Global Policy Forum

Investigation into the complex and confidential world of tax

British taxpayers are being left to plug a multibillion-pound hole in the public finances as hundreds of the country's biggest companies increasingly employ complex and secretive tax arrangements to limit the amount they hand over to the exchequer.

An extensive Guardian investigation has examined the accounts of the UK's biggest companies - many of them household names - and discovered a series of sophisticated tax strategies which, critics say, amount to an almost unstoppable tide of perfectly legal corporate tax avoidance.

The veil of confidentiality that covers these tax avoidance schemes is so difficult to penetrate that nobody knows exactly how much tax goes missing each year. But HM Revenue & Customs estimated that the size of the tax gap could be anything between £3.7bn and £13bn. The Commons public accounts committee put it at a possible £8.5bn and the TUC said £12bn.
UK listed companies are not required to set out exactly how much UK corporation tax they actually hand over to HM Revenue & Customs. When the Guardian asked each FTSE 100 company to provide this information only two offered a response.
Similarly each company was asked what its official policy on so-called tax planning is and how this is implemented. No company was prepared to answer the question directly. However, the investigation, which we publish over coming days, has established that:

• The UK-based drinks giant Diageo plc has transferred ownership of brands worth billions of pounds, including Johnnie Walker, J&B and Gilbey's gin, to a subsidiary in the Netherlands where profits accrued virtually tax-free. Despite average profits of £2bn a year, it paid an average of £43m a year in UK tax - little more than 2% of its overall profits.
• Two major drug firms have shifted ownership of their brands to tax havens in the Caribbean. Their UK operations can then be made to pay royalties for the use of the trademarks, reducing their profits and the amount of tax due in this country.
• An internationally renowned corporation has structured itself so that it is now simultaneously a British public company, tax-resident in Amsterdam, but whose brands are Swiss-owned.
• The makers of an iconic British food product have shifted the rights in it to a tax haven in Switzerland.
• A household name has been deliberately loaded with debt so that it no longer has any profits to pay tax on.
• Top accountancy firms are charging £500,000 a time to invent tax-avoidance schemes.
• Some UK-listed companies which have moved control to Dublin to benefit from Ireland's low-tax regime appear to have little real presence there.

According to the National Audit Office, in 2006 more than 60% of Britain's 700 biggest companies paid less than £10m corporation tax, and 30% paid nothing. Britain's top taxman, Dave Hartnett, told the Commons public accounts committee last year that 12 major corporations had "extinguished all tax liabilities in 2005-6" thanks to avoidance schemes. Vince Cable, the Liberal Democrats' deputy leader, said last night: "The scale of corporate tax-dodging exposed by the Guardian research is absolutely mind-boggling. It will deeply anger households and businesses who pay their fair share. "The baroque complexities of corporate tax-avoidance schemes are similar to the elaborate structures which have now devastated a substantial part of the banking system. The tax authorities should stop trying to compete in the complexity stakes and apply the general principle that if companies deliberately seek to avoid taxation they should be penalised and charged."

According to the Institute for Fiscal Studies, overall tax receipts - including personal income tax - will be £7bn lower next year than forecast as a result of the downturn. The respected thinktank says key Labour programmes face being squeezed, in particular health and education spending. The result, say unions and campaigners, is that ordinary taxpayers have to make up the difference. If the TUC estimate of £12bn is correct, it takes the average income tax contribution of 2.4m households just to fill the gap left by the perfectly legal tax manoeuvres of big business. That £12bn is the equivalent of around 480 new schools, 300 hospitals or more than 1.3m new nursery places.

Today, guardian.co.uk is also launching a unique interactive database of the corporation tax figures recorded in the accounts of each FTSE 100 compay in the last four years. It reveals the low amounts of tax paid by some, and a reluctance to supply meaningful numbers to the public. Despite their efforts to shift profits out of the country and minimise UK tax, the companies enjoy a range of important benefits by being based in Britain and listed on the London stock exchange. This has given them access to one of the widest pools of capital in the world; they have enjoyed light-touch but respected regulation and high corporate governance standards; and it has enhanced their international reputations to be listed in the UK, helping them to attract the best talent. Companies here also benefit from political stability and - perhaps most important of all - the directors want to live near London Many of the companies the Guardian looked at are already feeling the effects of the recession on their profits so their tax bills will go down. But campaigners insist that this makes the task of collecting maximum tax revenues more, rather than less, urgent. Failure to do so, they say, will put a massive strain on public finances already being stretched to breaking-point. Brendan Barber, TUC general secretary, said: "Tax avoidance is hollowing out the tax system. With the rest of us having to fill the tax gap left by Britain's most wealthy, there is a real threat to the future of public services - especially as the recession takes its toll on normal tax flows. "It will be hard to maintain public support for tax when it looks increasingly optional for big companies and the super-rich, who increasingly float free from the network of mutual obligations that underpin any civilised society."

As they watch tax receipts dwindle through a combination of legal avoidance schemes and economic downturn, governments also face international pressure to crack down on the entirely separate problem of illegal tax evasion. In the US, Barack Obama introduced the Stop Tax Haven Abuse Act in 2007 when he was still just an Illinois senator. Obama and his fellow sponsors of the act, Democrat Carl Levin and Republican Norm Coleman, claimed the US annual tax gap was approaching $100bn. "We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren't disadvantaged," Obama said. Political concern is growing across Europe. German chancellor Angela Merkel launched hostilities against individual tax evaders after her secret service bought computer discs from a whistleblower detailing the bank accounts of thousands of wealthy Germans in the tiny Alpine tax haven of Liechtenstein.

In Britain, the Revenue paid £100,000 for the same information about individual UK tax dodgers and is now pursuing them. And just before Christmas, Alastair Darling, the chancellor, launched a potentially explosive review of British-linked tax havens.