How 'British' companies dodge hundreds of millions in tax

To service UK huge debt, the middle classes are paying ever more tax. Yet a group of the country's biggest firms are moving offshore - and denying the UK exchequer hundreds of millions...

Anger: Taxpayers are angry that bosses use expensive schemes to dodge tax.

The familiar blue-and-white logo above more than 2,500 High Street shops remains as it has for decades. The chain of chemists started by John Boot 161 years ago continues to dish out medicines and sell everything from cold remedies to corn pads.

Boots, surely, is a quintessentially British business. It was founded in Nottingham, where its headquarters remain. Although it merged with pan-European pharmacy business Alliance UniChem in 2006 to become Alliance Boots, it is still outwardly British, a national corporate treasure.

This impression, however, is misleading. Pick through its financial accounts and you can trace its ownership back along a trail that leads not to Nottingham, but to Zug in Switzerland — a prim, rich city of 25,000 souls, sitting roughly midway between Zurich and Lucerne.

Zug — legally, at least — is the true home of Alliance Boots. The company's registered office is at 94 Baarerstrasse. There is little sign of activity here, though. The nondescript building is merely the company's post box address — one it shares with scores of other companies nominally based here, which run the full gamut of corporate names from ABC Consulting to Zephyr Entertainment.

And Boots — together with a growing list of other 'British' businesses such as Cadbury and Vodafone — has now become the target of furious campaigners protesting at the decision of several huge companies to shuffle their business bases around the world and thereby avoid tax in Britain.

Over the past fortnight, protesters have besieged outlets of the companies accused of the most aggressive — albeit legal — tax avoidance.

In one demonstration, the flagship store of Topshop in London's Oxford Street was forced to close its doors on one of the busiest shopping days of the year.

The chain is run by Sir Philip Green, but, perfectly legally, is officially controlled by his wife from the tax haven of Monaco.

Campaigners gathered outside, chanting and blowing whistles. Others were bodily removed from inside the store by security guards. Some of the campaigners glued their hands to the inside of Topshop's windows. There were 18 arrests.

Protests have been staged across the country: from Birmingham, Bristol, Cambridge and Liverpool to Glasgow, Edinburgh, Portsmouth and Southampton, campaigners have descended on more than a score of premises.

And it is not just Green's shops that have been in the protesters' sights. Vodafone has seen its stores picketed and invaded.

Fair share?: Arcadia boss Sir Philip Green uses his wife Tina to dodge tax.

While the Coalition Government is forced to slash spending on public services — not to mention raise the ceiling on student tuition fees — private companies contrive to cut the tax they hand to the Exchequer.

The strategies companies use to avoid tax are no doubt quite legal. But there is a widespread feeling that while most hard-working taxpayers have a considerable portion of their income removed by PAYE, there is something immoral about businesses that can employ expensive accountants to find increasingly complicated ways of paying less tax.

The Boots example is instructive.

The reason for Alliance Boots' Swiss address in Zug is simple: it has one of the most lenient company tax regimes in Europe.

Its headline rate of corporation tax — the tax on profits — is just 15%, compared with 28% in the UK. Some companies can pay as little as 8.8%. Little wonder that there are more companies registered in Zug than there are inhabitants.

Alliance Boots moved to Switzerland shortly after a £12bn takeover in 2008 by a group headed by Italian businessman Stefano Pessina. With that takeover - and the shift of legal base to Switzerland — the UK Exchequer lost yet another big corporate taxpayer.

In its final year with its shares quoted on the London Stock Exchange, Alliance Boots declared that its tax bill, excluding 'one-offs', was £89m. And now? The Swiss-based Alliance Boots says in its latest accounts that its underlying tax bill was a mere £9m. The business itself has been prospering: sales and trading profits have consistently grown. But two things have changed since the company was taken over and disappeared from the London stock market.

The move to the low-tax environment of Switzerland has helped. But, crucially, Boots has also been able to declare a far lower level of profits on which taxes are charged.

As part of the takeover, Alliance Boots borrowed almost £9bn from various banks. That debt incurs interest, and interest payments can be offset against profits when calculating the company's taxable income. A higher interest bill means lower profits — and less tax to pay.

Boots may be doing well, but the UK Exchequer sees no benefit.

When in Opposition, the then Shadow Chancellor George Osborne muttered privately that if the Tories got into power, he intended to tackle the issue of companies reducing their tax bills by taking on big debts and using interest payments to reduce their declared income. But now, the tune has changed.

This month, the Treasury published what Osborne described as 'the most significant programme of corporate tax reform for a generation'. And yet it explicitly ruled out the idea of limiting any company's ability to offset debt interest payments against taxable income.

This was a key concession to big business. The head of tax policy at a leading accountancy firm says companies 'will be breathing a collective sigh of relief'.

In truth, the footloose nature of large corporations means they can play off one country against another, picking and choosing where to make their legal home as they seek the most generous tax regime.

Even companies whose shares continue to be traded in London have moved their legal base elsewhere to reduce their tax burden.

Brit Insurance, sponsors of England's Ashes cricket team, is legally based in Amsterdam; advertising giant WPP is technically an Irish company. Pharmaceuticals group Shire, global business media firm United Business Media, Experian — which is best known for credit-checks — have all quit Britain.

Wolseley, tracing its origins to the 19th Century and now the world's largest supplier of building, heating and plumbing supplies, says it will move to Switzerland. The group says it would have saved £23m on last year's tax bill had it already made the move.

Certainly, successive governments have tried to make Britain an attractive home for business. In 1984, the UK levied corporation tax at 52%. By 1996, it had fallen to 33%. It is now 28% and is to be cut to 24%.

