Big companies like Starbucks and Amazon makes millions of pounds each year. Yet somehow they seem to be paying less tax than the rest of us. Say what?
Companies in the UK must pay corporation tax. This is a tax on the profits a company makes. It’s worth mentioning that profits are not the same as sales. Profits are your total sales, minus your costs. Basically what’s leftover at the end.
At the moment the corporation tax rate in the UK is 20%.
So if your company makes £100 in profit, you would need to pay £20 in corporation tax to HM revenue and customs.
All good in theory. Yet in reality many large companies are bringing in big profits, but paying low amounts of tax.
[SOR tax evaders video]
According to charity group Actionaid the UK’s top 98 companies are using tax havens. These are countries which offer businesses and individuals low tax rates.
Two key terms: tax avoidance and tax evasion. They sound the same, but are actually very different.
Tax avoidance is legally using loopholes in the law to reduce the amount of tax that you pay. We’ll repeat again, legal.
Tax evasion is illegally escaping paying taxes, usually by hiding your income.
When we hear about big companies in tax scandals, we’re probably hearing about tax avoidance. In these cases the companies haven’t broken the law. They’ve just worked the system to lower their tax bill. Sneaky or what?
There are a variety of ways that companies can legally lower their tax bill. Most involve lowering profits – as low profits mean you pay less tax.
However, if the profits were actually lowered then the company would be making less money. Cue lots of anger from investors.
Stephanie Flanders from the BBC explains how moving money around within a company can reduce profits (therefore reducing tax) and save you a lot of £££.
Still confused? Tim Bennett from Money Week goes into a little more detail;
In nutshell: UK section of the company buys and sells to other branches overseas – the cost of doing this reduces the company’s profits (which reduces the tax bill) while most of the money remains within the company.
Or in other words: UK tax law is a f@%king mess.
People get very angry about big business seeming to have an opt-out from paying taxes, whilst most mere mortals have no choice in the matter.
The current debate over tax avoidance erupted around the time of the Occupy Movement. This is an international organisation campaigning against social and economic inequality. Occupy’s slogan “we are the 99%” highlights how the 1% minority seem to play by different rules to the rest of us.
Large companies can afford to pay teams of legal experts to find potential loopholes in tax law.
They can also afford to set-up and run their business from countries with lower tax thresholds. Both of these are options that smaller companies potentially don’t have.
Our taxes pay for public services like roads, schools, hospitals and the police.
Anti-tax avoidance campaigners argue that companies avoiding paying tax are depriving the country of money which goes towards these things. They believe that companies which operate and benefit from a country should all pay the same tax as the rest of us.
The Robin Hood Tax idea goes even further, suggesting we should charge a tax on all large financial transactions which would pay for public services.
However big multinational corporations say that they do pay the correct amount of tax. Legally this is true. Who’s to say whether this is a “fair” amount or not?
As Toby Young explains there is no real definition of a “fair” share of tax. Therefore if we think the fair share is actually higher than the rate set by the government then everyone who fails to volunteer to pay more tax is guilty of tax avoidance. Slightly awkward.
There is also the elephant in the room – that most of us have probably avoided tax at some point in our lives.
Picked up some cheap booze at the Duty Free stand after a holiday?
Yep, that’s technically avoiding tax. Perfectly legal though.
So, do we only care about tax avoidance when it is large companies involved? If so, there’s something of a double standard going on here.
Even if it seems like tax avoidance is bending the rules, a 1936 court case sets the precedent that this is fine. A ruling by Lord Tomlin on the Duke of Westminster’s tax arrangements stated;
“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Meaning: people may not like it but as long as you’ve stayed within the law then it’s all good.
Many people who disagree with tax avoidance protest by boycotting the company involved.
For Starbucks this is easier than you think. I’ll just get my soy double shot espresso macchiato from another shop. Amazon? OK, fine, I’ll have to do my shopping in real life. Slightly annoying but all for a good a cause.
Boycott Facebook? Riiiight, so how are people going to see my latest selfie?
How about Google? WELL HOW THE HELL AM I GOING TO KNOW HOW TO GET ANYWHERE??!*
Sooo… boycotting may not work long-term.
However, you could write to your MP raising the issue, or join any one of the many organisations campaigning against tax avoidance. Or maybe you think the tax system works just fine. Let us know in the comments below.
* We hear great things about paper maps.
Seems like we’re “generation debt”: all we hear is student loans, overdraft and stuff about UK’s budget deficit – which is apparently around £90 billion… but what does this actually mean?
The deficit is the gap between the amount the government spends and what it receives in taxes. It’s different to the national debt which is the total £££ the UK owes to investors from the UK and other countries.* (FYI we owe a lot to America).
Each year the government spends money on things like schools, the NHS, the army and benefits. This money mostly comes from taxes collected by HM Revenue and Customs.
