Tax

General Election 2017: The big questions on tax

Although it’s already been dubbed the Brexit election, tax is likely to be as important as ever in the 2017 poll. So here are my initial thoughts on the main tax issues up for debate in the coming weeks.

No pre-election Budget

Governments usually use the Budget before an election campaign starts to stoke the feel-good factor and set the tax agenda. This time, there won’t be one. The Budget in March was something of a political non-event, except for the rise in national insurance that was so quickly reversed. The Chancellor of the Exchequer, Philip Hammond, didn’t lay out a long term strategy on tax, and the Prime Minister, Theresa May, has given few hints about her tax philosophy. The next Budget is due in the Autumn, although an immediate post-election Budget, as happened in 2010 and 2015, can’t be ruled out.

This means that the Conservatives will make their promises on tax without first having put them in context with a Budget. They won’t be able to present their new ideas as being part of a continuing strategy that is already being implemented. Furthermore, work has been going on in the background that was supposed to inform policy going forward. Matthew Taylor’s review of the rights for people working in the gig economy should have helped inform changes to national insurance. And during his Budget speech, Mr Hammond hinted at long-term plans to rebalance the tax treatment of online and bricks & mortar businesses. None of this work is complete enough to provide policies ready to go into the manifesto. This matters because future tax reform will be made more difficult if it part of the mandate given to the winners of the election campaign.

Conservative pledges

The Tories made wideranging promises in their 2015 general election manifesto. Mr Hammond’s plan to increase the national insurance contributions of the self-employed, which he announced in this year’s Budget, came a cropper as a result. Even though his proposal did not infringe the letter of the 2015 manifesto, he had to ditch the rise within days.

Simply abandoning all the promises they made last time would open the Tories up to accusations that they are planning to raise taxes. I think they would be wise to maintain their pledges not to increase the main rates of income tax, national insurance or, especially, VAT. However, they should include a specific promise to increase Class 4 NICs so that Hammond can do what he proposed in the Budget. Where the Tories are planning to increase taxes, honesty would be the best policy and burnish Mrs May’s no-nonsense image (which has been dented by the announcement of an election when she said there won’t be one).

The Conservatives should drop the ruinously expensive commitment to increase the rate of the income tax personal allowance to £12,500 by 2020. I suspect this pledge resonates much less with the public than the one on income tax rates. Help for the just-about-managing would be better targeted by cuts in employees’ national insurance as this would not cut the taxes of wealthy pensions with lots of investment income.

Labour tax rises?

Labour has already promised to impose VAT on private school fees to fund free school meals for primary school children. They are likely to propose further tax rises to pay for other aspects of their programme.

I expect a mansion tax, just like Labour proposed in 2015. The mansion tax generally works well in focus groups as most voters imagine they’d never have to pay it. However, the scope of any wealth tax (which is essentially what a mansion tax is) needs to be wide if it is to raise significant amounts of money. Additionally, any mansion tax would bite hard in London, which is one of the few parts of the country where Labour might hope to do well.

Other options include restoring the 50% income tax rate for income over £150,000. This could be popular because people support increases in taxes they won’t have to pay. Again, the money raised is likely to be negligible. Another option is a windfall tax on the energy companies, or some other unpopular sector of the economy. New Labour did this back in 1997. The problem is that a windfall tax must, by definition, be a one-off. Hikes in corporation tax also seem relatively painless in electoral terms (although they shouldn’t be, as corporation tax is levied on people as much as any other tax, just at a further remove from their wallets). Shadow Chancellor John McDonnell has already declared that companies bidding for Government contracts would have to follow ‘best practice’ in tax compliance and multinationals will be forced to publish their tax returns. Neither measure would raise any new money. Mr McDonnell has also hinted at increases in capital gains tax and inheritance tax, which HMRC also don’t think would lead to significant tax receipts.

