High inflation cost the UK economy £10bn, report says

High inflation has cost the UK economy £10bn over the last three years, says an influential report.

And with inflation averaging 3.5%, instead of the government's target 2% rate, high inflation will remain "a permanent fixture", says the Ernst & Young Item Club.

This has had a "corrosive impact on the UK economy", the report concludes, as household spending power has shrunk.

The group does not expect inflation to dip below 2.5% before 2017.

UK consumers have seen food prices rise 40% since 2007, says the Ernst & Young Item club report

Consumers have been struggling to cope with food prices that have risen 40% since 2007, as well as rising fuel and education costs. The UK High Street has suffered as a result.

Despite the economic impact, Carol Astorri, the Club's senior economic adviser said: "It could have been worse. Our modelling shows the [Bank of England's Monetary Policy Committee] were right to stick to their guns, allowing inflation to overshoot and avoid tightening monetary policy.

"The alternative scenario would have seen interest rates rise by 3.5% in 2011, choking off the recovery even earlier and adding an additional 625,000 people to UK dole queues."

The report forecasts that the consumer prices index will rise to 3% over the summer, but fall back to 2.5% by the autumn, as energy bills and food prices stabilise.

Mark Gregory, Ernst & Young's chief economist, said: "With consumer spending continuing to be curbed by rising costs and only set to improve gradually, retailers will need to battle harder than ever to win the war for our wallets."

When Mark Carney, the new governor of the Bank of England, takes over from Sir Mervyn King in July, he will face the difficult task of keeping inflation under control while also stimulating the faltering UK economy.

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Article source : http://www.bbc.co.uk

Google chairman Eric Schmidt softens line on tax loopholes

Boss of search engine says international tax law could benefit from reform – a marked shift in tone from December remarks

Google's chairman, Eric Schmidt, has said he welcomes promises by international leaders to crack down on tax loopholes exploited by the search firm and other multinational internet businesses that take billions of pounds of sales from the UK through overseas companies, which HM Revenue & Customs cannot tax.

"Given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform," he conceded in the Observer. He said an action plan from the Organisation for Economic Cooperation and Development, due to be presented to the G20 in July, was now "hotly awaited".

OECD officials have already signalled that the plan will include "updated solutions to the issues related to jurisdiction to tax, in particular in the areas of digital goods and services".

An OECD positioning paper published in February said: "Developments brought about by the digital economy are putting increasing pressure on … well-established [tax] principles. In an era where non-resident taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere."

Google's chairman, Eric Schmidt, said a tax action plan from the OECD was hotly awaited.

Schmidt's latest remarks on tax represent a marked softening in tone. In December he dismissed critics, saying: "We pay lots of taxes; we pay them in the legally prescribed ways. I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate."

But the Google boss now appears to accept that many of those "tax incentives" are in truth loopholes that have opened up as technological innovation has allowed companies to operate in ways unimaginable by those who drafted international tax rules.

Schmidt said he also supported moves by David Cameron to use Britain's presidency of the G8 to tackle tax. "The UK government has the perfect opportunity to take the lead in shaping this complex debate at the G8 summit next month. We hope [it] seizes the initiative and makes meaningful tax reform one of the top items on the agenda."

On Monday Schmidt will meet the prime minister, along with other multinational business leaders who sit on his business advisory group. One pressing issue for all is likely to be growing calls for big business tax reform. Bosses of BAE Systems, Tata Group, GSK, Vodafone and John Lewis will all be keen to give Cameron their perspective before the G8 meeting in Northern Ireland next month.

The prime minister has already signalled he wants to use Britain's presidency of the G8 to tackle "aggressive tax avoidance" by multinationals. "Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues," he told the World Economic Forum in January, urging multinationals to "wake up and smell the coffee".

The meeting comes after a dreadful week for Google during which its northern Europe boss, Matt Brittin, was recalled to appear before angry MPs on the public accounts committee to clarify testimony on the group's tax arrangements he gave to parliament six months ago.

Google did £3.2bn of business with UK advertisers and media buyers last year but told HMRC these transactions were technically "closed" in Ireland, and therefore not liable for UK tax. Brittin told MPs he stood by earlier evidence that his 1,300 employees in the UK – more than half of whom work in marketing – did not close sales.

