You think the government is fighting tax avoidance? Think again

George Osborne has pulled off a stunning confidence trick: he has bamboozled people into thinking he is fighting tax dodgers

• 
• • Richard Brooks
  • The Guardian, Sunday 17 March 2013 21.00 GMT

‘Chancellor George Osborne's new rules – as KPMG makes clear – give “UK-based multinationals an opportunity to significantly reduce their tax rate”.’ Photograph: Carl Court/AFP/Getty Images

Chancellors of the exchequer have never been entirely straight about their tinkering with the tax system. With his penchant for "stealth taxes", Gordon Brown certainly didn't always come clean with the British public. But when it comes to the vexed subject of tax avoidance, his successor George Osborne has taken the deception to a new level and, after three years, pulled off a stunning confidence trick.

"The parties agree that tackling tax avoidance is essential for the new government, and that all efforts will be made to do so," declared the coalition agreement in May 2010. The commitment was a victory for the Lib Dems and for their pre-election shadow chancellor Vince Cable in particular. A year earlier, Cable had responded to the Guardian's Tax Gap series by writing: "Systematic tax avoidance by rich individuals and UK-based companies strikes a particularly ugly note in these straitened times."

Cable's prize was to be a "general anti-avoidance rule", and soon enough one of Britain's leading tax QCs, Graham Aaronson, was dispatched to work up the scheme that Osborne has promised to introduce in this week's budget. But it will be what Aaronson describes as "narrowly focused", and apply only to the "most egregious tax avoidance schemes". For which, read convoluted arrangements involving multiple transactions that circumvent the spirit of the law – of the sort deployed by comedian Jimmy Carr before he saw the light (or the headlights of career death hurtling towards him).

Scheming of this type is, however, a relative minority sport, and is generally defeated by judges increasingly intolerant of tax avoidance anyway. Worse still, the senior tax inspectors' union argues that, by hitting just "egregious" cases, the new law risks "actually facilitating avoidance".

By far the costliest tax avoidance takes the form of the corporate structuring that has repeatedly hit the front pages in the last couple of years, whether through Starbucks' payment of royalties to Amsterdam, Amazon's Luxembourg sales hub or Vodafone's multibillion-pound internal financing arrangements through the same grand duchy. And,as the Lords economic affairs committee pointed out last week: "There is a misconception that Gaar [general anti-abuse rules] will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong, and the government need to explain that to the public."

Such corporate manouevrings do not officially constitute tax avoidance even if, on any commonsense view, that is exactly what they are. When a couple of years ago the BBC commissioned a ComRes survey on attitudes to tax avoidance, it defined the practice as "where people or businesses arrange their financial affairs to minimise the amount of tax they pay while remaining within the law". Eighty four percent of people favoured a clampdown on the behaviour, which clearly encompasses multinational's offshore structures.

Yet this is where the great tax trick is played. Outside the official definition of tax avoidance, the offshore schemes of Britain's biggest multinationals have not just escaped any clampdown, they have been rewarded with a rewriting of corporate tax law that makes them more irresistible than ever. Working closely with the companies most affected, in his last two budgets Osborne has relaxed – almost to the point of obsolescence – the so-called controlled foreign companies laws that were introduced by Nigel Lawson in the early 1980s to prevent companies shifting profits into their tax-haven subsidiaries.

From this year offshore financing structures such as Vodafone's, for instance, will be taxed at no more than 5%, while companies' tax-haven branches will be exempt from tax. Incredibly, the British government is subsidising the largest companies to send billions of pounds into the world's tax havens. And in the absence of any opposition from the Labour party – compromised by its own record of offshore tax relaxations and now advised by Vodafone's tax consultant PricewaterhouseCoopers – the new laws have arrived on the statute book unchallenged.

The big four accountancy and tax consulting firms that were hauled before Margaret Hodge's public accounts committee a few weeks ago are probably licking their lips. KPMG touts for business in one of its pamphlets by pointing out: "For every £1m of finance income received in the UK, the finance company regime could save cash tax of £165,000." And even better: "As the new rules have been designed and enacted by the government, this should represent a low-risk tax-saving opportunity." What could be sweeter than state-endorsed tax avoidance?

This surreptitious slashing of corporate tax bills is not something the government is keen to dwell on. Indeed, the rhetoric can be very different. In Davos, David Cameron said that businesses are "setting up ever more complex tax arrangements abroad to squeeze their tax bills right down ... Well, they need to wake up and smell the coffee". Given low corporate tax rates, soon to be 21% and by far the lowest among G8 countries, the PM insists they "should pay that rate of tax rather than avoid it".

