The principles of tax policy

Written evidence submitted by Richard Brooks

1. I am a journalist with Private Eye magazine. I write on a number of issues including tax and was a member of the Guardian’s "Tax Gap" team that ran a series on corporate tax avoidance two years ago. Until 2005 I was a tax inspector at HMRC specialising in international and corporate taxation.

2. This is a short submission on a basic flaw I have observed in UK tax policy making and the tax policies that emerge as a result.


3. Tax policy is strongly distorted in favour of the very largest corporations. Among the harmful consequences of this are the shifting of the tax burden onto other businesses and individuals and the competitive disadvantage suffered by smaller businesses. This distortion stems from a growing capture of the corporate tax policy-making process by the largest companies.

4. This trend appears to be accelerating, especially with HM Treasury’s current proposals for corporate tax reforms to be enacted in 2011 and 2012. Together with other recent changes (notably the 2009 exemption of overseas dividends) these mark the most fundamental shift in the corporate tax base since residence-based taxation, under which a UK resident is taxed on worldwide income, was introduced in 1914. Indeed, they are not far off a reversal of this development. (There may be a history lesson in the fact that the economic demands of war then necessitated a greater contribution from large business, whereas fiscal troubles a century on apparently demand the opposite response).

5. HMT’s proposals make the UK corporate tax system a largely territorial one under which UK income is taxed, whilst tax allowances are still given for costs, including funding costs, that might support non-taxable overseas operations. This is an extremely lenient arrangement that will see large multinationals’ effective tax rates fall drastically. In adopting the most generous features of two contrasting systems of taxation (a territorial view of income, and a residence-based view for allowances) it is unique. And even without this move the UK was set to have the lightest corporate tax regime among major western economies, according to Exchequer Secretary David Gauke. [1]

6. The benefits of this system are not, however, equally available to smaller businesses that do not have large international operations since it would be prohibitively expensive for them to establish the required offshore networks.

Imminent corporation tax reforms

7. Changes planned for the "controlled foreign companies" legislation over the next two years include: exempting profits diverted into tax havens from third countries (a beggar-thy-neighbour policy with serious consequences for developing countries), taxing financial income parked in tax haven subsidiaries at 8% and exempting profits of foreign branches including tax haven branches.

8. These are self-evidently very generous moves that encourage tax haven activity in the face of global pronouncements against offshore activity in the wake of the recent financial crisis. The important question is how they were developed.

9. CFC reform has been led by a "CFC Liaison Committee" comprising HMT and HMRC officials along with the tax directors of BP, AstraZeneca, International Power, RSA (Royal Sun Alliance) and HSBC. All stand to benefit substantially from relaxation of the CFC laws.

10. Reforms to be introduced in Finance Bill 2011, including the exemption for third country income described above, were developed by a working group comprising HMT and HMRC officials (four in total) plus tax directors from Anglo American plc, British American Tobacco plc, Xerox, IBM, Intercontinental Hotel Group plc, C&W plc, Rolls-Royce plc and Aviva plc. Again, all will benefit greatly from the changes developed by their group.

11. The same companies, plus others including Tesco, Diageo, Rio Tinto, Glaxosmithkline and many others are currently taking forward wider reforms under a further six working groups. [2] The group considering "monetary assets" includes the tax director of Vodafone, whose multi-billion pound tax avoidance using transactions covered by this very aspect of CFC law has been extensively reported by Private Eye.

12. The whole process has been overseen by a "tax and competitiveness group" comprising the finance or other directors of Vodafone Group plc, Diageo plc, RSA Insurance Group plc, GlaxoSmithKline plc, Rolls-Royce plc, General Electric Company, Ford Motor Company, Amey plc, Royal Dutch Shell plc plus the director of the business-funded Oxford University Centre for Business Taxation and the Director-General of the CBI. Again, the companies mentioned stand to gain significantly from the changes proposed.

13. Of course such "stakeholders" should be heard, but the structure of corporate tax policy making has left them far too influential. Rather than listening to business’s concerns and opinions and then making policy recommendations taking into account their and others’ views, policy-makers are writing the rules in conjunction with the very vested interests that stand to gain most from their decisions. The result is policy development reduced to not much more than giving the largest corporations the tax breaks they want in the name of "competitiveness" (with the words "whilst protecting the UK tax base" usually tacked on for form’s sake).

14. So in announcing its proposals on tax haven-based financing companies HMT reports: "Discussions with business suggested that a debt:equity ratio of under 1:1 [related to the mechanics of the rules] would be competitive if it delivered an effective tax rate of around and ideally less than 10 per cent". [3] The tax rate proposed by HMT is 9%, falling to 8% by 2014. Multinationals operating in tax havens will thus be taxed more lightly than a cleaner earning £7,500 a year.

15. On exempting profits of foreign branches, a crucial question was whether this would apply to branches in all countries and territories, including tax havens, or just those with which the UK has a tax treaty and can be considered not to be tax havens. Exempting tax haven branches opens big tax avoidance opportunities, but HMT’s response to consultation on the point reports: "There was a strong message from many respondents that extending exemption to all countries and territories is important for the competitiveness of the new regime". [4] So this is exactly what HMT proposes.


16. Surrendering policy-making to the group most affected by the policies in question to this degree would not be accepted in any other area. The nearest policy field is probably the regulation of banking and financial services, in which such "regulatory capture" over recent years has been widely reported. So have the disastrous results.

17. A similar pattern is emerging in tax policy, as economies "race to the bottom" to offer the laxest corporate tax regime. In 2005/06 28% of multinationals dealt with by HMRC’s Large Business Service paid no corporation tax. More than half paid less then £10m. [5] The latest changes are likely to see these proportions rise.

18. With government revenues more stretched than ever, this amounts to a dangerous narrowing of the tax base. Or to put it simply, everybody else will have to pay.

21 January 2011

[1] In a speech to tax advisers Deloitte in November 2010 Gauke said that when corporation tax rates fall to 24% in 2014 the UK rate “will be the lowest of any major Western economy”. Many other tax allowances legitimately reduce this rate yet further.

[2] See



[5] National Audit Office report, Management of Large Business Corporation Tax, 25 July 2007