Imagine you are presented with a brilliant new wheeze to reclaim your taxes from more than 40 years ago: taxes that have long ago been spent on services from the NHS to schools to welfare. Clever lawyers and accountants sell the idea to you; they spotted the opportunity at the turn of the millennium. But just like elaborate transnational tax avoidance, it only works if you are a large multinational business operating in different jurisdictions. What would you do? Balk at something that sounds so unfair? Ask: how is this possible? Or take up their invitation and ask who to call?
Lots of multinational companies made that call, and it is a huge but little-known problem facing any incoming UK government that HM Revenue & Customs acknowledges it may have to repay big business a staggering £55bn of old tax.The figure is enormous: that is nearly half the NHS’s annual budget. It’s more than the total amount of corporation tax and capital gains tax collected by HMRC in 2015. It makes arguments about whether Labour’s manifesto is properly costed look footling, and the Conservative promise to move in to surplus look wild.
After years without a real pay rise for ordinary workers, of benefits cuts and public sector job losses, it’s an amount that roughly doubles the 2016-17 deficit. Yet there it is, sitting like a time bomb on page 176 of HMRC’s 2015-16 annual accounts. In a note on its bills arising from legal challenges, HMRC records that it has already repaid £1.9bn in the 2015-16 year, and has potential liabilities of a further £55bn.
So how on earth is this possible, and why isn’t the government making more fuss about it? The answer lies in a decade and a half of legal tax battles that few outside a handful of specialist law and accountancy firms can grasp. Even the judges have described the saga as being of “exceptional complexity”.
In outline, big businesses have joined together in a series of group litigations to challenge past UK government decisions to levy tax on them. The tax regimes were approved by parliament at the time, but the cases involve exploiting the gap between UK tax law and European community law going back to the beginning of our membership in 1973. The highly technical nature of the arguments is reminiscent of the way corporates and their tax advisers have found to dodge tax through complex corporate structures spanning different European jurisdictions.
These group lawsuits hinge on the different way the Revenue treated transactions made by UK-registered companies and ones made by their related foreign companies. Lawyers for the claimants have successfully argued, decades after the event, that this difference discriminated by nationality and therefore unlawfully breached corporates’ rights enshrined in European treaties – the right to freedom of establishment (ie the right to set up shop in any member state without discrimination) and the right to the free movement of capital.
Since 2003, one test case with British American Tobacco has been through every level of court in the UK and to the European court of justice and back three times. HMRC has fought all the way but has lost on most of the technical issues. So in 2015-16, BAT was the happy recipient of a repayment of approximately £1bn, and its 2015 accounts give a handy summary. BAT explains that it is the principal test claimant in a legal action against HMRC called the “Franked Investment Income Group Litigation Order” (GLO), filed in 2003, involving more than 25 corporate groups, including many household names.
UK government attempts to impose a limitation period for the claims have failed. HMRC now has a last shot at appealing to the supreme court on an aspect of the BAT group claims: whether the corporates are entitled not just to simple interest on repayments in the way that you and I would be if we were being repaid tax collected, but to compound interest going back to 1973. It is this claim that turns the sums from disturbingly large to public finance-busting. The revenue declined to say to what extent its liabilities relate to challenges under EU law, but a source has told us the great majority of them do.
Until recently, HMRC argued that the size of its potential liabilities should be kept quiet. When the former tax inspector-turned-Private Eye investigative reporter Richard Brooks put in a freedom of information request in 2006 for the numbers, it refused to release them. Brooks appealed but in 2007 the information commissioner upheld HMRC’s position that releasing the figures could undermine people’s confidence in the ability of the government to manage the economy. HMRC estimates back then were presented as worst-case scenarios that would only come to pass if court rulings went against it. By and large those rulings have favoured the corporate claimants.
In a last-ditch attempt to limit the damage, HMRC said in 2015 that it would tax interest awarded on repayments at 45%, but that rule is being challenged in the courts by big business too. The issue was briefly used by Brexiteers in the referendum campaign as a reason to get the UK out of Europe – in an open letter to David Cameron and George Osborne in early June 2016, Boris Johnson and Michael Gove attacked the ECJ for £43bn-worth of tax decisions in favour of big business. But there was no mention in their letter of the legal and accountancy brains that sold business their “innovative solutions” and put the ECJ to the sort of use no one had dreamed of before. HMRC has upped its estimates since then.
Who are these corporates whose freedoms have been so offended that we should all pay? The courts hearing the cases were unable to provide me with a list but some marketing literature written in 2003 by Dorsey & Whitney, a London boutique law firm specialising in ultra-high-value litigation, gives the first clue. Promoting what it calls a “UK Tax Refund Opportunity”, it says that “over the last two years Dorsey’s litigation group has been very busy reclaiming tax from the UK Inland Revenue on behalf of clients”. Key members of the Dorsey team now work at the specialist London law firm Joseph Hage Aaronson. As lead adviser, it now maintains the registers of claimants in several of the group litigation orders. So at its offices I exercised my right to inspect the register for one of its cases, the group claim led by BAT.
What I found was names of top companies and their subsidiaries so old you have to go back through several incarnations to find who they were when they paid the tax they want back. Not just BAT, its global subsidiaries and Rothmans, but also Dunhill; oil and chemical companies Imperial Chemical Industries (which has been taken over by a Dutch multinational), Coats as in Coats Viyella, and BP, state-owned in 1973. Claiming too is Corus, or British Steel as it was, recipient of multimillion-pound state aid in the 1980s, with several of its subsidiaries, now owned by Indian conglomerate Tata Steel. Then there’s the EMI Virgin Records group, HSBC, De La Rue, BOC, Chubb, Pilkington, Aegis, GKN, Invensys and Hawker Siddeley, Prudential … The list goes on, although I cannot give it to you in full because JHA said its obligation did not stretch to providing the separate schedules to the register that list many of the subsidiaries.
The companies say they have simply followed the decisions of the courts that have found that the tax was unlawful and they are entitled to their money back. Their advisers told us it amounted to “double taxation”. No one doubts the skill of the lawyers. But their gain is our exceptionally damaging loss.
It is this sense – that the smart people with the money can afford to pay for the services of even smarter people who magic up ways to make more money for them all while leaving the rest of us the poorer – that has driven so much of the country’s disaffection. If and how any incoming government avoids this colossal bill and, even more importantly, nails corporates down to pay their fair share of tax is one of the biggest political questions of all.