The MPs were armed with evidence from several whistleblowers, former Google UK workers who told the politicians they believed they were negotiating and closing sales in the UK.

One of those whistleblowers, who worked for Google between 2002 and 2006, has spoken out publicly for the first time. "When I was at Google, our job was to find advertisers, to close the deals [and] to get them to sign bits of paper saying they were committing to spending in the UK," Barney Jones told the Sunday Times. "If that is not closing the deal, I don't know what is."

 He told the newspaper he planned to hand more than 100,000 emails and other internal Google documents to HMRC tax inspectors. Lawyers from the search firm are not expected to try to block him from doing so.

"Google has pulled the wool over the eyes of HMRC and the British population," said Jones. "[It] has prided itself on being a socially responsible company and to pay your tax is the most fundamental responsibility. This is a betrayal of everything that Google stands for."

The search firm is known for its motto, "Don't be evil", which was enshrined in the group's $23bn stock market flotation prospectus in 2004. It said: "Don't be evil. We believe strongly that in the long term, we will be better served – as shareholders and in all other ways – by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture."

But the words of the motto were turned against the group last week when – unimpressed by Brittin's evidence – Margaret Hodge, chair of the public accounts committee, rounded on him. "You are a company that says you 'do no evil'. And I think that you do do evil." She said the group's approach to tax in the UK was "devious, calculated and, in my view, unethical".

Google held on to its "Don't be evil" motto since it was first sent down in a list of ten guiding principles drawn up by founders Larry Page and Sergey Brin in the earlier years. Along with "you can make money without doing evil" and "democracy on the web works" on the list is "you can be serious without a suit".

Earlier this month Schmidt admitted he had initially considered the "Don't be evil" motto "the stupidest rule ever". However, in an interview with National Public Radio in the US, he added that he later discovered it did in fact provided a helpful check on sharp practices.

"So what happens is, I'm sitting in this meeting, and we're having this debate about an advertising product. And one of the engineers pounds his fists on the table and says, that's evil. And then the whole conversation stops, everyone goes into conniptions, and eventually we stopped the project. So it did work."

Not everyone agrees. In 2010, Welsh rock band Manic Street Preachers included a final track on their Postcards from a Young Man album, Don't be evil, a bitter take on online corporate culture.

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Article source : http://www.guardian.co.uk

One tax law for us and another for Amazon

Britain's reluctance to pursue multinationals risks turning us into another Italy

On the edge of Rugeley stands Amazon's largest distribution centre in Britain. Life for the workers who trudge around the 800,000 sq ft warehouse is not as bad as it was for the men who once worked in the pits of the Stafford shire coalfield, but that is not saying much. They must carry satnavs, which direct their movements round the stacks and flash warnings from managers to stop dawdling or chatting with colleagues. Britain being the way it is, they have no job security.

Trade unionists call the Amazon shed a "slave camp". But whatever arguments they have with Amazon's management, one point should be beyond dispute – Rugeley is in Britain. British customers send Amazon their money. British workers package their goods and send them off in vans along roads built and maintained by the British taxpayer. If workers steal – and before they can go home or visit the canteen, they must walk through airport-style security scanners to prove they have not – Amazon will call on the taxpayer-funded police to arrest them and the taxpayer-funded criminal justice system to prosecute them. Admittedly, Amazon's buyers who supply the stock are based in Slough rather than Rugeley. But the last time I looked Slough was in Britain too.

Amazon.co.uk is a UK company. It has to be. An online retailer cannot relocate offshore. It needs local distribution centres to service local markets, otherwise the costs of moving its stock would be ruinously expensive.

Yet Amazon pays just £3.2m tax on sales of £4.2bn because the Revenue allows it to get away with arguing that it should be taxed in Luxembourg. The same lack of connection between corporate tax status and commercial reality applies to Starbucks, Google, Vodafone,Goldman Sachs and every other company the British state allows to dodge tax.

The traditional defence that companies just take advantage of legal loopholes and you would "do the same in their position" falls apart in a country where the tax regime defies the evidence of our eyes. Leaving all other considerations aside, you will never be "in their position".