A final option for Labour is to go for a truly socialist manifesto, squeezing the rich till their pips squeak. Given the party is going to lose anyway, there seems little harm in its leader, Jeremy Corbyn, giving his leftwing instincts full reign. He could promise to increase the current 40% income tax rate (paid on all earnings over £45,000) to 50%. HMRC estimates that this would raise £12 billion and so deal with Labour’s fiscal credibility problem at a stroke. Of course, it would be poison with the electorate, as Labour found with a similar policy back in 1992, but this time it has nothing to lose.

Some brief notes on imposing VAT on private school fees

The Labour Party is proposing to impose VAT on private school fees. Here are a few notes on the technicalities of such a policy.

  • Education, including private tuition, is exempt from VAT. This is enshrined in the European Directive on VAT so couldn’t be changed until Brexit. However, once we have left the EU, the UK would be free to impose VAT at whatever rate it pleased, as long as our exit agreement allows us to. That Labour is suggesting a policy that contravenes EU law is, if nothing else, crossing a Rubicon of sorts.
  • The difference between exemption from VAT and zero-rating is important. Generally, where a taxpayer makes exempt supplies, like education, it has to pay VAT in full on things it buys. Where it makes zero-rated supplies, like food, it can claim back the VAT in incurs on its purchases. Thus imposing VAT on school fees is likely to mean private schools can reclaim the VAT they suf6fer on their purchases, reducing the net amount of VAT that the change will raise.
  • Many pupils at private schools are from abroad, some 200,000 by some accounts. University and school education of foreign students is treated as an export (as it is foreigners paying us for something we supply). Exports are outside the scope of VAT, since this is supposed to be a tax on domestic consumption. If we impose VAT on private education, we would also need to decide whether to charge VAT to foreign students as well. If we did, it would damage an important and growing export industry. If we didn’t, the yield from the tax would be lower and we would open a divide between UK and non-UK students.
  • It is unlikely that many parents will turn to the state system as a result of the VAT rise as private school usage appears to be quite inelastic on price. However, some parents will send their children to state schools, which will both increase the cost of providing state education and reduce the amount of VAT raised from private schools.

In summary, whatever the tax yield that Labour expect from imposing VAT on private school fees, the reality is likely to be a lot less.

Questions on Google’s UK tax bill

The financial statements of Google’s UK operations for the year ended 30 June 2016 show UK turnover of £1.03 billion, profits before tax of £149 million, and a UK corporation tax bill of £36.4 million on those profits. In addition, the financial statements show that Google is owed a £31 million tax refund from HMRC. This has led to much speculation in the media, notably the BBC and The Times, about whether Google is paying enough tax. This article is intended to shed some light on that question. I am a tax consultant of 24 years experience and a specialist in international tax. However, I have no inside knowledge or contact with Google whatsoever. If I did, I would not have written this article. My comments below are based on my general experience of international tax and publicly available information.

How much tax should Google have paid in the UK?

In short, it should have paid 20% of its UK taxable profits in corporation tax. Note that corporation tax is charged on profits. When you hear a journalist or politician comparing tax and turnover, rather than tax and profits, you can guarantee they have no idea what they are talking about.

Although profit before tax in the financial statements is not the same as taxable profits, they are often reasonably similar. In this case, the figures in Google’s UK accounts show an effective tax rate of 24%, or 17% after various deductions. This is fair enough, but not really the point. The controversial question is whether Google actually recognises enough of its profits in the UK.

So, how much profit should Google recognise in the UK?

If we have a look at the financial statements of Google’s parent company, Alphabet Inc, we find that total UK sales are reported as being £6 billion (here). And yet, Google’s UK operations only show turnover of £1 billion. Where has the other £5 billion got to and should it be taxed in the UK?

An analogy might help to explain what is going on here. It is a basic principle of international tax that you pay tax where you have the people and know-how making the profits. You are not taxed where you happen to sell your products. For example, Mercedes sold about 170,000 cars in the UK in 2016, but paid all the tax on the profits from building them in Germany. The exception is the dealer networks, which are UK based (and, in any case, independent franchises). The profits they make buying cars from Germany and selling them to UK customers are UK profits subject to UK tax.

