Britain's missing billions: counting the true cost of corporate tax avoidance

Yesterday's public finance figures were a tale of two countries: the public paid more and corporations paid less.

Last month Treasury receipts from VAT and income tax – which we all pay – rose by 6.4 per cent relative to October 2011. But corporation tax receipts – levied on the profits of the largest firms in the land – fell by 10 per cent on the same month a year earlier. In October companies poured £7.8bn into the state's coffers, down from the £8.7bn they handed over last year.

And this shortfall was not just a monthly aberration. Since George Osborne delivered his Budget in March companies have paid £24.9bn in corporation tax, 9.8 per cent less than the £27.6bn they handed over in the same period of last year.

The trend is an ominous one for the Chancellor. In March HMRC

Mr Osborne's official fiscal forecaster, the Office for Budget Responsibility, predicted that corporation tax receipts would grow by four per cent this financial year. But they are presently running about 10 per cent lower.

The shortfall in tax revenues is one reason why many analysts expect that the Chancellor will be compelled to announce further spending cuts and tax rises in his autumn statement on 5 December to meet his "fiscal mandate". This requires Mr Osborne to put plans in place to eradicate the structural deficit within five years.

The Treasury suggested yesterday that weak corporation tax receipts over the past seven months are largely due to a collapse in North Sea output this year after a gas leak, which means that large energy firms have been paying less tax. There is some truth in this. Output has been disrupted by problems on the Elgin Platform and maintenance work elsewhere.

Yet the Government's own figures also suggest that corporations are evading and avoiding many billions of pounds of corporation tax. Her Majesty's Revenue and Customs performs a regular estimate of the "tax gap", which is the difference between what it believes companies ought to be paying in corporation tax and what the state is actually receiving. In its latest estimate for 2010-11, HMRC put that figure at £4.1bn. Some campaigners, such as Richard Murphy of Tax Research UK, think that the real figure could be £12bn or more.

To put that in context, even the HMRC figure represents a sum that could finance the construction of 300 new schools. It could be used to build 25 new hospitals. £4.1bn would pay the annual salaries of around 153,000 nurses, or 164,000 police officers. It would pay for 430,000 nursery places a year. The money could be used to fund a penny cut from the basic rate of income tax.

According to HMRC large businesses accounted for £1.4bn of this unpaid tax. Multinationals such as Amazon, Google and Starbucks, which have attracted criticism for the low amount of corporation tax they have been paying in Britain, apparently legally, would be included in this category.

Tax avoidance by companies is not the only reason the Treasury's coffers are emptier than they should be. HMRC estimates that in 2010-11 it was deprived of £9.6bn in VAT, £3.3bn in excise duties, and £14.4bn in income tax revenues, national insurance contributions and capital gains tax. The National Audit Office said yesterday that aggressive tax avoidance schemes by individuals and small companies are costing the public purse billions of pounds. According to HMRC the tax gap for the entire economy amounted to £32bn in 2010-11.

If the Treasury closed this tax gap it would cover almost a third of the £120bn deficit projected for 2012-13 and consequently reduce the need for further spending cuts and tax rises. Earlier this month Mr Osborne and his German counterpart, Wolfgang Schauble, called for an international crackdown on tax avoidance by large multinational companies.

Yet the Chancellor has also tried to encourage multinational companies to move their headquarters to the UK by cutting corporation tax rates. In his March Budget Mr Osborne announced that the rate companies will pay on profits will fall to 22 per cent by 2014. The Government has also been accused of cutting staffing levels at HMRC by 10,000 as part of its austerity drive, thereby reducing the ability of officers to extract more tax from companies and others unwilling to pay their fair and legal contribution to the public purse.

Mind the £4.1bn tax gap...

A number of famous multinationals have come under the spotlight over corporation tax. Starbucks has reported taxable profits in the UK only once in the past 15 years. Google reported revenues in Britain of £395m in 2011, but paid just £6m in corporation tax. Amazon booked £3.3bn in UK sales in 2011 but paid no corporation tax at all. Senior executives from all three companies appeared before the Commons Public Accounts Committee this month. Starbucks told MPs it paid a royalty to its parent company in the Netherlands, which offset profits made here. Amazon said its profits are all booked in Luxembourg, and Google's profits are registered in Ireland.