Out-Law News | 15 Oct 2013 | 5:14 pm | 3 min. read
Self's comments came as a report claimed that Alliance Boots, the health and beauty group, had avoided tax by claiming large tax deductions for interest payments on the debt that funded its buy out. The report was published by trade union Unite, anti-poverty charity War on Want and the Change to Win federation of US trade unions.
The report suggests that Alliance Boots has "avoided at least £1.12 billion tax since going private six years ago through taking on excessive debts, profit shifting and corporate restructuring".
Alliance Boots used to be a public company, listed on the London Stock Exchange. However, in 2007 it was bought out, and is now owned by the private equity firm Kohlberg Kravis Roberts and businessman Stefano Pessina, who built Alliance UniChem and is now the executive chairman of Alliance Boots. The buy out was financed with £9 billion in borrowings.
The report says that in the six year period since the buyout, the company was "able to reduce its UK taxable income by an estimated £4.2 billion compared to what the company would have paid had it not carried any debt". According to the report "the Treasury would be richer by between £1.12 billion and £1.28 billion" if the company had not taken on this debt.
However, Heather Self, said, "We need to be clear about what constitutes tax avoidance". She said "Alliance Boots is being castigated as a tax avoider largely for claiming interest relief within limits set out by Parliament in the tax legislation".
Self pointed out that the report produced by the tax campaigners says that Alliance Boots has not done anything which is against the law and the deduction of finance costs "is generally not included within definitions of tax avoidance".
Heather Self explained that the UK tax system is "relatively generous" in the tax relief it gives for interest payments. However, she said "this is as a result of policy decisions made by governments over a number of years".
In its corporate tax roadmap published in November 2010 the current government said "The Government remains committed to interest being relieved as a normal business expense irrespective of where the proceeds of the loans are put to use. Any fundamental changes to these rules would have disruptive and potentially damaging effects on existing arrangements and could undermine the Government’s commitment to providing the stability and certainty needed to promote investment and growth."
HMRC has a range of anti avoidance measures which prevent interest deductions where there is a tax avoidance motive or where there is a 'group mismatch' on the treatment of deductions. These include the 'debt cap' which is designed to restrict UK corporation tax deductions for interest and other finance expenses claimed by members of a large group, by reference to the group's consolidated finance costs.
Self said that any UK company wanting to claim tax relief for finance costs needs to show that those costs are no more than would be paid to an arm's length third party lender. HM Revenue and Customs (HMRC) can and will challenge payments that appear excessive, she added.
Unite's report claims that "complex tax avoidance schemes cost HM Treasury an estimated £32 billion to £120 billion each year". Figures released last week estimate the 'tax gap' – the gap between the amount of tax due and that collected by HMRC – at £35 billion for 2011-12. The £120 billion figure is the amount that that the Tax Justice Network claims is uncollected. The Government disputes this figure and said in a government response to a Treasury Committee report on the Tax Gap, "we think the £120bn figure is very misleading. It confuses the tax gap with cash flow and legitimate reliefs in a number of areas."
The report calls on Alliance Boots to disclose further information about its tax position and ownership structure. It also calls for reform of the tax laws governing the treatment of debt and equity, calling on the government to strengthen thin capitalisation rules and equalise the treatment of debt and equity. In July the House of Lords Economic Affairs committee suggested that the Treasury should look at the difference in taxation treatment of debt and equity. However Self said that the select committee's proposals were "probably unworkable".
According to reports in The Times, one of the backers of the report, trade union Unite, is itself in a dispute with HMRC over the underpayment of £2.3 million of VAT. The dispute relates to the recovery of VAT on the union's running costs and arose because Unite said that a large part of its income from membership subscriptions could be attributed to the provision of free journals, which are “zero-rated” for VAT purposes.