasn't taxed so lightly in Luxemburg, billions would suddenly come rolling into the exchequer.
It's a common theme among tax campaigners "change law x and we'll get billions in tax" but that assumes people won't change behaviour. Take the non-dom tax regime, there's frequently calls for this to be done away with because then billions in extra tax will be raised from all those foreigners living here with massive wealth overseas but think seriously about this. Why are many of those foreigners here in the first place? Because we DON'T tax their overseas income. If we did, would they stay? Or would they go to (say) Switzerland or some other place that wouldn't tax them. I'm not saying it's right or wrong but I do know it's not simple.
@the Limey. sorry to repeat myself.....
But where did you get your information from?
That's a fairly detailed understanding of the scheme that you're demonstrating.
If the loan was non-recourse, what was the collatoral being offered by the investor?
What exactly did the film company have to gain from this? It needed money to make a film but didn't get any because it had to give any money it got straight back to the bank?
so......
So....the £5m the footballer borrowed from the bank would never have to be repaid?
And the £5m borrowed wasn't used to invest in the film? It was just handed straight back to the bank?
Is that what you are saying?
That would indeed be an odd set up.
Where have you got your background information from?
My (limited) understanding is that the loans came from ingenious themselves but are repayable and were used to invest in films and will (if the films are succesful) generate taxable income.
http://www.teeslaw.co.uk/news-events/news/lhwt-investment-in-british-film-or-a-tax-avoidance-scheme.aspx
Media campaign
There seems to be something of a media campaign on this, the tone of which is that footballers have been "at it" and now are being made to pay.
I confess I don't know the full details but the ingenious schemes seem to have invested in genuine films, many of which have been commerically succesful.
HMG offered tax breaks to people preapred to invest. People invested and got tax breaks.
Now HMG are pursuing them (complete with APNs) and the media are having a field day in the current anti-avoidance hysteria which can barely tell the difference between legitimate planning and robbing a Post Office armed with a sawn-off shotgun.
If bankruptcies follow and Ingenious win their case, what then? Apologies from HMG? Apologies from the media? I doubt it. It'll probably be portrayed as a win by cheating tax avoiders "on a technicality".
Personal morality....
The thing about morals is that they are personal.
If enough people feel the same way morally, then the law is usually changed to accommodate that consensus.
There are lots of people in the UK who think adultery is morally wrong but not enough such that the law is changed to make it illegal. In some countries it's illegal and you can be stoned to death for adultery.
Some people think you should drive past schools at 19mph even if the speed limit is 40mph but if you happen to be doing 39mph you aren't breaking the law and nor are you guilty of 'speeding fine avoidance'. If people want things changed they should campaign to change the speed limit to 20mph and not start chucking bricks at those driving past at 25mph.
As far as tax is concerned, there are some stupid laws which can trip people up so they end up paying more tax than is 'fair' but the taxman is under no obligation to adopt a 'moral' approach and let the person off. I can't work out why taxpayers are supposed to have regard to fairness and morality when HMRC do not.
As for MPs. If I recall correctly, when the expenses scandal broke, they all said they were following the rules and it was the rules that needed changing and (for the most part) no they didn't see any reason to refund any expense or tax they had gained by.
And finally, is it just me or has morality only become important since the government ran out of money and needed more?
@stephuran
My apologies, I didn't realise that attempts to lighten the mood were not allowed,nor was I ridiculing anyone's position.
I was just worried that tax advisors might be seen as a dull, humourless lot.
FAO Davtax
Prehaps I should have made clear that it's EACH wealthy individual that is evading £85,000,000 a DAY in tax?
Or perhaps it should have been obvious that I was just making things up and exagerating them for effect to demonstrate some of the sillier things that pass for 'facts' in the current debate on tax?
Tax confusion....
The facts of the matter are that;
Wealthy individuals are avoiding £85,000,000 a DAY in tax.
Large companies deliberately slash their profits by paying staff wages to reduce corporation tax.
Some bloke down my pub drives a fancy car and boasts that he pays no VAT on his income.
Amazon has trillions of pounds in profits earned worldwide that should be taxed in the UK
People who want to believe that tax evasion is endemic will believe anything no matter how ludicrous and without facts to back it up if it supports their viewpoint
A 'loophole' is now any law that legally allows you to pay less tax than the absolute maximum you possibly could.
Sighing wearily and saying "it's not actually that simple" means you are supporting tax evading big business.
And so on.........
I agree with Rebecca
The creeping increase of the % of list price seems unjust. There's nothing you can do once you have the company car (unless HMG expects you to swap your car every year to a more efficicient model).
It's not unlike VED where the cost can exceed the value of an older car. Again, what do they expect you to do, spend 000s on a newer car to save 00s on road tax?
Little talk of equity, fairness and the spirit of the law from HMG & HMRC!
@David Gordon
I'm afraid I don't share your sympathy with Hodge.
You state that she is in a difficult position because on one side of her is HMRC and on the other are MPs and she is caught in the middle?
If tax law is in a mess, what's her solution? Overhaul and reform? Educating the public & MPs about current tax law?
No, her response is to launch vitriolic, ignorant attacks on the accountancy profession and law abiding companies seemingly to grab headlines and stir up the mob.
If that's a reasonable summary it smacks of political cowardice.