Google Gobbledegook

In 1987 the Editor of the Week End Financial Times was looking for a contributor to write on tax and trust issues, ‘Our journalists like most MPs do not have sufficient background knowledge to know what not to say’. I was reminded of his comments last week reading the commentaries about the ‘sweetheart’ deal HMRC has reached with Google.

The EU, it would appear, has waded in asking whether this ‘sweetheart’ deal is legal. The Independent has retorted to say we should be thankful that an international body supports the taxpayer’s cause in finding that the UK authorities ‘colluded with a vast company’. The Observer joins in to say the Government ‘chastises  companies for not paying enough tax’ while, in Brussel ‘robustly defending the status’ of British-ruled tax havens. What a lot of piffle.

The fundamental basis of taxing profits of a business in the UK is whether the business is trading in the UK, as distinct to trading with the UK. This may seem to be splitting semantic hairs, until you realize that this small point makes the difference between paying no tax in the UK or many thousands of millions.

In the case of ‘Smidth v Greenwood’ it was decided that for profits to be chargeable to tax the ‘operations … from which the profits in substance arise’ need to be in the UK and if not are not chargeable to UK tax. This was a decision in the House of Lords in 1921, long before the Lordships could ever have envisaged operations being generated electronically outside the UK.

For journalists to encourage their readers to think that a country as desperate as the UK to gather tax in some way ‘colluded’ with Google is madness. The tax system operating in the UK is one of the most sophisticated in the world and is not open to negotiation, or power plays.

The ‘sweetheart’ deal between Google and HMRC is not to pay less than is required by law – but more. Even this is not without its legal implications. Under law a company director is under a duty to maximise the profits of the company for its shareholders. It is under a duty therefore to pay as little tax as is legally possible, because to pay more voluntarily than is required is contrary to its duty. The only exception to this is if in the opinion of the directors it is considered to be in the best interests for the reputation of the company to pay more. Presumably Google took the decision that to pay some tax would be seen to improve its reputation rather than paying no tax at all.

Then there is this notion that in some way the Government is sitting on its hands in letting its Crown Dependencies or Offshore Territories continue as tax havens. The fact of the matter is that the UK Government has no right to intervene in the laws passed by these offshore islands which rests with their own legislative assemblies. It is not robustly protecting these islands – it is powerless to do much about them.

I find it astonishing that not more is said to stop this misinformation being published without any word to counterbalance the perception that Google is above the law. The man in the street is led to believe that there is one tax law for people and another for financial institutions. This is simply not true.

The only person who seems to be making any sense in this sea of nonsense is Nigel Lawson. He not only understands the principles which underpin our tax system but also the psychology of acceptable and unacceptable tax policy. He is on record as saying that what is needed is to replace today’s corporation tax on profits with a ‘levy on sales’. Unlike profits, he says sales can’t easily be shifted.

It must also be remembered that under Lawson the top rate of tax was lowered from 60% to 40% and the tax take went up. Under Osborne however, stamp duty has gone up from single figures to 12% and the tax take has gone down 12%. Nigel Lawson was right; bashing the rich does not fill the tax coffers. So why doesn’t Osborne unite the electorate behind a common enemy – making global giants accountable.

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