But Osborne's new rules – as KPMG makes clear – give "UK based multinationals an opportunity to significantly reduce their tax rate". In other words, using "tax arrangements abroad" the largest multinationals won't pay even the new all-time-low headline tax rates.

Through the "general anti-avoidance rule" and a regular stream of smaller specific anti-avoidance announcements, such as this weekend's move against a national insurance dodge, Osborne will sustain the illusion that tax avoidance is being fought on all fronts, confident that his bamboozled audience will never notice the abject surrender on the most important one of all.

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

The spiders spinning the web of avoidance are the major accountancy firms who make billions from the public purse

• 
• • Polly Toynbee
  • The Guardian, Monday 10 December 2012 21.00 GMT

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.

Auditors must be held to account

The shareholder spring is the perfect time to challenge the poor performance of unscrutinised accountancy firms

• 
• • Prem Sikka
  • guardian.co.uk, Thursday 31 May 2012 15.04 BST

'KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies.' Photograph: Action Press / Rex Features

Shareholder spring is in the air, with increasing numbers voting against fat-cat executive rewards for failure and mediocre performance. However, the same scrutiny is not being applied to the business advisers and consultants implicated in headline failures. They continue to receive huge financial rewards. Company auditors are good example.

PricewaterhouseCoopers (PwC), Deloitte, KPMG and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies. These firms audited all distressed banks. At the height of the banking crisis they gave the customary clean bill of health to Northern Rock, Abbey National, Alliance and Leicester, Bradford & Bingley, HBOS, Lloyds TSB and Royal Bank of Scotland (RBS). Bear Stearns and Lehman Brothers went bust shortly after receiving the all-clear. A subsequent inquiry by the House of Lords economic affairs committee accused auditors of "dereliction of duty" (para 161) and "complacency" (para 167) and basking in a culture of "box ticking" (para 6) rather than delivering meaningful audits. Despite the damning criticisms, some partners in audit firms still charge over £700 an hour for their services.

In 2011, Barclays, the bank that forced the government to introduce retrospective legislation to combat its tax avoidance schemes, paid £54m to its auditors PricewaterhouseCoopers, including £15m for consultancy and advice on tax matters. PricewaterhouseCoopers, which once audited Northern Rock, collected another £48m from Lloyds Banking Group , including £10m for consultancy. HSBC has paid a whopping £56m, including about £8m for tax and consultancy services to its auditors KPMG, the firm that audited HBOS and Bradford & Bingley. RBS has paid £41m, including £7.4m for consultancy to Deloitte, the firm that audited Abbey National, Alliance & Leicester and Bear Stearns. Ernst & Young, the firm that audited Lehman Brothers, earned £36m in audit and consultancy fees from BP and another £28.5m from Aviva. At major companies, the fees paid to accountancy firms are larger than CEO salaries, but rarely attract sustained media attention. The auditor dependency on companies for vast fees neuters any impulse to deliver an independent opinion on company accounts. No one at any accountancy firm is ever promoted for blowing the whistle on dubious practices of companies and losing a client.

At company AGMs auditors are appointed often without any discussion. The resolutions on auditor appointment are not accompanied by any information on the composition of the audit teams; time spent on the job, audit and consultancy contracts, information obtained from directors, list of faults found with company accounts, regulatory action against auditors or anything else that might shed light on the quality of audit work or conflict of interests. With weak accountability measures, auditors deliver little of any social value.

The charges of "dereliction of duty" and "complacency" have not led to any worthwhile UK reforms though there is plenty of spin about encouraging auditors to be sceptical and tweaking auditing standards. There is no scrutiny of the basic auditing model which requires entrepreneurial accountancy firms to somehow invigilate giant corporations. The success of auditors is measured by private profits and they have no obligations to the state, or the public, which eventually bears the cost of bailouts and fraud. This mutual back-scratching has been a key factor in the debacles at Enron, WorldCom, Lehman Brothers and the banking crash. Yet no real change is in sight.

The EU is proposing minimalist reforms to check the collusive relationship between auditors and companies. These include a ban on the sale of lucrative consultancy services to audit clients and forcing companies to regularly change their auditors. At present, FTSE 100 companies change auditors every 48 years on average. Inevitably, major firms are using their financial and political resources to oppose even these modest proposals.

Major accountancy firms have got used to collecting mega fees for failure and mediocre performance. Shareholders should check that by turning the spotlight on them and demand refunds for poor performance. The government should sharpen liability laws so that auditors are forced to make good the damage done by their silence.