Google’s UK sales operation is not independent of Google, but the same principle applies. It should only pay UK tax on the stuff it actually does in the UK rather than on the basis of its overall sales here. Google says that the turnover attributable to its UK operations, being sales and marketing, is £1billion out of their £6billion UK sales. That is not an unreasonable figure and would be subject to serious scrutiny by HMRC.

Google recognises some of its turnover in Ireland and will make a proportion of its profits there. This should be based on work done by people actually based in Ireland. However, most of its profits will be attributable to the US where the ‘magic’ of Google is created. It is the search engine algorithm itself, not the sales people, which represents the true value of Google. Profits attributable to that should be taxed in the US.

So why does HMRC owe Google £31 million?

My guess is that this could well be Diverted Profits Tax (DPT) aka the Google tax. DPT was introduced in 2015 to catch profits that were being artificially diverted from the UK. Google was alleged to be doing this by booking sales in Ireland and ensuring the related profits were taxed there and not in the UK. It claims that it has changed its procedures and no longer does this.

The way DPT this works is as follows: HMRC gets to guess the tax bill it things a company owes and then the company has to pay the amount HMRC guessed. It is then up to the company to prove to HMRC that the guess is wrong. If, after going through all the documentation, HMRC agrees its guess is wide of the mark, it has to pay back some or all of the DPT to the company. It is possible that the amount HMRC is paying back to Google is the £31million in the accounts.

The UK Government introduced DPT to force international groups to come clean about their structures. That is why HMRC demands payment in advance and makes companies demonstrate that they should get it back. If DPT is a success, no one will actually pay it. Ideally, if all multinationals recognise the correct profits in the UK, they would be subject to corporation tax and not DPT. It is an anti-avoidance measure only.

So is Google avoiding taxes?

I can’t see much evidence that Google is avoiding material amounts of UK tax. That’s not meant as a defence of Google, but rather of HMRC and the UK tax system. We tax consultants spend a lot of time slagging off HMRC but, secretly, we rather admire them. The Government is also serious about fighting avoidance. HMRC asked for DPT to be introduced to give it the tool it needed to force multinationals to pay the right amount of tax in the UK. And the Government gave them exactly what it wanted.

However, Alphabet Inc’s financial statements suggest a very different picture in the US where most of Google’s profits should be taxed. We find that its effective tax rate is only 20%, far lower than the US corporate tax rate of 35%. It looks like it is paying a lot less US tax than expected. It is likely that Google has schemes in place so that the revenue they make outside the US is not remitted to its head office and so is not subject to US tax. These unremitted profits are probably contained in its ‘cash pile’ – a mountainous $86 billion according to Alphabet Inc’s financial statements. Much of this cash is held offshore and is not subject to US tax. The Trump tax reform plan is aimed at getting this money back to the US and taxing it (although at nothing like the full rate).

In summary, my best guess is that Google is not avoiding a material amount of UK taxes because our tax system is now robust enough to stop it. In contrast, there is evidence that it is avoiding vast amounts of US tax.

Confused by National Insurance? That’s not a bug: it’s a feature

First, let me make clear that Philip Hammond’s decision to compensate the Treasury for the abolition of flat rate Class 2 national insurance contributions (NICs) by increasing progressive Class 4 contributions is a sensible and moderate policy. The trouble is, for most people, that sentence doesn’t make much sense. What are Class 2 and Class 4 NICs? What happened to Classes 1 and 3? And did you know there is also a Class 1A? In any case, what is national insurance insuring against?

NICs are a mess, but an artful mess that exists for good reasons and because reform is not worth the candle. Fundamentally, the tax system is designed to extract cash from us with the minimum of fuss and without our understanding what is really going on. To achieve that, the machinery of tax collection is kept under the radar. For employees, that means we pay income tax and national insurance through the pay as you earn (PAYE) system. Under PAYE, our employers deduct the income tax and national insurance we owe from our pay packets. Effectively, the Treasury gets paid each month at the same time as we do. Better yet, we never possess the money that we pay in taxes and so never really miss it.

