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Self’s assessment: should the government support tax avoiders?

Heather Self's latest peice for Tax Journal examines the tax issues that make the headlines in the national press. This week, should tax avoiding businesses be denied government support under COVID-19 schemes?

In our continuing series, Heather Self examines the tax issues that make the headlines in the national press. This week, should tax avoiding businesses be denied government support under COVID-19 schemes?

There have been a number of calls over recent weeks to ensure that tax avoiders do not receive government support during the COVID-19 crisis.

Writing in The Times on 28 April 2020, Margaret Hodge MP said: ‘If you don’t pay your fair share of tax in the good times, it’s both offensive and downright wrong that you should have a right to access public funds in the middle of a pandemic.’

There has been particular criticism of Virgin Atlantic for seeking a £500m bailout, with many commentators noting that Richard Branson (who owns a 51% stake in the business) is apparently worth £4bn and lives in a tax haven. It was reported in The Times on 9 May that Tax Watch had proposed that ‘companies based in tax havens should have to pay tax on dividends from their British operations if they draw on government support during the Coronavirus pandemic’.

Tax Watch also noted that Arcadia, owned by Philip Green’s wife Tina, had furloughed 14,000 staff despite having paid significant dividends in the past, which had not been subject to UK tax. Meanwhile, peer pressure appears to have led to Victoria Beckham deciding against putting staff on furlough, after she had been ‘heavily criticised’ for taking public money while being worth an estimated £335m (although not living in a tax haven), as The Guardian reported on 30 April). The overall theme is that those who are rich, or who are based in tax havens, should not benefit from bailouts or from schemes such as the Coronavirus Job Retention Scheme (CJRS). While this may sound superficially attractive, there are likely to be a few problems in practice. In relation to CJRS, the scheme was introduced at great speed and has, on the whole, been a great success. Claims are being made for some 6.3m workers, and money is flowing rapidly to help prevent redundancies. Additional conditions to limit this to UK owned (or at least non-tax haven owned) businesses would make the scheme more complicated, and inevitably would mean that more workers would lose their jobs. It is also important to note that all money received by an employer under CJRS must be passed on in full to their employees, so there is no risk at all that any non-UK individual would benefit from a claim. It would, in my opinion, be wrong to impose additional conditions which would simply harm UK workers and have no real impact on tax haven owners.

What about bailouts? Here, any difficulty is not likely to be a tax one, but an issue of applying government policy in a fair and transparent way. Those with long memories may remember the outcry after HMRC (then Inland Revenue) offices were sold to an offshore company, Mapeley, in 2002. There were calls for public procurement rules to ban this practice, but it was not until 2013 that the rules were updated, and even then the restriction was much more limited than might have been expected (see Procurement policy note: Measures to promote tax compliance, dated 25 July 2013). It turns out to be really difficult to define a ‘tax avoider’ in a way which complies with legal obligations.

Banning those who don’t pay their ‘fair share’ from receiving government support is likely to be difficult

A number of countries within the EU, including Poland, Denmark and France, have said that companies registered in tax havens will not be entitled to benefit from COVID-19 schemes (as Politico recently reported). But the actual list of havens is far from comprehensive, and it was described by one campaigner as a ‘symbolic first step’.

What about imposing tax on UK dividends to tax haven owners, as Tax Watch has suggested? This would be possible, but it would require a change to UK domestic legislation and would reverse a longstanding element of UK tax policy. Those with extremely long memories (even longer than mine) will recall the introduction of advance corporation tax (ACT) in 1973, and the payment of tax credits to dividend recipients to recognise the double tax burden at both corporate and individual level. ACT was abolished in 1997 and only the vestiges of tax credits remain, but it would be a significant further step to impose withholding taxes. And, of course, all those not in tax havens would have to submit claims for exemption. This is possible as a policy option for the future, but it would not affect any COVID-19 claims in the meantime.

So, banning those who don’t pay their ‘fair share’ from receiving government support is likely to be difficult, and if it is introduced the losers could well be UK workers rather than the tax haven owners of the business. Not for the first time, it is easier to say that you want something to be ‘fair’ than to define how you would do it.

In implementing CJRS and other schemes, getting money out fast was more important than getting a perfect system. This means that some who claim may not ‘need’ the money, however you define ‘need’. But the answer to that, in my view, is to define the future tax system in a way which ensures that those who have gained most, pay back more in future. Or, as I suggested last month, we should take this opportunity to seek to design a tax system that does what we want it to do, as efficiently and fairly as possible.

First publish in Tax Journal.

For more information, please contact Heather Self.