IT, tax avoidance and the total cost of ownership

The recent interest in “off payroll” taxation of individuals looks like it’s about to be trumped by the much more significant issue of “offshore” company taxation.

The Sunday Times ran a piece last weekend stating that:

“Apple and Google are avoiding up to £800m a year in tax in Britain despite sales here worth billions of pounds”

Only a short time before, Facebook was criticised for apparently similar behaviour:

“Facebook pays only £238,000 in corporation tax on UK earnings of up to £175m”

These companies are not alone: many businesses choose to headquarter themselves wherever the tax impact is most beneficial. They would doubtless argue, with some justification, that their corporate and shareholder obligations require them to optimise tax management, and hence profitability, using whatever legal means is available to them.

Such tax “efficiencies” are not confined to consumer-oriented technology companies. Take a look at a list of the historic top IT suppliers to government for example – just how many of these adopt similar tax efficiencies?

Supplier
“SI”
Estimated Public
Sector revenues
(£million), 2008
HP/EDS 2,235
BT 2,100
Fujitsu Services 1,200
Capgemini 900
IBM 650
Capita 646
Dell 645
Serco 580
CSC 400

(source: “Better for Less”, using figures supplied by Kable)

With such large sums involved, it would be useful to know, both for these and all major suppliers to the public sector. More up-to-date and comprehensive supplier data should become available in the future as a result of the government’s transparency agenda, making it easier to identify those companies who do and don’t declare their full UK revenues here. Ideal material, too, I think for a creative Rewired State mashup …

The whole taxation model is anachronistic and somewhat Alice in Wonderland – with company earnings not consistently taxed where income is earned. It’s all very Janus-like: with one face the companies involved claim that the revenues were not really earned here in the UK; but with the other, they bonus their UK staff on revenues driven here in the UK – something which requires them internally to keep accounts showing very clearly what was earned in the UK. I’m uncertain how EU legislation enables companies to declare earnings from one member state as if they were earned in another – input from specialists in this area would be most useful.

Whilst this taxation issue is not restricted solely to IT providers, the problem is compounded in the IT marketplace by the nature of the distorted model that has arisen in the UK public sector. Its historic concentration in the hands of a small number of mega-players was referred to by the House of Commons Parliamentary Administration Select Committee as an “oligopoly” in its report “Government and IT – “A Recipe For Rip-Offs”: Time For A New Approach“.

This unusual market concentration is also aligned with atypically high public sector IT expenditure. The historic UK government spend on IT has seen some 1.93% of UK GDP spent on public sector IT, rising to 2.23% based on findings of the “Operational Efficiency Programme” undertaken by Dr Martin Read (a former chief executive of LogicaCMG, who led a 2009 Treasury review into the costs of IT and back-office administration).

This is much higher than the average for advanced industrial companies, whose governments typically spend between 1% and 1.5% of GDP on public sector IT (Dunleavy et al). The consequence of this is that a disproportionately large percentage of GDP is being spent on the IT supply base to government. If, as appears to be the case, that supply base contains a number of companies avoiding paying significant amounts of taxation on revenues earned from UK taxpayers, this represents a significant double cost to both the taxpayer and the wider economy.

Still, some of the companies involved at least acknowledge the problem:

“Eric Schmidt, executive chairman of Google, has blamed the Government’s weak tax laws for the fact it has paid just £8m of corporation tax in Britain despite making more than £6bn in revenues in this country in the six years to 2010.”

I’m not sure how much this is a UK government issue and how much an EU one. If we accept that declaring revenues from one EU member state as if they were earned in another *is* permitted (as it seems to be), then perhaps the UK government should at least factor the additional total cost of ownership caused by such tax avoidance into its assessment of bids from any companies operating this model.

After all, the government would normally see some of its expenditure effectively returned to its coffers when companies pay their corporation tax and other business-related taxes here in the UK. For those claiming to have earned some or all of their UK revenues elsewhere however, this will not be true as it will be their nominated member state that collects any business taxes due – inflating the true costs of goods and services in the UK significantly. It also has much broader and significant macro-economic impacts, given the increased net outflow of money offshore and its investment in businesses abroad rather than those here in the UK.

This Wonderland taxation model also impacts other areas, such as the release of public data and its associated intellectual property rights. The government rightly wants to release as much public data as possible into the public domain – so that, for example, innovative companies can build exciting new businesses around the likes of Ordnance Survey maps, or real-time travel information. All good news in terms of generating economic growth. But if the companies that take the data and generate new, multi-million or multi-billion pound companies don’t pay their taxes here, it’s obviously a very different prospect for economic growth than if the companies do pay their taxes here. These things matter and it’s time the current business taxation model was properly reviewed and improved.

One problem in objectively assessing the true scale of the cost of the existing approach is the dearth of analyses of these complex macro-economic issues, despite how central they are to a whole host of debates – from the true total cost of ownership of government IT systems to the best licensing model for public data. According to the Sunday Times the Public Accounts Committee is about to examine the whole issue of corporations and where they pay taxes on their UK revenues, so perhaps some much needed progress is about to be made.

In the meantime, the government’s commitment to increasing transparency remains a strong card in protecting both government’s and taxpayers’ interests. This is one area where much greater transparency would enable us to understand more clearly the scale of the current taxation issues, their true costs to the UK economy and their impact on our potential for improved economic growth.

Sources

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