Employers also pay NICs on top of the tax that we see deducted from our wages. Make no mistake about employers’ national insurance. This is a tax on our salaries just as much as income tax. It is just that it is effectively invisible, which suits the taxman fine. In fact, if you earn £45,000 a year, you pay over 40% more in national insurance than you do income tax. Employees’ and employers’ national insurance taken together are Class 1 contributions. Class 1A NICs are paid on employee benefits like company cars.

As everyone now knows, Class 2 NICs are a flat rate tax of about £150 a year on the self-employed. George Osborne abolished these with effect from next year. All Philip Hammond has done is claw this money back by increasing Class 4 NICs on the self-employed, which are based on a percentage of profits rather than a flat rate. But, despite the recent fuss, the big difference between the employed and self-employed is those employers’ NICs, which the self-employed don’t pay. For example, a banker taking home £60,000 a year pays over £41,000 in income tax and NICs. A self-employed doctor, also getting £60,000, pays just £28,000. Given the fuss that Mr Hammond’s modest change has caused, we can be confident that the Government won’t be evening up the scales between the employed and self-employed any time soon. Instead, HMRC tries to reclassify people who are self-employed as being employed by someone else. This enables the taxman to extract more tax from them. Expect more action on this front involving Uber drivers and other workers in the gig economy.

There’s another reason that the self-employed tend to pay less tax. Because they don’t pay through PAYE, they have to write a cheque, or at least make a bank transfer, direct to HMRC. That means the self-employed know exactly how much tax they pay and resent it accordingly. Most employed people haven’t got a clue.

The complications don’t stop there. NICs are only paid by people in work. They don’t apply to savings income, which means that the leisured rich enjoy much lower effective tax rates than the working poor. You also don’t have to pay NICs once you get past the state retirement age, even if you are still in work. This means we tax the productive part of the economy far more heavily than we do the unproductive part. Sloth is tax efficient compared to toil, provided you have money in the bank.

The major benefit for taxpayers paying NICs is to ensure they get the full state pension. You need 35 years of contributions to be entitled to the full amount (Class 3 NICs can be paid if you miss a few years of the stipulated 35). Nonetheless, having to pay NICs to access the state pension is not a terribly good deal. It is currently worth about £8,000 a year, increasing each year by the higher of inflation, earnings growth or 2.5% (the so-called triple lock). Meanwhile, if a worker on the average wage could invest all their NICs in a private scheme, he or she could expect an index-linked pension of over £14,000 a year. Worse, pensioners are dependent on the largesse of future taxpayers to fund the state pension and keep the current triple-lock indexation going. There is no money invested by the Government to pay tomorrow’s pensioners.

The awful complications of national insurance make reform very difficult. As Philip Hammond has found, for every change you make, there are winners and losers. The winners are quietly satisfied while the losers are apoplectic. In the present case, these losers include a lot of self-employed columnists who can make their annoyance very public. Thus, even a tax change that has genuine public support (as the NIC changes do) can be portrayed in the media as a disaster.

Some have suggested that we should abolish national insurance completely and replace it with equivalent rates of income tax. This would be a transparent and rational reform. But politically, the change would be a disaster for the Chancellor foolish enough to implement it. Lots of people would suddenly realise that their income tax bills were much higher than they thought. Worse, the manifest unfairness of the employed and the self-employed paying very different rates of tax, not to mention the lower rates for rich pensioners and savers, would be out in the open.

Perhaps the events of the Spring Budget 2017 will serve as a lesson for future Chancellors who think that there is anything rational about reactions to tax reform.

Business rates: the anatomy of a controversy

This article was originally published at Reaction.

Even the Daily Mail is splashing business rates on its front page. What has this most unglamorous of taxes done to deserve that?

