2015 seems to have been the year that HM Revenue & Customs (HMRC) finally huffed and puffed with enough force to blow down even some of the best-built (read: convoluted) tax-sheltering schemes. For many, 2015 closed with the immortal words of Benjamin Franklin ringing in their ears: “In this world nothing can be said to be certain, except death and taxes”. And tax HMRC did, as evidenced in Key Note’s latest market report, Accountancy 2016.
With increasing pressure on tax planning services thanks to political and public outrage over the issue, tax planning services at accountancy firms have faced a major squeeze. This is problematic: along with auditing, another sector that has taken a battering in recent years, tax services form a cornerstone of fee income in the accountancy sector. Diversification has been the answer, with accountancy firms branching out into other services, such as legal services and consulting.
HMRC recouped some £130m in back taxes owed by Internet search giant Google in January 2016. Despite the UK being one of Google’s biggest markets, it was taxed like a minnow in 2013 rather than the enormous whale that it is, paying £20.4m in taxes that year. This is on sales of £3.8bn, meaning the taxes it paid in 2013 accounted for just 0.5% of its sales. This is a tax rate many, on opening their pay cheques every month and noting the deductions, would envy.
It was made possible by Google’s Europe operations being based in the Republic of Ireland (ROI), where corporation tax is charged at one of the lowest rates in the OECD, including the UK. Google and many other multinationals choose to bill sales from low-tax jurisdictions, meaning that profit is not necessarily always made in the same country as the sale took place. Add in complex tax arrangements involving second Irish companies, shuttling money to the Netherlands and back — the now notorious and subsequently outlawed in the ROI ‘Double Irish with a Dutch Sandwich’ — and finally taking advantage of Irish tax law that allows a company to be resident there but not domiciled for tax purposes, and you end up with piles of profits sitting in tropical paradises such as the Cayman Islands or Bermuda, attracting plenty of rays but no taxes.
Still, the boss of Google in Europe was nonetheless hauled over hot coals in front of the Public Accounts Committee over Google’s UK and European tax affairs, and the EU’s Competition Commissioner, Margrethe Vestager, had put the option of an investigation into Google’s tax dealings on the table if a complaint about them was made.
Of course, Google was not the only company that got hammered by tax authorities last year. The European Commission published the results of its investigation into Starbucks in October 2015; the words used to describe Starbucks’ European tax affairs were stronger than a triple espresso.
Starbucks’ Netherlands-based coffee roasting subsidiary, Starbucks Manufacturing EMEA BV (which sells and distributes roasted coffee and coffee-related products to Starbucks outlets in Europe, the Middle East and Africa), pays substantial royalty payments for the coffee-roasting knowhow of Alki, another Starbucks subsidiary based in the UK. No other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty for using the same knowhow in essentially the same situation. These royalty payments mean a significant proportion of Starbucks Manufacturing’s taxable profits are shifted to Alki, a company that is not liable for corporation tax under either UK or Dutch tax law.
The European Commission was similarly unimpressed at the fact that Starbucks Manufacturing buys the green coffee beans it roasts at a ‘highly inflated’ price from another Starbucks subsidiary based in Switzerland, Starbucks Coffee Trading SARL. The cost of buying these green beans is so high that Starbucks Manufacturing would not generate sufficient profit from coffee roasting alone to pay the royalty fees required to Alki for the knowledge of how to roast the coffee, meaning the profit shifted to Alki is actually largely comprised of the turnover generated by selling non-coffee products to Starbucks outlets, such as tea, pastries and other packaged food, cups, etc.. The ruling means that the Netherlands now has to recover what the Commission deems to be the ‘illegal state aid’ it granted to Starbucks Manufacturing by allowing its tax system to be used in this way, a figure estimated at between €20m and €30m. The Netherlands announced in November 2015 that it was to appeal.
Other tax deals hammering firms, individuals and their accountants include the beefing up of the General Anti-Abuse Rule (GAAR) in the Autumn Statement 2015, which added a penalty of up to 60% of tax due to its arsenal. The Autumn Statement expected the GAAR to raise an extra £10m in taxes paid in the 2015/2016 tax year; with the addition of penalties, the figure should rise to around £65m by 2021.
HMRC now has the power to demand tax upfront from the people it is investigating, a move that was challenged by judicial review in the High Court but upheld. The OECD has introduced its 15-point action plan against so-called ‘base erosion and profits shifting’, while the UK Government’s Diverted Profits Tax has been forecast to raise £355m by 2019/2020.
In light of growing regulatory and legislative burdens, tax planning is falling out of favour in the current environment, and volume and value sales of such services are falling as a result.
By Michael Englefield
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Notes to editors:
Key Note’s Market Update, Accountancy 2016, analyses the UK accountancy market.
Key Note Ltd has been providing commercially relevant market information to libraries, academia and businesses since 1978. With over 1,000 titles available across 22 market sectors, and new or updated titles published every month, Key Note is one of the UK’s most prolific and respected business information providers. Within the range, some reports are written in response to particular market conditions, whereas other reports will be produced regularly year on year.