Did you see this BBC2 documentary last night?
If not check it out on the iPlayer. http://www.bbc.co.uk/iplayer
The business people of Crickhowell, a small town in Wales, took on HMRC and the tax system to try and level the playing field for small businesses. They attempted to prove a point by researching and investigate a possible way to use the same tax haven schemes that the likes of Facebook and Amazon use.
It was pointed out in the documatary, aired on 20th January 2016, that the likes of Facebook and Amazon pay a ludicrously small % of corporation tax (although recently Amazon have had a change of policy on this – but only becasue of the goodness of their heart apparently).
Furthermore a comparison was made between Café Nero, who had paid no corproation tax since 2007, with the local coffee shop who paid £130K over the last five years.
How is that fair?
Well it’s not and these small business owners wanted to do something about it.
Their voyage of discovery took the villagers on an amazing journey, literally to two tax havens, to find out how the big corporations do it and led them to discover how they could do it too.
The first stop was the Isle of Man to investigate how this, relatively near, tax haven can help tax avoidance.
The first thing to note about the Isle of Man is its 0% corporation tax. So no tax on profit. The villagers formed a company on the spot; next they had to find out how to get their profits into their new offshore company.
The idea, as used by many multinationals, was to create a brand for the village and then move this offshore (the brand would be owned by the offshore company); then the offshore Company would charge the onshore companies for the right to use brand.
These intellectural property royalty costs are tax deductible in the onshore company and this is exactly the same method used by many multinationals.
However, it turns out its not that simple because, in a never ending game of cat and mouse, the government have partially closed this loophole by introducing a ‘withholding tax for payments for intellectual property’.
So the villagers were informed that they needed to introduce a Dutch company into their new structure as the Dutch do not charge this withholding tax. So the scheme works like this the UK company pays the Dutch company for their right to use the brand, who in turn pay the Isle of Man company, who then loans the money back to the UK company.
The villagers discovered that it is possible to avoid tax perfectly legally with these simple mechanisms. Next they went to London to find out what HMRC make of all of this?
In a nutshell, HMRC didn’t say no, they said they don’t have the resources to manage small companies but should the village go down this route, and set up the scheme, then they would pay close attention.
They were advised by a leading Tax QC that HMRC would challenge the scheme and it could take years to resolve but in the film the villagers were resolved to make this stand.
I have to say I do agree with the Villagers of Crickhowell it is galling, that the back bone of the country, small businesses, pay their fair share of tax and larger multi-national companies, who sell to the same customers, pay little or no tax in the UK.
Most of the small business owners I know do not mind paying tax, what they mind is paying tax unfairly whilst others are getting away with it. What’s more is that the tax the big companies save can be used to lower prices and drive their small competitors out of business.
I believe there should be a lower rate of corporation tax, say 10%, for small businesses who employ at least 2 people. This would help these genuine small businesses who provide much of the employment in the UK.
This 10% corporation tax could be paid for by HMRC cracking down on the large multinational tax avoiders.
Do you think Facebook would stop advertising in the UK if HMRC flexed its muscles and made them pay their fair share?
Would google remove its business from our shores if they were made to pay?
Either way this was a great programme that highlights some important issues for small businesses, so I highly recommend it.
More information about Crickhowell’s campaign visit http://fairtaxtown.com/
