The Government's New Rules Won't Stop Companies Avoiding Tax

07/12/2012 13:56 GMT | Updated 06/02/2013 10:12 GMT

Thursday's somewhat surreal announcement from Starbucks that they would pay an estimated £10 million a year in 'tax' over the next two years seems to have pleased almost no one. UK Uncut dismissed the move as "a desperate attempt to deflect public pressure", while HMRC and tax experts have all questioned the legality or feasibility of Starbucks' proposed gift to the government.

Yet bizarrely it was the Treasury spokesman for the Liberal Democrats who hit the nail on the head: "People have been joking that some of these multinationals seem to think that paying tax is voluntary. Well, Starbucks have just confirmed the joke really."

For many multinational companies paying tax is a choice, it is all too easy for them to shift profits into tax havens, whether that's through buying all your coffee beans in Switzerland or paying enormous fees to an offshore subsidiary for the rights to use your own company's branding.

In the face of such widespread abuse this government would have you believe that they are leading the charge, a clampdown on tax avoidance was supposed to be one of the few rays of sunshine in George Osborne's autumn statement this week. Amid all the doom and gloom of cuts to spending was the good news that the government would be making big business pay its fair share.

Nothing could be farther from the truth. The centrepiece of the government's announced efforts to tackle tax avoidance is a "general anti-abuse rule". This has been repeatedly hailed by Cameron and Osborne as the government's key tool in fighting "morally repugnant" tax avoidance, and its tough approach for big companies with "fancy corporate lawyers and the rest of it".

This rule however, will do absolutely nothing to tackle tax avoidance by big corporations like Starbucks, Amazon or Google, and will ensure that these companies can continue avoiding tax. War on Want's report, Avoiding Avoidance, published on Monday, also shows that the rule would have made little or no difference to other major tax avoidance scandals of the last year, such as those involving Jimmy Carr or the stars of Take That.

It is not just ineffective, but also sends a signal to business that it is fine to keep avoiding tax, as long as they steer clear of the most extreme abuses of the tax system. The tax avoidance undertaken by large multinational companies like Starbucks would now be considered responsible "tax planning", while only a tiny minority of cases at the very fringes of what is legal would be covered by the new rule.

The government has also repeatedly argued that it is powerless to act and that the problems stem from an international tax system over which it has no power. Yet in developing its proposals for the new rule, ministers rejected the opportunity to recover up to £5.5 billion a year via a General Anti-Avoidance Principle that could give HMRC a hugely powerful tool to take on these tax-avoiding giants.

Ministers also made a lot of noise about a £154 million investment in HMRC, focused on multinationals, the wealthy and offshore evasion. However, that investment is taking place against a backdrop of an overall cut to HMRC's budget of £3bn over the lifetime of this parliament. Staffing at HMRC has already fallen by a third since 2005, and another 10,000 jobs are set to go by 2015 under the coalition government's plans. The government has no hope of tackling tax avoidance when it is putting tax inspectors on the dole.

The measures the government is taking in its attempts tackling tax avoidance is also claimed to be one of the biggest sources of new revenue in the Chancellor's autumn statement, after the estimated £3.5 billion the government has hoped it will raise through sales of 4G licenses. Yet even the limited measures the government have announced are hugely unlikely to recover the billions the government has claimed. The government this week claimed it would net £5 billion over the next six years through its deal with Switzerland. However this deal was recently described by the Financial Times as "too lenient", "sanctions anonymity" and "may not make back what was originally owed." Detailed research by the Tax Justice Network has gone even further, finding that rather than netting the UK billions, the deal could potentially lose Britain revenue.

The only way the government can recover the billions lost is through changing the tax laws, not announcing tiny cosmetic tweaks to deflect public pressure and try to secure some positive column inches. A General Anti-Avoidance Principle would be a good place to start, recovering around £5.5 billion of the £25 billion lost to tax avoidance every year. But the government also needs to tackle its network of tax havens, such as Jersey and the Cayman Islands, and stop the enormous cuts to HMRC staff. Then we could start to see a tax system on its way to big businesses paying their fair share.