Panorama: The Truth About Tax

The company puts its money into Luxembourg and borrows it back. It just sends money round in a circle and picks up a tax break on the way."Richard Brooks, Private Eye
Date: 11.05.2012     Last updated: 18.03.2014 at 18.07
Category: BBC One; News
BBC Panorama, Monday at 8.30pm on BBC One, investigates how some of the UK’s most famous companies have been using a tax haven at the heart of Europe to save millions in tax.

Secret documents obtained by the programme reveal how major UK-based firms cut secret tax deals with authorities in Luxembourg to avoid paying corporation tax in Britain.

The confidential tax agreements, that Panorama has looked at, were all devised by big four accountancy firm, PriceWaterhouseCoopers.

The companies involved include pharmaceutical giant GlaxoSmithKline (GSK) and media company Northern and Shell, owned by Richard Desmond.

In the case of GSK, the UK-headquartered firm set up a new company in the tiny European tax haven of Luxembourg in 2009.

In 2010, the subsidiary lent £6.34bn to a GSK company in the UK.

In return, the UK company paid nearly £124m in interest back to the Luxembourg subsidiary - effectively removing that money from the UK company's taxable profits – so it was no longer available to tax in the UK at 28%.

In Luxembourg, tax authorities had agreed a generous deal to levy tax on that £124m at effectively less than 1/2 %, just over £300,000.

As a result, GSK potentially avoided up to £34m in UK corporation tax.

Richard Brooks, a former investigator with HMRC who now writes for Private Eye satirical magazine, said the documents reveal in detail the machinations of tax avoidance on a large scale with the full cooperation of the tax haven.

"We're seeing really with these, for the first time, exactly how companies avoid tax through a jurisdiction that wants to help them do it," he said.

These agreements relied on an interpretation of tax law, which was fought out through the courts.

GSK eventually negotiated a tax settlement with HMRC in 2011 and closed down its £6.34bn loan operation through Luxembourg.

In a statement, the company said: "Both the UK and Luxembourg tax authorities are agreed that we have paid all the taxes that are due. We take very seriously our duty to pay tax. But we also have a duty to our shareholders and patients to be financially efficient so that we can maximise returns to investors and fund the development of future medicines."

In the case of Northern and Shell, owners of Channel 5, the Express, OK magazine and others, before 2009, some of the company’s subsidiaries in the UK had been lending each other money totalling £804m.

There was no obvious tax advantage on these transactions to be had in the UK. So Northern & Shell looked to Luxembourg where it set up a company and transferred the loans there.

Interest payments left the UK, leaving lower profits available to the UK taxman.

In Luxembourg that money was effectively taxed at less than one per cent. The end result was that Northern & Shell had sheltered profits which would otherwise have generated six million in UK corporation tax.

Richard Brooks said of the practice: "The company puts its money into Luxembourg and borrows it back. It just sends money round in a circle and picks up a tax break on the way."

Richard Desmond declined to be interviewed by Panorama but in a statement to the programme his company said: "Our strategy is to comply with relevant regulations whilst minimising the tax burden for Northern & Shell and our customers. The board considers it entirely proper that Northern and Shell endeavours to structure its tax affairs in a tax efficient manner."

Tax expert Richard Murphy commenting on the use of Luxembourg to avoid UK tax, said: “All absolutely, without a shadow of a doubt, legal. I'm still able to ask the question, is this acceptable? Look, this is purely artificial structuring which is designed to undermine the tax revenues of the UK.”

PriceWaterhouseCoopers, which over the last few years has given more than a £1 million worth of advice to both Coalition parties and Labour, says: “all their advice and assistance is given in accordance with UK, European and International tax laws and agreements. Their client relationships are governed by strict confidentiality and they cannot comment on individual cases.”

It also says: “it provides limited and fully disclosed technical support to the main political parties where its expertise and knowledge of the business environment can help.”

In the recent budget the Chancellor announced legislation that will relax the rules on taxing the foreign profits of UK based companies and ongoing reductions in corporation tax.

Leading economic commentator Martin Wolf told Panorama: “At the core of this, I think, is a race to the bottom on the taxation of profits and capital income. As the tax revenue can be generated from the corporate sector diminishes under this long-term downward pressure of tax competition, somebody else must pay more to support the functions of the state or the functions of the state themselves collapse.”

The Panorama programme was made in collaboration with the French production company Premier Lignes and France 2.

Panorama: The Truth About Tax will be shown on BBC One on Monday 14th May at 8.30pm.

Should you use any of the above information, please credit BBC Panorama.