Dubbed “the Google tax”, the new levy was announced in the chancellor’s autumn statement alongside a move to punish banks for losses incurred during the global financial crisis.
Responding to outrage about the minimal contributions big corporations make to European governments, the Treasury is targeting Silicon Valley companies such as Google, Amazon and Apple, but the measures will reach beyond technology to high street chains such as Starbucks.
“We will make sure that big multinational businesses pay their fair share,” Osborne said. The tax is intended to raise more than £1bn over the next five years by tackling aggressive avoidance, while an unexpected strike against banks will raise another £4bn over the same period by reducing their ability to use losses racked up during the crisis to reduce tax payments now.
Labour MP and tax campaigner Margaret Hodge welcomed the strike against Silicon Valley, but experts said the estimated £300m a year in extra revenues was just a fraction of the real profits multinationals are making in Britain.
The rules for the Treasury’s “diverted profits tax” will be published in draft legislation on 10 December and introduced in April 2015. They are designed to hit companies that use artificial structures (video showing how it is done) to minimise UK profits and therefore lower their UK tax bills.
The rate is 5% higher than next year’s UK corporation tax rate of 20%, suggesting the chancellor hopes companies will choose to dismantle complex structures that divert profits to low-tax nations such as Luxembourg and Ireland, and choose to pay HM Revenue and Customs instead.
“The chancellor said this will raise a billion over five years, but ultimately this is a tiny proportion of the profits the multinationals he has in mind are generating,” said Toby Ryland, a partner at accountants HW Fisher & Company. “In reality, many of the UK’s double tax treaties with other countries dictate where profits can be taxed. Sweeping measures like this often come to nothing. The chancellor has made the right noises, but most multinationals will be able to side-step these new rules without breaking into a sweat.”
Google paid just £20m tax in the UK last year. But its actual British revenues were £5.6bn. The group as a whole has a profit margin of 20%, suggesting the company’s real profits in the UK could have been as high as £1.2bn. Taxed at the proposed 25% rate, this would deliver £280m a year in revenues for the Treasury from just one company. But the government expects to collect no more than £360m a year from the diverted profits tax.
Hodge, who has grilled Google over its tax policies as chair of the public accounts committee, tweeted: “Welcome new measures to crack down on companies who move their profits offshore.”
Osborne also said he wanted to increase the burden on banks bailed out at huge cost to the public purse in 2008. He is cutting in half the “carried-forward losses” used to defer tax. The government said it was unreasonable that these losses of roughly £17bn could be used to eliminate tax on current profits. Without the changes, some banks would not pay corporation tax for another 20 years.
Osborne said: “The banks got public support in the crisis and they should now support their public in the recovery.” Bank shares wobbled following the announcement. Bailed-out Lloyds Banking Group was hardest hit, falling just over 1%.
Jonathan Richards, executive director in financial services at consultancy EY, said: “This is unexpected and significant news for banks. It is likely to represent a significant additional cash tax cost for the banking sector over the next few years. If it results in banks being required to revalue their deferred tax assets, banks’ capital position and reported earnings could be affected.”
The industry was digesting the detail, but it appeared the chancellor was only targeting losses incurred in the UK, which would limit the impact. Barclays lists more than £4bn of deferred tax, but just £499m of this relates to the UK. Royal Bank of Scotland, 81% taxpayer-owned, has £3.1bn of deferred tax assets, £2.1bn of which is UK-related.
Ian Gordon, banks analyst, at Investec said Lloyds appeared to be most affected with £5bn of deferred tax assets “which, in the absence of disclosure or guidance to the contrary, we assume to be primarily UK-related”.
The banks are already paying a levy based on the value of their balance sheets which is supposed to be bringing in £2.5bn a year.
1.255 The government is committed to fighting tax evasion, which increases the burden on
honest taxpayers. The UK has played a leading role, including through its Presidency of the
G8, in the development and early implementation of a new global standard to automatically
exchange financial information for tax purposes. Almost all financial centres have now agreed to begin exchange of information under the new standard in 2017 or 2018. The UK has already signed agreements to this effect with 50 other countries and jurisdictions which will lead to a step change in HMRC’s ability to tackle tax evasion. In advance of these agreements coming into force from the end of 2015, the government will increase the amount and scope of civil penalties for tax evasion, and review how best to enhance the incentives for obtaining information on offshore tax evaders.
the government will introduce legislation on enhanced civil penalties for offshore tax evasion.
This will amend the existing offshore penalties regime to:
• include IHT
• apply to domestic offences where the proceeds of non-compliance are hidden offshore
• update the territory classification system to reflect the jurisdictions that adopt the new global standard of automatic tax information exchange
• include a new aggravated penalty of up to a further 50% for moving hidden funds to
circumvent international tax transparency agreements
The changes will come into effect from April 2016, except for the aggravated penalty which will come into effect following Royal Assent. (Finance Bill 2015)
existing framework for offering financial incentives for information on offshore tax evaders,
in particular those who remain outside the reach of international efforts to achieve tax
amount of UK tax. Where multinationals use artificial arrangements to divert profits overseas
in order to avoid UK tax, the government will now act. Autumn Statement announces
the introduction of a new Diverted Profits Tax to counter the use of aggressive tax
planning to avoid paying tax in the UK. The Diverted Profits Tax will be applied at a rate of
25% from 1 April 2015.
Margaret Hodge: Gatwick runway appeal ‘is hypocritical when it avoids corporation tax’
Gatwick has been accused of “hypocrisy” for avoiding corporation tax while campaigning to build a new runway, allegedly for the benefit of the UK economy. Margaret Hodge, head of Parliament’s Public Accounts Committee, said the airport should pay its “fair share” if it wants its runway campaign to be credible. She also criticised Heathrow which has not paid corporation tax for several years. But she particularly criticised Gatwick. Its Guernsey-based parent company Ivy Mid Co LP has invested in a £437 million “Eurobond” which charges the airport 12% interest, thus avoiding tax. Gatwick says this sort of bond is often used by other infrastructure companies. Companies in the UK should pay 21% corporation tax on profits, but by spending £1 billion on upgrading the airport, Gatwick has made no profit recently. Despite pre-tax loses in recent years, it has paid dividends to its overseas shareholders of £436 million. Heathrow has also avoided profits by investing in new buildings etc. Mrs Hodge said the companies “made a fortune” from their UK activities, which relied on public services, adding: “For them to pretend they are only in it for the benefit of the UK economy is a touch hypocritical.”
Gatwick airport announces first profits for years and returns for its investors … UK tax?
Gatwick Airport paid no Corporation Tax in three years