Channel 4 News recently ‘revealed’ that HMRC had so far paid Mapeley £2.7 billion for rent and maintenance of its properties, but that the company has yet to pay any Corporation Tax in the UK, because it has not yet declared a profit.

Corporation Tax is an important issue to Northern Ireland, because it is part of the UK Government’s General Revenue, which it sets against its Expenditure. When this is not in perfect equilibrium, the Government calls this situation a “Deficit”. The “deficit” to George Osborne, the current Chancellor of the Exchequer, is a thing of terror. But it is a terror he doesn’t understand. And so he has committed to reducing it by means of further public expenditure cuts, so severe, that even the OECD has cautioned that he is in danger of running the productive economy into the ground. For Northern Ireland this will have a negative impact on the future allocation of the Block Grant to the Assembly under the Barnett Formula, which crudely balances out public expenditure allocation across the UK.

Off-shore, but in plain view

However, the Mapeley tax “avoidance” is less of a revelation than it appears. The Sunday Express reported a similar concern about this contract in 2013. But it was Private Eye magazine which has challenged the contract from its inception in 2001, when Gordon Brown, then Chancellor of the Exchequer, signed over the bulk of HMRC’s property estate in a Private Finance Initiative (PFI) deal for 20 years at a headline cost of £3.3 billion. It was known at the time that Mapeley, the successful bidder, had an off-shore structure and was 50% owned by George Soros the famous Hedge Fund manager, who did more than a little damage to Sterling at a point in his investment “career”. Soros subsequently sold on his share to another shareholder, the USA based Fortress Investment Group in 2004.

That alone should have been raising flags during ‘due diligence’, but at this point PFI was still regarded as a magician’s trick that existed outside of rational economics.

The HMRC portfolio consists of 147 freehold properties and 454 leasehold properties with a 20 year sale and leaseback arrangement. Mapeley state that they - “own the freeholds and manage the leaseholds occupied by HMRC as Principal (we take the risk of rising rents and we benefit from falling costs), provide full facilities management and carry out construction fit-out works on behalf of HMRC to a pre-agreed price.”

The problem at the heart of PFI

The first and most obvious problem that arises with this, is the problem that lies at the heart of all PFIs. For the private sector body to get the lowest interest rate on the cost of borrowing to finance such schemes, it is best to borrow over an extended period. But then unlike a straightforward mortgage for a house, PFI contracts which ‘bundle’ such different elements, require that complex requirements are accurately assessed, then projected over a 20 year period, taking account of the ramifications and risks of any policy commitments given by future governments on matters such as the location of offices, the impact of new technologies on working arrangements and often, a change in demographics. The contract will then be delivered without any further competitive process or ability to benchmark with any similar contract, as all are cloaked in “commercial in confidence” protection. It will essentially remain in a steady state, typically over a 20 year period, other than if amended terms are negotiated, which as we have learned from experience, will be done at considerable cost.

The reality is that PFI does not even work in theory and it has proven impossible for the state to accurately draw specifications to any sufficient extent to tie down contractors and guarantee that services are provided as actually required. That there is a secondary market, trading in PFI shares, indicates that there is something of the lottery about such contracts.

Mapeley’s Magic Circle

The particular financial magic trick that avoids tax in this PFI contract goes like this:

Mapeley Steps Contractor Ltd receives rent from HMRC, which it then “pays” to Mapeley Estates Ltd to manage the properties. Both companies are UK registered, but each has a separate parent company – Mapeley Steps Holdings Ltd and Mapeley UK Co Ltd. Both of these companies are registered off-shore. Mapeley then borrows money from within its own structure at ‘adjusted rates’ so high, that the repayment of interest on the “loan” made, prevents it from making a profit in the UK. A less than virtuous circle. But, Abracadabra - no Corporation Tax due.

Public Accounts Committee Report

The Public Accounts Committee at Westminster which examined the contract, produced a report titled “HM Revenue and Customs Estate - Private Finance deal eight years on.” In it they note –

“While HMRC got a good price for the contract, it has not obtained key information on Mapeley’s financial position or profitability and has not monitored overall costs or Mapeley’s viability, even though it could incur substantial costs in the event of contractor default.”

Dealing with the off-shore nature of the arrangement, they noted it “had not only been damaging”, but “it is also unlikely that the arrangement delivers any overall benefit to the Exchequer as any reduction in contract price is accompanied by lower tax revenue.”

