Google tax deals: Why a bird in the hand is worth two in the bush

Google screen Image copyright Reuters

The agreement between Google and HMRC to pay back-tax covering the past 10 years has been described as "derisory" by the Labour Party, and by the Chancellor, George Osborne, as "a victory for the action we've taken".

But who is right? Well both can be.

It was famously the American billionaire, Leona Hemsley who was alleged to have said "Only the little people pay taxes", a claim she strongly denied but which helped to convict her of tax evasion.

It can sometimes feel as though she was right, having just completed my annual tax return and sent my cheque off to HMRC I would just like to put on the record that I too would like to cut a deal with the taxman.

The problem is that if I or any of the other tens of millions of PAYE taxpayers try to do that, the authorities come knocking. That is why, when many of us look at the likes of Google and, to be fair, many other wealthy companies, it can look like for them paying tax is an optional extra.

However, with giant companies it is a bit more complicated than that. They are taking part in perfectly legal tax avoidance schemes, have a small army of consultants and lawyers to advise them, and a war chest for court cases that rivals that of many governments.

They are also normally multinationals, which gives them one great advantage that most of us will never have, they can play one country and its tax system off against other countries and their tax rules.

But even multinationals are not immune to the attentions of the tax collectors, and they are certainly not immune to the bad publicity that tends to result when the media discover just how little they are paying in tax and how some of the schemes they use actually work.

That helps explain why Google has decided to negotiate a deal with the British government and pay £130m in tax.

Image copyright PA

But while nearly everyone will welcome the idea that huge firms should pay tax, not everyone thinks that cutting deals is the best way of going about it.

Google's payment of £130m covers the past 10 years and means it has effectively paid £13m a year in tax. But many critics believe that this is a very low tax rate overall, "in the low single digits" according to Prem Sikka, Professor of Accountancy at Essex University, given the huge amount of business that Google does in the UK.

It might, they believe, have a deterrent effect if instead HMRC took on some of these companies in the courts and won a victory that would bring in more money not just from them but from every other company that was thinking of using a similar scheme.

But Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, says if HMRC thought they could have "won a quick victory they would have done it" and that they will have done a "cost-benefit thing. They will have done the sums they might get in a court case... they probably think this is a good deal."

For HMRC this is an appallingly difficult call. Court cases involving international tax law are very complicated, very long and very, very expensive. And after all that time and expense HMRC might well lose, having spent a small fortune of taxpayers' money and deterred no-one.

This is why many believe negotiating tax payments from big companies makes sense. After all sometimes, a bird in the hand is worth two in the bush.

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