The Lax Tax Pact

How Her Majesty’s Revenue and Customs surrendered to the tax avoiders

By George Monbiot. Published in the Guardian 9th November 2010.

Did Vodafone avoid £6bn of tax? As protesters gathered outside its shops last week, both the company and Her Majesty’s Revenue and Customs dismissed the claim as an urban myth. That, for the media, was the end of the story(1). But in accepting this account, journalists made an unsafe assumption: that Vodafone and HMRC are on opposing sides in the tax battle. Over the past few years, the government tax office appears to have been mutating into a subsidiary of the corporate avoidance industry.

It’s arguable that the UK government does not have a spending crisis; it has a tax avoidance crisis. Official accounts suggest that the tax gap amounts to £42bn(2). Richard Murphy of Tax Research has demonstrated that this figure cannot be correct, as it contradicts other government statistics. He estimates that avoidance now amounts to £25bn a year, evasion to £70bn, and outstanding debts to the tax service to £28bn: a total of more than £120bn(3).

That’s roughly three-quarters of the budget deficit(4). It’s equivalent to 80% of the UK’s revenue from income tax(5). By comparison, benefit fraud, which both the government and the rightwing press emphasised in order to justify the cuts, amounts to £1.1bn a year(6). No one would claim that all this missing money could be recovered. But even if only 20% were clawed back, the most damaging cuts could be reversed.

So the government is frantically seeking to close the tax gap? You’re joking of course. The comprehensive spending review will cut the revenue service by 15%. It had already been hacked to bits by New Labour. In 2005 Gordon Brown merged the Inland Revenue with Customs and Excise to create HMRC. Between them they had 99,000 staff. Since the merger this has fallen to 68,000. Some of the staff cuts were the result of sensible efficiencies. Others attacked the service’s core functions. The money it spends on fighting tax avoidance, for example, has fallen from £3.6bn in 2006 to £1.9bn today(7).

Many of the crises HMRC has suffered since then – such as the recent pay as you earn fiasco(8) – are the result of Labour’s cuts. A parliamentary report found that people working for the revenue had the lowest morale of any civil servants(9). HMRC is hopelessly outclassed by corporate ruses: the LibDem Treasury spokesman Lord Oakeshott compares it to “a fat policeman chasing a speeding Ferrari.”(10) Now its staff will be cut again: to 56,000 by 2015(11). The government announced that an extra £900m would be spent on tackling tax avoidance(12). It turned out that this was magic money: nothing but a reallocation of funds HMRC already possessed(13).

This cut, in the midst of an economic crisis, looks like madness. It’s like cutting your household bills by deciding to stop commuting to work. While the government’s new strategy for reducing benefit fraud, according to the Association of Revenue and Customs, is likely to harvest £3 for every £1 it spends; money invested in HMRC to deal with tax avoidance and evasion brings in £60 for every £1 spent(14).

Seen as a means of reducing the deficit, the government’s policy makes no sense. It becomes explicable only when you understand that this is a response to political opportunity, another application of the shock doctrine(15). The Conservatives have seized the chance afforded by the economic crisis to free corporations and the very rich from their obligations to society.

It’s not as if they were oppressed in the first place. The last Conservative government cut corporation tax from 52% to 33%. In 1999 Gordon Brown cut it again, to 30%. This, he boasted, was “now the lowest rate in the history of British corporation tax, the lowest rate of any major country in Europe and the lowest rate of any major industrialised country anywhere”(16). Labour then cut it again, to 28%. George Osbourne has promised to reduce the rate to 24%(17).

Richard Murphy points out that, thanks to tax avoidance, the effective rate of corporation tax (the amount they actually pay) is now 21%. If current trends continue, it will be 17% by 2014(18). This means that big business will soon pay tax at a lower rate than small companies (which can’t afford sophisticated avoidance strategies) and at a lower rate than basic income tax(19). The richest companies in the UK will surrender less of their income than the poorest workers.

Some companies pay less than others. A recent edition of the BBC’s File on 4, for example, found that the chemist chain Boots, after relocating to a post office box in Switzerland, has legally cut its tax bill from over £100m a year to around £14m(20). That’s roughly 3% of its profits.

If you expected HMRC to come out fighting, you’ll be disappointed. In August, the service’s permanent secretary, Dave Hartnett, told the Financial Times “we are sometimes too black-and-white about the law.”(21) From now on, the paper reported, the tax service “will adopt a less combative approach to resolving tax disputes with businesses”. This would be “welcomed by businesses critical of the revenue’s uncompromising approach to litigation and also chime with the coalition’s ‘open for business’ message.”(22)

Workers at the revenue – lions led by donkeys – tell me that some offices have been instructed not to chase business debts to HMRC of under £20,000; but are still expected to send threatening letters to people who have accidentally been given an extra £200 in tax credits. “The whole system is falling apart. It’s predicated on allowing big business to get away with billions, while pursuing the poorest.”

So did Vodafone wriggle out of a paying up to £6bn in tax? We’ll never know. But we do know that even the company appears to have been surprised at how little it got away with: it set aside £2.2bn to settle its case with the revenue, but had to pay only £1.25bn(23). Private Eye makes a strong case for another £5bn, which, it says, the company legally avoided by channelling around Euro18bn through a subsidiary in Luxembourg, where the money was taxed at less than 1%. HMRC agreed that the arrangement could continue without further challenge, raising the alleged shortfall to the UK to £6bn(24).

HMRC’s inability or unwillingness to pursue big tax avoiders means that taxation shifts from the rich to the poor. As corporate payments fall, either the poor must pay more or services must be hit even harder. Regardless of the exact amount Vodafone avoided, the protesters are right to picket its shops (and they might have a go at Boots while they’re at it). We are living in a country where the poor bail out the banks, while the rich keep their billions intact.



2. HMRC, 16th September 2010. Measuring Tax Gaps 2010. Table 1.1, Page 7.

3. Richard Murphy, March 2010. Tax Justice and Jobs: The business case for investing in staff at
HM Revenue & Customs.

4. Public sector net borrowing in the last financial year was £156bn.

5. The government expects to raise £150bn in income tax in 2010/11. See page 5.

6. Department for Work and Pensions, 2009. Fraud and Error in the Benefits System: April 2008 to March 2009. Table 2.1, page 8.

7. Private Eye, 3rd September 2010. The £6bn Vodafone bill.



10. Lord Oakeshott, 26th October 2010. File on 4, BBC Radio 4. A Taxing Dilemma.



13. According to one of the tax officials I spoke to.

14. Association of Revenue and Customs, pers comm.

15. See

16. Gordon Brown, 1st November 1999. Speech to the CBI Conference.


18. Richard Murphy, October 2010. The Corporate Tax Gap.

19. Both the small business tax rate and the basic rate of income tax are 20%.

20. File on 4, BBC Radio 4, 26th October 2010. A Taxing Dilemma.



23. Private Eye, 6th August 2010. Vodafone-a-friend.

24. Private Eye, 3rd September 2010. The £6bn Vodafone bill.