For many businesses, rates are a bigger headache than corporation tax. After all, they only have to pay the latter if they are profitable. There is no such escape from rates. The trouble is the way they are levied. To figure out how much it owes, a business first needs to know the theoretical amount that someone would pay to rent the premises it occupies. This ‘rateable value’ is determined during a periodic exercise by the valuation office agency. The business has to pay roughly half of the rateable value as a tax each year. It doesn’t matter if the business is doing well or seriously struggling, it still has to cough up.

At the best of times, the tax is unfair in the way that it hits some kinds of trade harder than others. A bookshop in the High Street of a pretty country town might not make much money. But it has to pay business rates that reflect the gentrified area in which it is located. Conversely, a small office in an out-of-town development might contain a few highly paid executives for whom the business rates are not a significant cost.

In short, business rates are oppressive for a retailer which has to locate close to its customers. One result is that charity shops, that get an automatic 80% rebate, have colonised high streets where regular stores are priced out. The Government periodically promises a review of business rates but the chance of serious reform founders on the need to raise the same amount of money after any changes. Nonetheless, there are plenty of exemptions and reliefs, such as those for village shops and pubs, which mean everyone else has to pay even more.

The current hullabaloo, reflected in the Daily Mail and other papers, is simply the regular revaluation exercise intended to keep rates fair. Although the total amount to be raised isn’t increasing much, there are, inevitably, winners and losers. The winners, which allegedly include Amazon’s warehouses, are quietly satisfied. The losers, comprising popular brands and small shops, are outraged. Numerically, it also looks like the losers may outnumber the winners, further increasing the volume of their complaints. The Government itself has made matters worse. The revaluation was supposed to happen in 2015 but, since it did not want the resulting controversy to hit just before a general election, it postponed the changes until this year. As a result, many ratepayers are seeing much bigger revaluations than they would have done had the exercise taken place two years ago as scheduled.

In some ways, business rates are the commercial equivalent of council tax. Like with council tax, the revenue raised goes to fund local government. A total of £26 billion a year is collected and, through a complicated formula, it is redistributed to local authorities. Unlike council tax, business rates are not automatically spent in the same area in which they are collected. My local authority of Tunbridge Wells, being quite a wealthy borough, keeps a tiny proportion of the rates it collects. Councils don’t even get much say on what the level of rates should be. Since the 1980s that has be set by central government. Going forward, local authorities will get to keep increases in the money raised from business rates in their patch, but conversely they are on the hook if they do not manage to collect enough.

The Government will be very keen to face down the current resistance. Assuaging those seeing increases in their rates will cost money that it does not have. David Gauke, Financial Secretary to the Treasury and a politician who radiates seriousness, has been dispatched to calm things down. Number 10 will be hopeful that when Article 50 is debated by the House of Lords next week, public attention will be distracted from business rates (that most people know nothing about) and the Daily Mail will come back onside.

However, all this could merely be a dress rehearsal for what would happen if there was ever a council tax revaluation. Council tax is calculated from the value of our homes in 1991, which is now hopelessly out of date. But given the regular angst caused by business rates changes, it is no surprise that ministers have repeatedly refused to countenance a revamp of residential property taxes. That would just be asking for trouble.

The sugar tax looks more like a way to raise money than cut obesity

Last week, the Government published a draft of the legislation intended to implement the Soft Drinks Industry Levy or sugar tax. This was supposed to be the most contentious aspect of this year’s UK Budget. Perhaps the Chancellor of the Exchequer at the time, George Osborne, was hoping it would provide cover for some the other measures that blew up in his face, like forcing all schools to become academies or cutting disability benefits. Osborne is gone now, but the sugar tax lives on.

The tax is supposed to add about 8p to the cost of a can of Coca Cola from April 2018. Many people have been justifiably concerned it will fall disproportionately on the poor. Research on the effectiveness of sugar taxes is mixed but there is some evidence that they might be effective in reducing sugar consumption. The Government is certainly justified to give it a go. Even if we find it doesn’t work, that’s useful to know, as long as politicians are willing to admit to their failure.