The Chancellor of the Exchequer (currently George Osborne) is in charge of the country’s finances. They set the budget each year which outlines how much we pay in tax, and what gets spent where (we explained how the budget works here).
If one year the government collects £100 in tax but spends £150, then the deficit would be £50.
Alternatively if £100 is collected but only £80 is spent then the government would have £20 left over at the end. This is called running a budget surplus.
In real life we’re talking a lot more money than this. The UK deficit is currently around £90 billion.
Since the global financial crisis of 2008, “deficit” and “borrowing” have become dirty words. Understandably, the public don’t seem to like the idea of irresponsible governments overspending.
How the financial crisis happened;
Financial crisis in a nutshell; the banks ran out of money – the government had to lend them money.
The Conservatives claim that the current deficit is all Labour’s fault, as the previous Labour government was running a deficit at the time of the financial crisis. Expect to hear this a lot around election time.
Considering all this, it may surprise you that running a deficit is the norm for a lot of countries.
Whilst it is true that Labour was running a deficit before the crash, they had previously ran a budget surplus between 1998 and 2001. Before that point the UK (under Conservative rule) had run deficits each year since 1975 (with the exception of three years between 1988 and 1990 where there was a small surplus).
Many well-respected economic experts like former Bank of England governor Mervyn King and senior Treasury official Nicholas Macpherson suggest that the banks are more to blame for the current situation, rather than Labour overspending.
However, increased government borrowing during the crisis (partly to save the banks, partly to pay for benefits as more people lost their jobs) meant the UK deficit shot up from around £34.5 billion to £90 billion and continued to climb. Ouch.
The Conservatives promise to cut the deficit and deliver a budget surplus by 2020.
Chancellor George Osborne’s austerity programme was supposed to bring the deficit down. In simple English: lowering government spending. Some of the austerity measures have proved controversial; such as cutting tax credits.
Rather than making cuts, some argue there are other methods to reduce the deficit. This include closing loopholes so that big businesses and non-doms pay the right amount of tax, and investing in public services.
The economist JM Keynes suggested something similar during the Great Depression of the 1920s. The idea was use unemployed workers to work on public projects. The workers would start spending their wages, which would get the economy moving again.
Is the Conservative 2020 deadline achievable? George Osborne’s original plan was to eliminate the deficit by 2015, but missed this target; managing to reduce the deficit by half.
This means that although public spending is coming down, the UK is still overspending and doing nothing about our national debt. Are you sitting down? The UK national debt is currently around £1.5 trillion. Wowzers.
Don’t panic though – the International Monetary Fund thinks the UK can survive with high levels of debt forever. Phew.
Current Chancellor George Osborne has created the Fiscal Charter. It’s a proposed new law which bans the government from creating a deficit in “normal” circumstances. This is defined as when the economy is growing healthily.
On paper this sounds like a sensible idea, no?
However, if the charter is passed it would make it harder for governments to borrow money for public investment. Why is this bad? Labour List explains in language we can understand:
“No one thinks it is wise to max out the credit card to pay for the weekly grocery bill, but just as families have a mortgage to pay for their home, so it makes sense to borrow for the infrastructure – like broadband, transport, scientific facilities for universities – which will increase our economic productivity and growth.”
However, perhaps it’s not a good idea to compare economics to your household budget;
So, what’s the answer? Suggestions on a postcard, please.
It’s hard to know who to believe. It’s even more confusing when politicians disagree over whether spending more than your income is good or bad.
What we do know: lending and borrowing is risky, so you had better be sure people can pay it back.
Will the Fiscal Charter work? Think we’ve missed something? Let us know in the comments below or email email@example.com
The Foreign Exchange Scandal: If you’re going to break the law, probably best not to email about it. Several big banks have been hit with record fines totalling $5.7 billion after it was revealed they had fixed the foreign exchange markets to make profit.
Foreign Exchange is the conversion of different currencies. Changing one countries money into another. The value of a country’s currency is determined by things like trade, investment and tourism and what’s going on in the country at the time (I.e. things like war tend to have a negative affect).
How other countries are doing also effect this. Most countries “float” their currency on the market against other countries – which basically means the value of their currency is affected by how well the other countries are doing and also by trading in the Foreign Exchange (Forex) Market.
Foreign Exchange is handled by big international banks. Traders buy and sell currencies on behalf of clients. Foreign exchange enables international trade and investment from one country to another.
E.g A car company from one country imports car parts from another country. The parts that are being bought, must be purchased in the currency of the country that the car parts belong to. Foreign exchange traders will assist the car company with the exchange. The international banks make money off of this exchange.
Their aim: Finish the day with more money than you started. As the value of currency continually rises and falls, if you are clever (and sometimes just plain lucky) currency traders make a lot of profit on these trades.