If you want to understand any society, look at its tax system. If one man or a clique can tax at will, you can conclude the society is a dictatorship or oligarchy. If you have reasonably progressive and universal taxes, you can assume it is a modern democracy. Britain has elements of democratic taxation. The same rules on occasion apply to everyone. But other parts of the system resemble the ancien régime of pre-revolutionary France. Only in our case the privileged estates the government exempts from taxation are the corporations rather than the aristocracy and the church.

For a generation, politicians have extended exemptions by selling Britain as a country where big businesses would be lightly taxed. When I put it like this, I make the policy sound too cool and rational. The process was far more emotional than that. Tycoons enchanted politicians. They convinced them that their interest and the national interest were as one. So deep was the ideological capture of the top of the British state that corporations have not on the whole had to corrupt ministers.

No one has accused Gordon Brown of taking bribes, to quote the most egregious example. But in his abject period as chancellor, Brown ensured that his friends in private equity were taxed at a lower rate than their cleaners. One might have thought that the crash of 2008 would have discredited the notion that all will be well if we let capitalism run riot. Not a bit of it. George Osborne invites multinationals to advise him on how to tax multinationals. At their behest, he allows companies to move money to tax havens and then deducts the costs of their shady transactions from their British tax liabilities. The result of two decades of special treatment for vested interests can be summarised in one statistic. Between 1999 and 2011, British companies' profits increased by 58% but revenues from corporation tax increased by just 5%.

An Amazon warehouse, where workers carry satnavs 'that flash warnings from managers to stop dawdling'

To understand the scale of the avoidance, it is not enough to look at the permissive laws, however. Richard Brooks's The Great Tax Robbery is close to being this year's indispensable book because, as a former tax inspector turned Private Eye journalist, he has the material to show how the wealthy are exempt from what few laws apply to them.

"Dear Saddam," ran a spoof letter doing the rounds of the Revenue in the run-up to the Iraq war, "we are trialling a new weapons inspection regime modelled on the Inland Revenue's approach to large corporate taxation. All you have to do is tell us you don't have any and we'll go away."

One inspector said in his bitter farewell speech that he once thought that the Revenue's advertising slogan "tax doesn't have to be taxing" was a bad pun. "Now I realise that for big business it meant what was said on the tin."

British politicians and a series of negligent and doltish managers ordered the Revenue to back away from big business. In his justifiably notoriouss peech to the Confederation of British Industry in 2005, everyone remembers Gordon Brown promising "light-touch" regulation for a financial services industry that was already careering towards bankruptcy. We forget that he went on to say that he would apply a light touch to "the administration of tax" for big business as well.

The Revenue itself promises corporations that, rather than doing its job and collecting monies owed, it will follow a "customer-focused supportive and enabling approach". Or as Dave Hartnett, the former permanent secretary for tax, who cut sweetheart deals with Vodafone and Goldman Sachs, explained it in 2010, Britain had a "non-confrontational" approach.

I have written before that the willingness of New Labour, the Tories and the Revenue's senior managers to pursue the working and middle classes while exempting powerful corporations would turn the British into Italians. We would start to believe that tax evasion was respectable. We would view a state that hit the ordinary man and woman while sparing big business as immoral and illegitimate. That moment is drawing closer. The old complaint that there is one law for the rich and another for the rest does not do justice to the debasement of public authority in Britain. When it comes to tax, too often there is no law for the rich whatsoever.

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Article source : http://www.guardian.co.uk

Marks & Spencer under fire over online tax arrangements

Exclusive: Retailer accused of scheme in which goods shipped to Europe from UK are invoiced to Irish subsidiary at lower rate

Marks & Spencer has become the latest in a string of UK companies to face criticism from tax campaigners over the way it structures its online sales to Europe – with one describing its sales operation as similar to that of the internet retail giant Amazon.

The British retailer has been expanding its online operations to several countries across Europe with a new marksandspencer.eu site, hoping to grow its business in a difficult economic climate.

But internal M&S documents seen by the Guardian show the firm's structure involves shipping goods from one country – the UK – while invoicing the transaction to another – Ireland.

