Tax haven dodge costs UK taxpayers £4 billion

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date: 27 February 2009

embargo: 06:00 hours Sunday March 1 2009

Tax avoidance by wealthy UK residents through tax havens costs UK tax payers at least £4 billion a year, according to new research published today (Sunday) by the TUC.

The TUC research is the first ever analysis of the role of individual tax havens in tax lost to the UK. It shows that most of the loss to tax havens is caused by Jersey, Switzerland, the Isle of Man and Guernsey.

Under the EU's Savings Tax Directive, UK residents who hold off-shore bank accounts in tax havens could either declare all their interest to HMRC or opt to have 15 per cent tax withheld from the interest payments by the tax haven where they hold their account. Three-quarters (75 per cent) of this is then paid to the UK government, with the rest being retained by the government of the tax haven. This makes the effective UK tax rate on such off-shore accounts 11.25 per cent, rather than the 40 per cent that would be paid if the money was held in the UK in the period the research covers.

An analysis of figures given in a recent parliamentary answer of the sums involved by TUC tax consultant Richard Murphy has produced the first ever estimates of how much UK tax payers lose through such off-shore accounts, and the amount lost in each of the tax havens. The figures show that over the last three years the total tax lost was £319 million on a total income from such accounts for their holders of £1.1 billion. Most money was lost over the period reviewed through accounts in Jersey (£94 million), Switzerland (£72 million), the Isle of Man (£68 million) and Guernsey (£47 million).

But these figures are a serious underestimate of the total tax lost through tax havens for two main reasons. First, a conservative estimate is that over five times more money is held in offshore accounts by companies or trusts set up for the benefits of the super-rich which are not covered by these rules. Secondly, evidence suggests that only 18 per cent of assets held off-shore are held as cash in such accounts.

Using conservative assumptions for these factors, the TUC estimates that the total tax loss last year from UK residents (without non-dom status) holding assets off-ashore to avoid and evade tax is at least £4 billion.

TUC General Secretary Brendan Barber said: 'The mechanisms of tax avoidance are always hard to understand, but this is a very simple story. If the super-rich held their money and assets in the UK they would contribute at least £4 billion pounds extra.

'This would be enough for the Government to meet its target to halve child poverty by 2010. It would also mean that instead of being squirreled away in tax havens, it was being spent in the real economy here helping us fight recession. With the tax take falling because of the recession, there can be no better time to get tough with the super-rich, so many of whom did so much to throw the world into recession.

'We welcome the Prime Minister's call for the G20 to get tough on tax havens. This is an important demand of the unions, development and faith groups organising the 'Put People First' march for jobs, justice and climate on 28 March in the run up to the London G20 summit. But the UK Government can do much more.

'It should back plans to reform the EU Savings Tax Directive to enhance information exchange between tax havens and the UK and other member states. It could also require that all the many tax havens it controls cancel the tax withholding option they now offer that provides this continuing opportunity for tax abuse. And we could require that they place the accounts - and even trusts - that are registered in their domains on public record so everyone can see what is going on in each tax haven.'

NOTES TO EDITORS:

Figures taken from http://www.publications.parliament.uk/pa/cm200809/cmhansrd/
cm090212/text/90212w0006.htm#09021316000432

Converted

Converted

Converted

Three year totals

totals

totals

Totals

Country

£'000

£'000

£'000

£'000

2005-06

2006-07

2007-08

Austria

145

486

766

1,397

Belgium

453

1,099

1,569

3,121

Luxembourg

1,202

2,622

2,689

6,514

British Virgin Islands

0

1

2

4

Gibraltar

87

422

0

509

Guernsey

2,460

8,028

8,206

18,694

Isle of Man

6,393

9,765

10,700

26,858

Jersey

6,096

14,031

16,890

37,017

Netherlands Antilles

0

0

0

1

Turks and Caicos Islands

2

5

5

11

Andorra

40

0

141

181

Liechtenstein

59

159

233

451

Monaco

254

614

753

1,621

San Marino

2

8

10

20

Switzerland

5,697

5,543

17,294

28,534

Total

22,891

42,784

59,260

124,935

UK tax lost to haven

7,630

14,261

19,753

41,645

Imputed gross income

203,480

380,302

526,754

1,110,536

UK tax lost because

of non-declaration in UK

50,870

95,075

131,689

277,634

Total tax lost to UK

58,500

109,337

151,442

319,279

Lost to Guernsey

6,286

20,517

20,972

47,774

Lost to Isle of Man

16,339

24,955

27,344

68,638

Lost to Jersey

15,579

35,858

43,163

94,599

Total Crown Dependencies

38,203

81,329

91,479

211,012

Lost to Switzerland

14,560

14,165

44,196

72,921

Lost to others

5,737

13,842

15,767

35,346

- This table shows by year the amount of tax withheld in a tax haven that has been paid to the UK. Figures have been converted into sterling from the raw data published in Hansard. For these purposes Austria, Belgium and Luxembourg are tax havens because they refuse to exchange data with the UK.

- This tax is withheld from bank accounts held by persons (not companies or trusts, just individuals) who are resident in the UK but have bank accounts in these locations. They have a choice: they can either have details of the interest they are sent to HM Revenue & Customs or tax can be withheld at 15 per cent from the payment of interest. Tax experts agree that people who ask for tax to be withheld have no intention of declaring the income received in the UK to HM Revenue & Customs. If they had intention of doing that they would be better off opting for information exchange.

- The tax haven keeps one quarter of the tax deducted. In other words the UK received 75 per cent of 15 per cent of the interest paid an effective tax rate of 11.25 per cent.

- The payments made have been grossed up on this ratio to estimate the gross income not being declared. In three years this comes to more than £1 billion.

- The tax lost has also been calculated, which would be 28.75 per cent of the gross income. This goes from £58 million in 2005/06 (the year tax withholding started, and was a nine-month period for UK reporting purposes) to £109 million in 2006/07, leaping to £151 million in 2007/08.

- It is important to note that:

Only relatively small account holders put their funds in their own names in these places. We estimate based on data published by Jersey Finance and other sources that more than five times the amount held in individual's names will be held in trusts or companies for the benefit of wealthy individuals. These trusts and companies are not covered by the EU Savings Tax Directive and as such can be used to avoid UK tax with little risk of detection.

Evidence published by Merrill Lynch suggests that only 18% of people's portfolios held offshore are likely to be in cash.

These losses do not relate to non-domiciled people.

- Extrapolating the above data, and going for lower ratios, and assuming the annual loss is £150 million in the above table, the likely loss to the UK Exchequer from this is at least £4 billion.

- All TUC press releases can be found at www.tuc.org.uk

- Register for the TUC's press extranet: a service exclusive to journalists wanting to access pre-embargo releases and reports from the TUC. Visit www.tuc.org.uk/pressextranet

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: media@tuc.org.uk
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk
Elly Brenchley T: 020 7467 1337 M: 07900 910624 E: ebrenchley@tuc.org.uk

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