Tuesday, 11 December 2012

Britain could end these tax scams by hitting the big four accountancy firms

UK Uncut at Vigo Street on 8 December
A Starbucks protest on 8 December. ‘A clever protest on the right issue can catch public imagination and media attention.' Photo: Antonio Olmos for the Observer
Sometimes it only takes a spark. Never imagine nothing can be done: UK Uncut packs a punch far above its weight, as did the suffragettes, slave trade abolitionists and most causes great and small. A clever protest deftly done on the right issue can catch the public imagination and the media's attention: now the public accounts committee investigates and the government is obliged to pledge action.

At Saturday's Starbucks occupation of 40 coffee shops, the point was easy to explain to passers-by: companies massively avoiding tax help to cause the cuts that shut libraries, Sure Starts and women's refuges. This short occupation with an orderly exit and loud chants causes Starbucks deep reputational damage. Costa, nearby, does pay its taxes, while Starbucks avoids its duty to the civilised society it depends on.

Take note, all other corporate avoiders: Manchester Business School estimates that Starbucks will see a 24% drop in sales over the next year, from the experience of reputational crises in 50 other companies. The eye-popping stupidity of choosing this same week to cut its staff's paid lunch breaks and sickness and maternity pay suggests a company whose only efficiency is in tax-avoiding. The £20m it offers as a "donation" to HMRC may even be tax deductible: it can offset this "overpayment" against future tax, once public attention has drifted elsewhere, adding to the phenomenal recent drop in corporation tax receipts, as companies copy one another's avoidance schemes.

In 2009 the Guardian's tax gap series kicked off this debate, exposing devious but legal devices such the "double Luxembourg", the "Dutch sandwich" and Roger the Dodger of Barclays. This is the most dangerous kind of investigation, where any mis-step risks lethal lawsuits from those with deep enough pockets to kill: it cost us £100,000 in lawyers' fees alone, plus months of journalists' time digging into opaque company accounts. We told how Boots, bought by private equity firm KKR, abandoned its Nottingham home to put its HQ in Zug, the Swiss tax haven. By loading the company with debt, its tax bill dropped from £606m to £74m – and Barclays lent them billions to do it. GlaxoSmithKline and Astra Zeneca moved to Puerto Rico and Shell took its trademark to Switzerland. Diageo transferred brand names to a Dutch subsidiary, so Johnnie Walker whisky paid just 2% tax.

How did they put the profits from a whisky blended in Kilmarnock into low-tax Amsterdam? Deloitte did it, reportedly so proud they broke open champagne when it went through. And that is the crux of the matter. At the heart of almost every tax-avoiding scheme is one of the big four accountancy firms – Deloitte, PricewaterhouseCoopers (PwC), KPMG and Ernst & Young.

Tax campaigner Richard Murphy, whose razor-sharp work with the Tax Justice Network fuels so much of this campaign, says these four are at the heart of the worldwide web of avoidance, with offices in all the main tax havens. PwC explained on the radio last week that the reason it had large offices in Bermuda was to audit the local hospital. Few clients could use these havens without one of the big four as auditor: virtually no business happens in havens, but bankers, lawyers and accountants need to be located there.

The four have a grip on the auditing of many major firms. The dogged work of accountancy professor Prem Sikka shows how they work, cold-calling to offer elaborate tax schemes. They hardly ever give bad audits to companies hiring them, and despite grave failures in auditing banks, they are not disciplined by professional accountancy bodies. Nor does the Treasury recover costs, even when successfully challenging their elaborate scams.

The public accounts committee last week gave a satisfying roasting to three boutique tax-avoidance firms. Margaret Hodge tore a strip off them, as one admitted that all his schemes had been declared illegal and shut down. But now the committee needs to go after the big four: none of this could happen without them. In his autumn statement George Osborne declared – as chancellors always do – that he would pursue avoiders. But he replaced only a fraction of the Revenue's cuts, with another 10,000 staff still to be lost.

If Osborne were serious, stern regulation could stop all this. As it is, companies that pay their auditors £700 an hour will sometimes undeservedly get a clean bill of health, as did Northern Rock, HBOS, Bear Stearns and the rest. One radical suggestion is that the National Audit Office should take charge of all big company auditing itself, paid by a levy according to company size: it would protect shareholders from inadequate audit and taxpayers from avoidance. Banks are still receiving clean audits, despite the governor of the Bank of England declaring them to be zombies paralysed by undeclared bad debt.

So far attacks on tax avoidance focus on the web, but now it's time to go for the spiders that spin it. The same firms that conspire to deprive the state of revenues are paid large sums as consultants by the very government they weaken. KPMG, along with McKinsey, is conducting much of the sale of the NHS to private contractors. If you want to see this curious contradiction, look no further than PwC's website, which blends its contrary functions in one sentence: "Our Government and Public Sector practice comprises over 1,300 people, more than half of whom work in our consulting business, with the remainder in assurance and tax."

Osborne has announced a consultation on making honest tax payment a condition of winning government contracts. But these companies are woven into every aspect of government and business. The chair of the NAO, Sir Andrew Likierman, is a director of Barclays and past president of the Chartered Institute of Management Consultants. The NAO auditor general, Amyas Morse, was previously global managing partner at PwC. Meanwhile, accountancy firms are major donors to the Conservative party.

With political will, all this can be cleaned up. However remiss in office, Labour should seize the initiative. The OECD is urging the G20 to agree on a fair system for taxing companies according to where profits arise – though countries are locked in cut-throat corporation tax competition. However, the UK controls most tax havens and could shut them down overnight if it copied Charles de Gaulle: angered by tax scamming, he once surrounded Monaco and cut off its water supply until it relented.

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