A group of traders decided they wanted to make even more money than usual and decided to play against the rules.
It is possible to “fix” the market in order to make a profit. This is illegal.
The market runs 24 hours a day so it’s very difficult to see how much things are worth at any given time. To make it easier to know the value of things a picture is taken of how the market is doing. Before the scandal this was done 30 seconds before and after 4PM and was known as the 4PM fix or fix window.
Traders can affect market prices but placing lots of orders just before the 4PM fix. More orders changes the price value as the demand for a particular product has risen.
If you know an event like this is going to happen you can place your own orders and sales earlier in the day and make a profit when the price changes later on. Buy it while it’s cheap and then drive the price up, for example.
However trades made on their own don’t really make much of a difference to the market as there’s so much going on – you need a rush of similar trades with many people working together.
And that’s what members of the banks did. In one case HSBC traders worked with three other firms to drive the sterling-dollar rate lower. For those that don’t speak City talk: that’s the difference in value between the Pound and the Dollar.
They used confidential information from their clients to manipulate the market, making HSBC a tidy profit of $162,000.
It’s probably worth saying – buying currency you know is going to rise is not illegal. This is called “front running” and is legal in the foreign exchange market because it was thought no single trader could affect the market enough to make a profit. But colluding (coming to a secret understanding) with others to make it happen definitely is illegal.
These emails have a nasty habit of coming back to haunt you.
The traders, who called themselves “the three musketeers”, “the players” and “the A team” sent a series of messages via email and online chat rooms after manipulating the markets:
“Loved that mate… worked lovely… pity we couldn’t get it below the 00”, “Hooray nice teamwork” and of course “If you ain’t cheating, you ain’t trying”
The banks involved in the scandal were JP Morgan, Barclays, Citigroup, RBS and UBS, just in case you were wondering.
The movements in the market are so small that if you’re exchanging money for a holiday you probably won’t notice what’s happened.
However that didn’t stop people getting very angry:
— Tim Fenton (@PompeyTim69) May 20, 2015
— HYDROPONOLOGY (@HydroponicsHUGE) May 20, 2015
As a result of the scandal the 4PM fix window is being extended to five minutes, rather than 30 seconds. This should in theory make it a lot harder for traders to try to fix the markets.
In this case the biggest losers were the banks who will plead guilty to criminal charges and face the hefty fine. Also some of the employees involved in the Forex Scandal are now being sacked. Despite the punishments, events like this don’t make the banks look good and many of the public are wondering “Will they ever learn?!”
What’s the difference between a Dom and Non-Dom?
Domicile and Non-domicile is a matter of status. You have a domicile status in a place where you permanently live and/or have originated from, you have a non-domicile status in a place where you might be currently living but wouldn’t consider your permanent home or origination.
I want a status, where do I get one?
You tend to be born with one. Where you are born however, does not necessarily determine your domicile status. You tend to inherit your status from your father (and sometimes your grandfather).
E.g. you might be born in the UK but your father spent most of his life in Spain and would consider Spain his permanent home. You are therefore granted a non-dom status even if you continue to live in the UK.
You do also have a domicile choice…if you have a domicile status in the UK and decide to emigrate to another country you can actively change your status. If you decide that France is the place for you and decide to live there indefinitely, should you return to the UK you will now have acquired a non-dom status.
What’s all the fuss?
If you have a non-dom status you don’t have to pay UK tax on foreign income until you’ve been living in the UK for seven years.
FOREIGN INCOME IS? Money made abroad. You might live in the UK but your business might reside in another country, or you could be making money off of the property you own abroad, or you might have relatives abroad giving you money.
With your non-dom status you don’t have to pay UK tax on this foreign income for seven years as long as it is under £2,000 or not transferred to the UK.
After seven years, then what?
You pay a fee to keep your non-dom status. This is also known as a remittance and costs £30,000 per year if you’ve been resident of the UK for at least seven of the previous 9 tax years (this rises to £50,000 once you’ve been here 12 of the previous 14 years).
Again, WHAT IS THE FUSS?
Wealthy individuals from all over the world have been coming to live in the UK and using their non-dom status to avoid paying a lot of tax. Similarly, several UK citizens through domicile choice have been able to acquire a non-dom status and benefit from the same scheme.
SHOULD WE BLAME THEM? HOW CAN WE, THE UK HAS MADE IT LEGAL.
Players: Enticing these wealthy individuals to live in our country brings us investment and money from the UK taxes that they have to pay.
Haters: Our country is out of pocket 100’s of millions of £ worth because of it.
If you hadn’t guessed already, the Tories are the players and Labour are the haters…
Ed Miliband announced that if he gets voted in the GE15, he’d like to scrap the non-dom status once and for all. Cameron says, you won’t need to, these wealthy individuals won’t stick around long enough to see you scrap it.
Who knows…and yet we’re meant to decide.