EU to Investigate British Tax Loophole

Last month it was discovered that the EU is launching an investigation into a British government scheme that may be helping multinational firms pay less in tax.

Margrethe Vestager, EU competition commissioner announced that she is running an in depth investigation into the scheme. The EU believes that this scheme may break EU competition rules by allowing multinationals to pay less tax than domestic-only rivals.

The centre of this enquiry is the change to the “controlled foreign company” rules that were announced by George Osbourne in 2011. The changes meant that a multinational company in the UK could lower its tax bill by shifting some of the taxable income to an offshore corporation, a “controlled foreign company”.

These are offshore subsidiaries that multinationals can use to move capital around their global operations. Though CFCs are not illegal, the commission believes that the UK setup breaks EU competition rules and gives multinationals an unfair advantage over British companies.

Investigators don’t have an estimate of how much tax that may have been lost. However, HMRC calculated that changes to CFC rules would reduce the tax take by £805m a year by 2016.

HMRC recently revealed that multinationals have avoided paying £5.8bn in taxes during 2016. This is 50% more than government forecasts.

EU officials are currently unaware which companies are thought to have benefitted from the scheme. However, once they do find out who has had an unfair tax advantage, they will be told to pay money back to the UK Treasury.

EU officials say that they’re unsure whether the investigation will be completed before the UK leaves the EU on the 29th March 2019.

Other cases

Amazon was recently ordered to repay €250m when the EU commission tried to break up a “sweetheart” deal with Luxembourg.

Apple was also told to hand back €13bn in unpaid taxes to Ireland after a tax deal there.  However, both companies have rejected the commissioner’s findings.

Property sales loophole

There’s a key tax loophole in the property sector too. According to the British Property Federation, there’s £871bn worth of commercial real estate here in the UK. That’s 10% of our net wealth. 20% of commercial real estate is sold every year and the market was worth £115bn in 2015 according to HMRC.

Those who sell property are subject to corporation tax on their capital gains. However, this isn’t the case when the seller is foreign-based. Around one third of UK commercial real estate is held in offshore companies which are usually tax havens.

Back in 2015, George Osbourne ended permanent non-dom status and introduced capital gains tax on residential property sales by non-doms. However this doesn’t apply to commercial properties. This means that people can repurpose property as commercial in order to avoid the tax. Closing this loophole could raise between £5bn and £8bn per year.


What do you think of the EU’s investigation? Would you like to see the loopholes closed? Let us know what you think.

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