Orders made through the site by customers from France, Germany, Ireland or other countries are shipped from M&S's UK warehouses – but the transactions are all made with, and charged to, Marks & Spencer (Ireland) Limited, a subsidiary located in the Republic of Ireland, which has the lowest corporation tax rates in Europe.

M&'s UK branch is paid a wholesale price for the goods it ships by M&S Ireland, and this is subject to UK corporation tax, but the rest of the retail markup is subject to Ireland's much lower corporation tax rate of 12.5%.

 This process of using internal billing between countries in order to ship goods from one country when doing business in another is referred to as "transfer pricing", and while perfectly legal is the practice highlighted by tax campaigners who object to Amazon. However, M&S only uses this structure for sales outside of the UK: all sales in UK stores and online to UK addresses are processed through the UK and are subject to UK corporation tax.

A specification document prepared last year when the site was being designed specified that "[t]he corporate tax structure will be aligned to that of the Irish website".

The document then detailed how, while the goods would be shipped from the UK, M&S UK would only receive a wholesale – not retail – price: "Goods issue from Hardwick DC [distribution centre] in the UK at cost price … intercompany invoice at cost price in GBP with a variable mark-up % by country (of order) plus UK VAT".

Earlier this year, after George Osborne announced a further cut to UK corporation tax in his 2013 budget, an M&S employee sent an email to a superior questioning the need for the complex operation of Marks & Spencer's international site, giving their personal view as to why the structure existed:

"Given that it was developed as a means to avoid UK corporation tax when it stood at 26% it now seems appropriate to reassess this," it read. "Corporation tax will be 21% by next year. Does this not render many of the advantages of having an Irish company obsolete?

"From a tax management perspective there may have been advantages in avoiding the UK 26% tax rate but the process and IT overhead with the additional VAT complexity may negate these advantages. Needless to say there is also the reputational damage to M&S should it be seen to be avoiding UK tax in the current climate, as seen with recent examples such as Starbucks [and] Amazon."

The revelations come amid mounting cross-party political focus on corporate tax avoidance, as Ed Miliband pledges to act unilaterally to tackle tax avoidance, just days after the public accounts committee chair, Margaret Hodge described Google's tax structure as evil.

Tax avoidance has also been made a central component of next month's meeting of the G8 economic summit by David Cameron and George Osborne.

Marks & Spencer said Ireland was used to host the website as it was the largest international market for M&S, and therefore the logical host for the EU site. It said: "M&S is a major UK taxpayer, contributing over £800m to the UK exchequer in 2011/12.

"We pay UK corporation tax on all profits generated by UK sales and comply with the tax laws of all jurisdictions in which we operate. We conduct our tax affairs in a transparent and legally compliant manner that is consistent with our longstanding values and complies with the tax laws of all jurisdictions in which we operate.

"Our European websites are owned by M&S Ireland. This is made clear to all customers shopping on our European websites. Ireland is our largest international online market, taking over 50% of our online European sales, which is why we structure our other European websites around it. It would not make good business sense for us to set up anew in every market we enter.

"These are not UK sales, these sites do not serve UK customers and there are no sales made in sterling. All tax is legally and fairly paid both in the UK and in Ireland."

But tax campaigners have been angered by the revelations of how M&S operates its international division, accusing it of trading off its British reputation.

"Given that Marks & Spencer portrays itself as a British institution, it is disgraceful that it is choosing to avoid paying tax in this country," said Suzy Blackwell of UK Uncut, which has pushed for changes to the law to cut down on legal tax avoidance measures.

"The government must stop letting companies like Marks & Spencer dodge tax which could go towards funding vital public services. It's an outrage that the government is allowing this behaviour to continue while making devastating cuts across the country."

Richard Murphy, an accountant who writes for the UK Tax Justice Network, agreed. "There is no doubt that this is Marks & Spencer is 'doing an Amazon' by setting up an arrangement in a low tax jurisdiction where little or nothing happens to avoid tax where the trade really takes place.

"As Ernst & Young told the public accounts committee last week, such arrangements are common. But what that means is big business is now used to playing games with tax authorities, who appear to have meekly accepted there is nothing they can do about it. That has to change."

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Article source : http://www.guardian.co.uk