From the point of view of designing effective new taxes, the soft drinks industry levy seems sensible. For example, the Government doesn’t want ordinary people to have to pay the tax themselves. Think about the way the income tax and national insurance on our salary are paid via PAYE before we ever get our hands on it. That lessens the pain we feel about losing a large chunk of our wages to HM Treasury each month. The sugar tax works on the same principle. It’s paid by drinks manufacturers rather than by consumers. Of course, the cost will be passed on to the people buying the drinks, but then all taxes are ultimately paid by human beings. The sugar tax will also be a stealth tax. We won’t see it on our shopping receipts or know exactly how much we are paying.

The art of designing a tax is to ensure that it brings as much money as possible with the minimum of political blowback. In other words, it “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Nonetheless, the sensible implementation of the sugar tax might be an obstacle if it is supposed to reduce obesity rather than raise revenue. If people are not aware they are paying the tax, they are unlikely to alter their behaviour as a result of it. It might work better if the amount payable was emblazoned on soft drinks’ packaging for all to see.

How can we tell if the sugar tax is working? It is currently expected to raise a bit over £500 million in its first year of operation. If that number goes down, it means sugar consumption is going down too. Ideally, the revenue from the tax would drop to nil as we stop consuming sugary drinks at all. However, as it happens, the Government is only predicting a slight decrease in the revenue raised each year, suggesting that it does not expect the sugar tax to have much effect on our drinking habits.

For the moment, the Government is relying on the manufacturers to cut the sugar in their products. However, if the sugar tax doesn’t cut our intake, the Government might be tempted to increase the rate until it has an effect. It wouldn’t be long until the soft drinks levy brings in £1 billion plus a year and becomes just another revenue raising sin tax like cigarette and alcohol duties. If that happens, the naysayers claiming it is just way to extract cash from the feckless poor would be proved right.

The victorious Uber claimants may regret it if HMRC become involved

The Uber app has become an essential part of life for many people, although I admit I’ve never used it. Out here in darkest Kent, there are no buses and getting a minicab to anywhere is horrendously expensive. That means a car is essential for almost everyone.

To recap, the Employment Tribunal last week found that two Uber drivers were ‘workers’ and so entitled to the national living wage and holiday pay. However, the Tribunal did not decide that the drivers were employed by Uber, largely because the claimants did not ask to be treated like this. Why not? Because, being employed means that you are subject to much higher taxes compared to if you are self-employed or a ‘worker’. Unfortunately for the drivers, HMRC might now get interested. So it may start demanding that Uber drivers are subject to higher taxes and the claimants may find they have cut off Uber’s nose to spite their own faces.

If you are employed, the tax on your salary is about 17% higher than it would be if you were self-employed. Most of the difference is made up of employers’ national insurance contributions of 13.8% of your gross salary. These are in addition to employees’ national insurance that, at 12%, is also 3% higher for employees than for the self-employed (inevitably, there are allowances and thresholds to complicate these bald figures).

What, you might ask, is the difference between employees’ and employers’ national insurance? In truth, it’s not very much. They are both taxes on our wages, together with income tax. All this tax, and our take-home pay, has to come out of the same bucket of money that our employers set aside to make sure we turn up to work each day. Tax experts will point to historical reasons for the split between employers’ and employees’ national insurance. They might also note that, in theory, businesses rather than employees pay the employers’ contribution. But since businesses treat this as just another cost of having staff, it is really a tax on employees, just like income tax.

The reasons for the disparity between the taxation of the employed and self-employed are manifold. Some of it is explained by the fact that employees have more rights than the self-employed, including holiday pay and protection from unfair dismissal. For that reason, some on the left see the entire gig economy as a giant tax dodge where individuals are duped into self-employment by unscrupulous businesses. Another issue is legislative inertia. It is very hard to iron out niggles in the tax system without someone complaining. But I think the main point of employers’ national insurance contributions is that they are a very effective stealth tax. They enable the Government to extract the equivalent of an additional 14% of income tax without us really noticing. The reason that the self-employed don’t have to pay this is that they write cheques to HMRC themselves and would definitely spot a 14% hike.