But other countries have cut it, too. And in the cold, calculating world of multi-national commerce — in which patriotism counts for nothing — companies will seek out the regime where national Exchequers take the smallest slice.

Many companies do not even feel the need to move wholesale from one country to another in order to exploit nation states' eagerness to outbid one another in cutting taxes.

Vodafone, the mobile phone giant valued at £88bn, continues to have its HQ in leafy Berkshire, yet much of its profits go through an offshoot in Luxembourg, where taxes are negligible. By last year, more than €15bn of profit had been poured into the Luxembourg company rather than paid directly into Britain, where its tax liability would be greater.

After negotiations with HM Revenue and Customs, Vodafone has agreed to pay £1.25bn in UK taxes — £800m straight away, plus £450m over five years. Critics say Vodafone has got off lightly and that this is far too modest a bill — although the Revenue dismisses as an 'urban myth' suggestions that the tax the firm should pay is nearer £6bn.

But it certainly appears that Vodafone had expected to pay more: in its 2006 accounts, it earmarked more than £2bn to settle the bill, plus interest.

So how have other huge companies sought to reduce their UK tax burden?

Earlier this year, drugs group AstraZeneca, born out of the breakup of the ICI behemoth 17 years ago, agreed to pay more than £500m to the UK Exchequer following a dispute over 'transfer pricing', a device which allows multi-national companies to lower their overall tax bill by making bigger profits in countries with lower taxation rates than they do in high-tax countries.

The British arm of Starbucks has also admitted in its most recent accounts that it was 'in discussion' with HM Revenue and Customs over transfer pricing.

As we have seen, over the past two weeks, Vodafone has been a principal target of groups campaigning against tax avoidance. The other company very firmly in the spotlight has been Sir Philip Green's retail empire of 2,300 shops, which embraces Topshop, BHS, Dorothy Perkins and Evans. After Marks & Spencer, Green's group is Britain's second-largest clothing retailer.

So why has Green been the focus of such anger given that he is a UK tax resident? The answer is that although he runs his retail business, Green does not actually own it. Instead, company accounts say it is controlled by Green's family and headed by his wife Cristina.

This distinction is key, for while the company does pay corporation tax in Britain, Cristina (Tina for short) has lived in the tax haven of Monaco for 12 years.

For more than a decade, she, not her husband, has featured as being behind controlling stakes in businesses run by Green — Owen and Owen and Mark One, and more recently Bhs and Topshop's parent Arcadia. By 2003, she had firmly established her status as not living in Britain for income tax purposes.

In 2005, the company through which Arcadia is controlled famously paid out a huge £1.14bn dividend to a Jersey company of which Tina Green was the only director. Company records say that control was — and is — in the hands of "CS [Cristina] Green and her immediate family".

No tax was payable because Tina Green was resident in Monaco, saving the family at least £285m.

But a Daily Mail investigation shows that this tells only part of the story.

Between 2002 and 2004, BHS paid dividends totalling £423m. Virtually all of these went to offshore companies linked to Green's wife. But no tax was paid on dividends to these companies. Had Tina Green been living in Britain, the tax bill would have been at least £100m.

Furthermore, the dividends from both BHS and Arcadia were possible in part because the companies increased their borrowing to fund the payouts.

That meant higher interest bills on their debts. And that, once again, meant that, in turn, the companies reduced their taxable UK profits — and thus faced smaller corporation tax bills.

On top of this, BHS has done business with Carmen Properties, a firm based in the tax haven of Jersey and controlled by the Green family.

In 2001, BHS sold a clutch of its stores to Carmen for £106m. Carmen thus became BHS's landlord, and over the subsequent seven years received £81m in rents, providing a further source of income for the Green family. It also reduced BHS's profits, thus cutting its tax bill.

Exactly how big was the tax saving to the Green family from the Carmen deal? It is impossible to say: that would depend on Carmen's costs, including the interest on any loans it took out to buy the stores.

But what is clear is that in total, offshore companies linked to Green and his wife have received fully £1.8bn since 2000, and, at the very minimum, there is a further £250mn to come by 2019. In total, the Greens' tax saving is at least £400m. That said, last year Arcadia paid £70m in UK corporation taxes.

Within the past fortnight, there have been further revelations that have stoked the ongoing tax controversy in Britain. The American food giant Kraft, which bought Cadbury for £11.5bn earlier this year, is embarking on what is euphemistically called 'restructuring' of the confectionery company. During the tussle for control of Cadbury, the US group promised that if it was successful in the takeover, it would keep open a factory near Bristol that was threatened with closure. Once the takeover went through, Kraft reneged on that promise and said it would close the factory anyway, with the loss of 400 jobs.

Now, it has emerged that Kraft plans to change the way Cadbury does business in a move that means it will avoid paying tens of millions in UK tax. Much of Cadbury's profit will go to Switzerland — where Kraft already has its European HQ — rather than the UK.

How much are we talking about? Last year, Cadbury paid taxes of almost £200m. Naturally, the plans by Kraft (corporate slogan 'Make today delicious') has fuelled the ire of tax protesters.

Even former Business Secretary Lord Mandelson voiced his misgivings, describing it as 'the beginning of a slippery slope'.

But there is a piquant irony in his lordship's public disquiet. Mandelson is currently setting up a business consultancy firm, Global Counsel. And which company is giving financial backing to the new venture? Marketing group WPP which moved to Ireland last year to cut its tax bill.

So the shameless strategy of tax avoidance continues in the world of big business, and the losers are the millions of hard-pressed taxpayers who are left to take up the slack.

Topshop and Vodafone will have repaired the shop windows that were smashed in the riots last week. Their reputations may take rather longer to mend.