Sunday Telegraph: Businesses flee the leaner, meaner taxman

By Robert Watts (Filed: 11/06/2006)

Some companies are prepared to move abroad to avoid Britain’s powerful merged tax agency. Robert Watts reports

A menacing metamorphosis underway in Whitehall is causing considerable alarm to British business. Companies are concerned over what they regard as the growing power of HM Revenue & Customs, the Government’s new tax department.

Created last year when the Inland Revenue merged with HM Customs & Excise, HMRC is today a vast organisation run by David Varney, the former chairman of O2, and involving more than 100,000 employees, 906 different offices and annual tax revenues of £400bn.

“A lot of our biggest businesses are now looking at whether they want to be domiciled here because of the tax system,” says Sir Digby Jones, the director general of the CBI. “They’re looking instead at Holland, Ireland… Estonia, even. That was never on the radar screen before. I fear that the chancellor, in going after a few millions of extra tax, will lose the Exchequer billions by driving companies out of Britain.”

A steady stream of companies has already announced plans to move their tax domicile abroad. Hiscox, one of the biggest Lloyd’s insurers, for example, hopes to shift its base to Bermuda for tax purposes. The move will have to be approved by shareholders at an emergency meeting later this year, but it could dramatically reduce the insurer’s tax bill. Catlin, one of Hiscox’s rivals, rhas alreadyd one so, citing “the lighter touch” of Bermuda’s regulatory regime and slashing two thirds from its tax bill as a result.

Colt, the telecoms company, is transferring its tax domicile to mainland Europe. In February Colt said it was doing this to “reduce its costs” compared with operating in the UK.

Meanwhile Royal Dutch Shell, the Anglo-Dutch oil company, last year unified its two separately listed holding companies. The new company’s headquarters – and its tax residency – are in the Netherlands, which enabled it to structure the transaction as broadly tax neutral.

“There is not a mass exodus,” says Malcolm Edge, the head of tax at KPMG, the accountancy group. “But there is a feeling that the UK is starting to become uncompetitive in terms of its tax rate compared with the EU. There is also this uncertain environment – companies don’t quite know what is acceptable tax planning and what isn’t.”

The rising corporate tax burden is unquestionably an issue. The UK’s corporation tax rate is 30 per cent, substantially higher than in Germany, Japan, all the Scandinavian countries and the majority of the states in the OECD.

According to the CBI, Britain’s businesses will pay the Government a massive £135.2bn in corporation tax, national insurance, stamp duty and other taxes this year. That compares with £79.8bn in the year before Labour came to power.’

Tesco, the supermarket giant, says 50 per cent of its profits go to the Government through corporation tax, business rates and other taxes.

“We have a larger and rising tax burden,” says Lucy Neville-Rolfe, Tesco’s company secretary. “Yes, the corporate tax rate was lowered, but business rates have risen sharply and so has National Insurance. There is also much more uncertainty about the tax system.”

Executives at some of Britain’s biggest companies point to a range of “anti-business” initiatives unleashed since the creation of HMRC.

Only last week the taxman announced a crackdown on a tax-efficient scheme that allowed businesses to save millions of pounds on loans by claiming tax relief on both the amount of the loan and the interest payments.

Meanwhile, the Institute of Chartered Accountants (ICA) says Revenue investigators are increasingly asking to see private bank statements when making inquiries into small businesses. The ICA is also concerned by HMRC’s growing use of “enabling letters” sent out to businesses. These are speculative letters reminding the recipients of the penalties for tax evasion and suggesting that they check that they have paid their full liability.

These examples are all symptomatic of an increasingly aggressive new tax department, say critics. Former tax inspectors believe this is partly due to the dominance of former Customs officials within the department.

“We’ve seen a reverse takeover of the Revenue by Customs,” says one senior business figure. “Customs men always had strong powers for cracking drugs rings and smuggling, but there is a deal of difference between that and collecting tax from business… and I don’t think the tax department realises that.”

Heather Taylor, a senior tax manager in the investigations department of Grant Thornton, says: “In the old days of the [Inland] Revenue, deals would be done with the taxpayers being investigated… the impression is that the days of such deals are gone. We are seeing a leaner, meaner taxman.”

The Revenue, until a few years ago personified by the Hector cartoon character, had exuded a “gentlemanly” manner. By contrast, Customs, which was founded to stamp out smuggling, had powers to break down doors without court orders and put suspects under surveillance.

Customs investigators carried the nickname “the Dynorod boys”. “They kept digging until they found something,” says one accountant.

There are two current initiatives causing greatest concern. The first is the Large Business Service (LBS), a new part of HMRC that will look at the tax affairs of Britain’s biggest businesses.

An official document laying out the LBS’s strategy says it will make stamping out tax avoidance “a high priority”.

Under the LBS, every one of these 7,000 companies will be allocated an “individual tax manager” to examine their financial structures and root out any tax avoidance.

“Of course, HMRC says the Large Business Service will improve customer service… but there’s no doubt it’s there to extract more money,” says Martin Bridges, a partner at Bridges & Partners, the accountants.

A second development concerns a consultation document published by HMRC three months ago. Entitled HM Revenue & Customs and the Taxpayer: Modernising Powers, Deterrents and Safeguards, it too is vague. There are fears that all tax inspectors will now wield the powers once reserved for Customs officials. “The consultation document is carefully written to leave all options open,” says Chris Singer, the head of tax policy at Ernst & Young, the accountant.

Ultimately, the figure pulling the strings behind this powerful new tax authority is not Varney but his boss, Gordon Brown, the chancellor.

The Treasury has identified a theoretical “tax gap” of between £20bn and £30bn of uncollected revenues, which Varney and his officials are under intense pressure to collect. He has also been set a target of reaping £4bn from “anti-avoidance” measures this year alone.

John Cullinane, the president of the Chartered Institute of Taxation, is concerned that the merger has allowed the chancellor unprecedented control of tax policy. “That is the real issue,” says Cullinane. “There is now much more a flavour that the Treasury advises on and makes the rules and that HMRC just carries it out. The Treasury has some clever economists, but our concern is about the ongoing input of people with real experience of running the tax system. ”

However, the serious long-term issue is how many companies will choose to leave Britain as a result of the increasingly punitive tax regime. “International business is like a flock of birds,” says the chairman of one financial services group. “If you throw a stone they will disappear.

“As businesses we have a duty to place ourselves in a region that is not unduly expensive. And there are plenty of other places we can go.”

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