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| Sunday, 2 October 2005 |
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| News Business Features Editorial
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Accountants: threat to democracy by Prem Sikka The tax avoidance industry is on a collision course with civil society. Elected governments take months and years to develop tax laws, but in pursuit of private profits accountancy firms can undermine them within hours of a chancellor's budget speech. An accountancy firm partner was bold enough to state recently: "No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken." Evidently, what ordinary people regard as antisocial and corrupt is a matter of pride in accountancy firms. The firm has been fined nearly $500m as a result. Several of its ex-partners face the prospect of criminal prosecutions. Other big US accountancy firms, Ernst & Young, PricewaterhouseCoopers and Deloitte also face financial penalties and threats of prosecution. The same firms also peddle a range of avoidance schemes in the UK, which are estimated to cost the State Sterling pounds 100bn each year in possible tax revenues. KPMG developed a VAT avoidance scheme for a company operating 127 amusement arcades in the UK. The company employed 600 staff, but under KPMG's scheme a complex corporate structure was created to show that it was controlled from the Channel Islands, and claim that, despite trading here, the business was not really established in the UK. Such an arrangement enabled the company to claim a deduction for the VAT on its UK purchases but not pay the VAT collected on its sales to UK Customs and Excise authorities. The scheme increased the firm's earnings by about Sterling pounds 4.2m - about the amount needed to provide 2,500 NHS hip replacements. The ensuing court hearing learned that, in common with its US practices, KPMG called the amusement arcade operator to sell the scheme. The firm produced a 16-page booklet that listed 83 detailed steps necessary to make it work. The firm suspected that Customs might regard the scheme as "unacceptable tax avoidance", but nevertheless sold it. Following a UK court defeat, KPMG and its client took the case to the European court of justice. A preliminary decision by the EU advocate-general has declared the scheme to be "unacceptable". With advice from Ernst & Young, directors of a major phone company paid themselves in gold bars and fine wines to avoid paying UK income tax and National Insurance Contributions (NICs). No sooner had the government plugged this loophole than the firm devised another scheme, which enabled its clients to pay directors salaries and bonuses through an elaborate offshore "employee benefit trust" and avoid UK income tax and NICs. The scheme is estimated to have been copied by 500 companies to avoid paying an estimated Sterling pounds 1.5bn in taxes and NICs. The House of Lords has now ruled that the scheme was unlawful. In another Ernst & Young-inspired scheme, high-street retailers such as Debenhams issue credit-card receipts with small print claiming that there is a 2.5% handling fee, even though the price charged to customers paying in cash or through credit card is identical. The rub is that the retailers charge customers VAT at the rate of 17.5% on the whole price but only want to pass over VAT on 97.5% to the authorities. They claimed that 2.5% is not liable to VAT because, under EU law, banking charges are exempt. The scheme, copied by over 70 major retailers, has been declared unlawful by the court of appeal. Puny fines The UK government levies puny fines on the tax avoidance industry. Accountancy firms face a fine of Sterling pounds 5,000 for failing to register their avoidance schemes with the Inland Revenue. This amounts to just 30 seconds of income for some of the big accountancy firms. The government continues to award lucrative public contracts to the big accountancy firms. Their partners advise government departments on legislative design and enforcement. There has as yet been no public investigation into the tax avoidance industry. Veto Major casualties of the tax avoidance industry are ordinary people, who are forced to pay higher taxes while corporations and the rich avoid theirs. Individuals on the minimum wage have to pay income taxes, but some 65,000 rich individuals living in the UK are estimated to have paid little or no income tax. The top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. Corporate tax payments now account for just 2.5% of national income, the smallest share ever. Unless stopped, the tax avoidance industry will destroy nation states and the very idea of democracy. Without adequate tax revenues no government can deliver its legislative programme, provide public goods of redistribute wealth. We can be persuaded to vote for governments that promise to invest public revenues in education, healthcare or public transport. But the tax avoidance industry exercises the final veto by shrinking the tax base and eroding tax revenues. Prem Sikka is professor of accounting at the University of Essex. (Courtesy: Guardian Unlimited). |
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