The fact that Uber does not have to pay employers’ national insurance means that its drivers get more cash or other benefits such as flexible working. Presumably most Uber drivers like this arrangement or they’d just up sticks, and go to work for a regular minicab firm. If HMRC do force Uber to pay extra tax, that’ll just mean less money for the drivers; higher prices for customers; and probably fewer Uber cabs at 2am on a Sunday morning.

With the British gone, can the EU push on towards tax integration?

What do you mean, you’ve never heard of the common consolidated corporate tax base? It’s all the rage in Brussels, and represents a typical example of how Eurocrats are still increasing centralisation of the EU. Public concern about multinational companies avoiding tax has provided the cover to resurrect a plan for a Europe-wide corporate tax system. It was originally booted into the long grass in 2011, but Eurocrats are a patient lot and have been waiting for an opportunity to bring it back.

At the moment, companies operating in Britain calculate their taxes according to legislation introduced by the British Parliament. Likewise, German companies have to follow the rules from the Bundestag, and Irish companies the laws passed by the Dáil. Under the Eurocrats’ plan, all multinationals operating in the EU will have to calculate their taxable profits according to rules set centrally by the European Commission. The profits would then be divided up between the countries in which the multinational operates and subject to those countries’ corporate tax rates. Corporate groups would also be allowed to set off their losses in one European country against their profits in another country, depriving the country with the profitable business of tax revenues.

EU member states would be allowed to continue setting their own corporate tax rates. But in practice, the ability to do this also requires control over the tax base, which Brussels would determine. In any case, tax rates would be the next item on the agenda for centralisation. As far as Eurocrats are concerned, tax competition between member states is an unacceptable distortion of the single market.

The British Government has consistently stated that it would block the plans and does have a veto over corporate tax measures. However, Brexit has put paid to this obstacle. Eurocrats have also split their proposals into two parts. They will first try to get agreement on an common corporate tax base (CCTB) harmonising the rules under which multinationals operating in the EU have to calculate their taxable profits. Only then, when the same corporate tax rules have been imposed by Brussels on all member states, will the common consolidated corporate tax base (CCCTB) be launched. This will effectively treat the EU as a single country for company tax purposes.

Eurocrats are hopeful that by dressing the plans up as a way to combat tax avoidance by multinationals, they can exert political pressure on unwilling EU member states to swallow the pill. It is true that the measures would help prevent multinationals from using differences in the tax systems of various countries to reduce their tax bills. However, those differences are the product of decisions by sovereign Parliaments trying to ensure their tax systems are competitive and well-adapted to local circumstances. Even with the British out of the picture, expect strong resistance from smaller countries like Ireland and the Baltic States, which have used tax policy as a central plank of their economic offering to foreign investors.

In the interim, the European Commission is pushing forward with a directive specifically on corporate tax avoidance, which obliges member states to bring in a raft of measures that would previously have been the preserve of national Parliaments. Again, public concern about the activities of multinationals has provided the excuse for this power-grab. In this case, even the UK is on board, in large part because we are introducing most of the rules ourselves in any case.

Under the EU treaties, direct tax has been a matter for national Parliaments. However, if they can achieve unanimity in the Council of Ministers, Eurocrats can still extend their competence into this area. In that case, they don’t need treaty change with the attendant risks of triggering referendums. And once Brussels has the powers it wants, the ratchet has turned and member states can never get them back. The European Court is then be able to further erode national sovereignty through its programme of judicial activism. Already, it has decided old UK rules on taxing dividends and foreign subsidiaries are incompatible with the single market. This has left the British taxpayer with a bill for billions of pounds in compensation payable to the businesses that had suffered the taxes in question. Brexit is unlikely to mean these refunds can be cancelled.