The HMRC and Google’s Tax Settlement

Given the HMRC’s evidently relaxed attitude to its principal mission i.e. gathering tax, the deal recently made with Google shouldn’t be such a surprise either. In their “settlement” with HMRC, Google paid £130 million to cover back-tax owed since 2005. The settlement involved no additional penalty for their somewhat tardy approach to tax compliance, as would be levied against smaller fry in the ocean of tax avoidance. The settlement was certainly modest given that Google earned over £7 billion, amounting to 10% of its global revenues, from its activity in the UK in 2015 alone.

Enter the Public Accounts Committee – Again

Reporting on the settlement, the PAC recommended –“HMRC should consult widely, including with other tax authorities, on the case for changing the rules that protect corporate taxpayer confidentiality to make the tax affairs of multinational companies open to public scrutiny.”

The committee noted that the French and Italian authorities were seeking to extract more tax from Google than the UK has settled for. And because of the apparent generosity of the HMRC brokered deal, the UK government is vulnerable to challenge under EU State Aid rules. These are defined in Guidance published by the UK Government which states:

“State aid is any advantage granted by public authorities through state resources on a selective basis to any organisations that could potentially distort competition and trade in the European Union (EU).

The definition of state aid is very broad because ‘an advantage’ can take many forms. It is anything which an undertaking (an organisation engaged in economic activity) could not get on the open market.”

State Aid Rules

State aid rules can (among other things) apply to the following:

  • grants;
  • loans;
  • tax breaks;

the use or sale of a state asset for free or at less than market price.”

Titanic Belfast – “Unsteady as She Goes”

Interestingly, the NI Assembly breached EU State Aid rules in the commissioning and assistance given to Titanic Belfast, with millions of pounds in anticipated EU grants having to be written off and made up from the Block Grant. This was reported at an Assembly Committee, but as there was no argument between local politicians about it, journalism simply ignored it.

Google and the ”Double Irish”

On 20 February 2016, the Irish Times reported that – according to company documents filed to the Dutch authorities, “Google’s main Irish unit handled transactions worth €28.7 billion over three years as part of an international tax avoidance scheme.”

Their economics editor explained: 

“Google employs more than 2,200 people in Dublin, which serves as its headquarters for Europe, the Middle East and Africa. It deploys a scheme known as the “double Irish” to reduce the ultimate tax bill.”

Under the scheme Google exploits the different tax regimes and rates between Ireland and other jurisdictions “such as the tax haven of Bermuda.” Just like Mapeley as described above, Google has created a structure of separate companies with the main Irish entity being Google Ireland Holdings, owned by Google in Bermuda. It is an unlimited company for which financial information has not been available since 2006. However as the Irish Times reported –

“the scale of its operations has now emerged via the reporting of transactions with a subsidiary called Google Netherlands Holdings BV.

Financial accounts for Google Netherlands Holdings, which has no employees, show it paid royalty expenses of €10.7 billion to Google Ireland Holdings in 2014 and €9.2 billion in 2013.”

This allocation of profits made in the UK to Google’s Irish unit, its headquarters for large tracts of the world, was raised as a concern by the HMRC and noted by the PAC. Noted too was the fact that Google further minimised its tax via internal company transactions with units in the Netherlands and Bermuda. Unfortunately none of this is illegal under the current tax rules and although the Irish Government agreed in 2014 to phase out this “loophole”, it allowed companies already availing of it to continue with the arrangement up until the end of 2020.

A fish rots from the head down.

There is a maxim that a fish rots from the head down. It is not surprising then that Google’s tax advisors are Ernst and Young, (now just EY). Again thanks to Private Eye, we know that in common with the other major accountancy firms, EY deploy tax efficient arrangements involving similar ‘transfer pricing’ in their own affairs. The Partners in EY have thus established themselves as self-employed directors of limited liability partnerships (LLPs). This company vehicle allows them to separately employ thousands of staff in specially created “service companies”. The Limited Liability Partners then reimburse the costs of the service company and add a “mark-up” that gives a taxable profit. The key thing is this profit is taxed at a lower rate than the partners would be liable to as income tax. What does this mean? Quite simply from figures available in 2013 it emerged that Ernst and Young LLP “transferred” more than £90 million taxable profit to Ernst and Young Services Ltd, saving the Partners £18 million in tax.

Another of the Big Four Accountancy firms, Deloitte, employed the same arrangement with its partners transferring £38 million saving its partners around £7.5 million. To close the less than virtuous circle, one of Deloitte’s Partners is Dave Hartnett, former Head of HM Revenue and Customs!