The Lost Tax Receipts in the UK’s Closet

A short look into Britain’s silent endorsement of tax avoidance

ast Thursday I introduced a debate in the House of Lords about the proposals in two excellent reports by Church Action for Tax Justice, ‘Tax for the Common Good’ (Sept 2019), and ‘Fair Tax Now’ (Jan 2021).

I am no expert on matters of taxation, but I have been all too aware of the numerous news stories over recent years documenting how various multinational companies pay miserly rates of tax. Tax avoidance is one of the report’s central focuses, highlighting not only its extent but the associated loss of revenue. For example, in the UK the annual tax gap that arises from tax avoidance has been estimated at £31 billion per annum.

Globally however, the UK plays a particularly pernicious role in facilitating tax evasion on an international scale. British Overseas Territories and Crown Dependencies have long acted as international refuges for tax avoidance. Their lax regulation, easily exploitable loopholes and low tax regimes seamlessly connect to the City of London to create a network that allows wealthy individuals to avoid paying a fair level of tax. For example, did you know that the British Virgin Islands was identified as the most popular tax havens in the Panama Papers? In fact, it isn’t just the British Virgin Islands; according to the 2019 Corporate Tax Haven Index, four out of the top ten tax havens globally were UK associated territories — the British Virgin Islands, Bermuda, Cayman Islands, and Jersey.

Tax avoidance isn’t just lucrative for these jurisdictions, but also for the companies that offer these ‘creative solutions’ to facilitate it. In 2009, HMRC concluded that 50% of the ‘Big Four’ accountancy firm’s (KMPG, Deloitte, Ernst & Young, and PWC) tax fees came from “commercial tax planning” and “artificial avoidance schemes”, which generated around £1 billion per year.

During the debate Lord Sikka asked why the government has not acted:

“On numerous occasions, courts have adjudged tax avoidance schemes, manufactured by big accounting firms, to be unlawful. For example, the Supreme Court, in the case of HMRC v Pendragon plc, considered a KPMG mass-marketed avoidance scheme as “an abuse of law”. Despite strong judgments, no big accounting firm has been investigated, fined or prosecuted, although they are awarded plenty of taxpayer-funded contracts. Can the Minister tell us why these firms continue to be indulged? Can she name even one instance where the Government have fined or prosecuted any big accounting firm for peddling unlawful tax avoidance schemes?”

Certainly, this is something the government should answer for — tax avoidance is immoral and legally dubious at best, but more likely it is both immoral and unlawful as Lord Sikka points out. In 2018, the Big Four signed £307m worth of contracts for new government consultancy projects, so why does the Government continue to reward poor behaviour with lucrative deals? Clearly, this is an indefensible position — though perhaps the government is afraid of the pot calling the kettle black; after all the UK, as pointed out, is at the centre of an international tax avoidance network — a network that the government has shown little desire to dismantle.

Bishop of St Albans, Doctor of Philosophy, Lords Spiritual Member of the UK Parliament