“Tax morale” is a concept that describes the willingness of citizens to pay their taxes. In countries where it is high, the state’s coffers fill without undue arm-twisting from the authorities. Where it is low, the opposite applies.
In Britain, tax morale has traditionally been strong. It is one reason why HM Revenue & Customs is able to raise many hundreds of billions of pounds each year on a budget of just £3bn. While the public may grumble, it is generally prepared to pay its dues.
That is not to say, of course, that this state of affairs is somehow baked into the national character, like the British penchant for queueing in an orderly manner. There is nothing preordained about a country’s willingness to stump up its taxes.
And it is precisely this concern that makes the rumpus about the amount of corporate tax paid by Google, Amazon and other multinational companies so damaging. It is not simply that the public resents paying up while large corporations so blatantly structure their affairs to dodge tax liabilities. These insouciant tactics also undermine confidence in the process by which disputed tax bills are determined. They make the public distrust the very machinery by which the tax goose is plucked.
In the past few years, the accusations of so-called “sweetheart” tax deals have been mounting. These are not the special state-to-company arrangements that the European Commission is currently unpicking: the one-off rates that companies like Apple and Amazon have been able to secure for themselves from compliant politicians in Ireland and Luxembourg.
No, this is the much more mundane business by which disputes between individual big companies and the taxman are negotiated. It came into sharp relief recently with the case of Google, which finally settled a six-year investigation into its UK tax liabilities. No sooner had the chancellor, George Osborne, declared the resulting £130m deal a triumph than critics rounded on HMRC for not extracting more.
Public suspicion is understandable. Most people have a rather more binary relationship with the taxman. For the great majority of taxpayers, including smaller businesses, HMRC’s demands don’t tend to come with an invitation to negotiate attached.
It reflects also the almost priestly mystery that surrounds the taxman’s decisions. Much of the debate with Google hinged on whether HMRC had argued hard enough that the company had a so-called “permanent establishment” in the UK. This is a complex issue, involving an economic assessment of the facts as well as the application of legal principles. But whatever the rights and wrongs of the outcome, HMRC was prevented by taxpayer confidentiality from defending the decisions it reached.
Since the outcry a few years ago about HMRC’s perceived leniency in disputes involving Vodafone and Goldman Sachs, governance has been tightened when it comes to signing off tax deals.
But as the tax barrister Jolyon Maugham, has observed, a certain uniformity can still be detected in HMRC’s deliberations — one that can seem too eager to see the multinational’s (or wealthy taxpayer’s) point of view. He points out that over the past decade, HMRC has only once raised a legal challenge to the assertion of non-dom status, has prosecuted only one of the 3,600 names on the so-called Falciani list of tax dodgers with Swiss accounts, and has brought but a single corporate transfer pricing challenge before the tax courts.
One way to avoid the impression of undue leniency might be to tighten governance further. But a more effective method would be for HMRC to throw open its curtains to public scrutiny. Individuals might deserve confidentiality in their tax affairs, but it is less clear why this should apply to corporations — legal constructs that anyway enjoy privileges such as limited liability not available to ordinary mortals.
Getting companies to publish their tax returns might sound radical. But it already happens in other countries, such as Denmark and Norway, and the sky doesn’t appear to have fallen in. The lifting of confidentiality would allow HMRC to explain its decisions regarding big companies. It would also raise the stake for corporations such as Google and Amazon that are in the business of testing the boundaries of fiscal tolerance. At present big, wealthy businesses are given too few incentives not to push unduly at the limits of the law.
Whether it is the Google case, or Facebook paying just £4,327 in UK corporation tax in 2014, this sort of tax structuring chips away at public confidence. While transparency might not end the arbitrage, it might at least restore confidence in the process. When it comes to tax morale, a little fiscal voyeurism might do a surprising amount of good.