Like many of the machinations in Brussels, the common consolidated corporate tax base is probably too obtuse to be easily understood by European voters. But it shows that the European Commission’s hunger for centralisation is as sharp as ever, especially now that the UK has left the building.

The Panama Papers aftermath: it’s time to abolish the withholding tax.

Originally published on Conservative Home.

When the Panama Papers were splashed back in April 2016 with breathless excitement by the Guardian and the BBC, it looked as though we might get to enjoy some juicy scandals. But now, after a few months of gestation, the leaked documents are, from a UK point of view, a damp squib. Admittedly, the name of David Cameron’s father was unfairly dragged through the mud. However, it eventually dawned on people that neither he, nor his son, had done anything remotely untoward. Other than the Cameron non-story, the 11.5 million files in the Panama Papers don’t appear to tell us much about the tax affairs of UK residents.

In any case, when it comes to tax evasion, the Government has been on the case for some time. From June, all UK companies have to publicly register their owners, while an international treaty to share information on offshore bank accounts has been agreed by over 130 countries. A string of new offences is included in this year’s Finance Bill against enabling and engaging in offshore evasion. All this was in train well before the Panama Papers hit the newsstands. Admittedly, no one will be convicted for any of these new crimes. They are intended to ensure that financial institutions stop turning a blind eye to possible cases of tax evasion. The banks themselves will enforce the new rules through enhanced compliance procedures.

With all this activity, it is worth asking how serious the problem of evasion is. Wealthy British people do indeed have billions stashed offshore, and not all of them come clean with the taxman. But, perhaps surprisingly, the vast majority of them do. For example, when HM Revenue and Customs (HMRC) obtained account details from the notorious Geneva branch of HSBC in 2011, they found information on about 7,000 British-held accounts holding in the region of £13 billion. Yet, it turned out that over 80 per cent of these didn’t owe a penny extra in UK tax.

From those that did, HMRC recovered £135 million of back taxes, interest and penalties. A significant haul, to be sure, but only enough to pay our dues to the European Union for a few days. In only one case did HMRC and the Crown Prosecution Service adjudge that the evidence of criminality was sufficiently strong for a prosecution. No doubt, the Panama Papers will reveal some more tax evaders, although the scale of wrongdoing is likely to be more modest than the trillion pounds suggested by Labour MP Dan Jarvis in the New Statesman. Nonetheless, we must be close to the point at which the myriad of new regulations and offences introduced by the former Chancellor, George Osborne, end up costing innocent taxpayers more than the Exchequer recovers from the miscreants.

Turning to legal tax avoidance and planning, the Government is implementing a series of international agreements to restrict the tax deductions that companies can enjoy for cross-border financing and has introduced a general anti-abuse rule. Perhaps more importantly, the courts have stopped finding that tax avoidance schemes work, even when the scheme follows the letter of the law.

In this new era of transparency, the Government should now start to dismantle the tax barriers that distort international commerce. Just as Nigel Lawson removed exchange controls, Philip Hammond should abolish the nineteenth-century throwback called withholding tax. This is a tax that countries levy on money paid abroad. For example, the UK charges a tax of 20 per cent on payments of interest to many non-resident recipients even though the recipients will also pay tax on the money in their own country. That’s double taxation and completely unfair.

Unfortunately, sorting this double taxation out gives rise to all sorts of administrative problems. So, if you want to set up a fund that caters for international clients, you can’t do it in the UK because of the withholding tax. That’s why Ian Cameron set up his trust abroad and why so many European funds, holding €3.5 trillion in 2015, are actually situated in Luxembourg, which doesn’t withhold tax. The vast majority of money held in countries like Switzerland, Luxembourg and elsewhere is kept there specifically so that it is taxed once, but no more often than that. Abolishing withholding tax would see some of that money returning in the UK. And much of the business of law firms like the Panama Paper’s Mossack Fonseca would dry up.