Britain - A decade of Labour's state handouts to the rich

Jul/Aug 2007

Gordon Brown's final budget as Chancellor of the Exchequer, presented in March this year, was designed to provide the eye-catching headline of "tax cuts".

But while the press focused on the 2% cut in the basic rate of income tax, the far more significant cut in this budget was the 2% cut in the headline rate of corporation tax. Given the record levels of company profits through 2006/7, the fact that companies were granted this concession, says it all about who really rules the roost behind the facade of "democratic government"!

That said, Brown has never needed his arm twisted by the City. He was an ever-willing steward of British capital from the day he arrived in the Treasury in 1997. This latest cut in corporation tax was just one more concession to the rich, in a long series of them.

Since then, tax measures - cuts, rebates and allowances - have been the most conspicuous vehicle used by Brown to keep British business happy, but they were by no means the only one.

The Treasury's policy, in practice, turned a blind eye to numerous tax loopholes for the rich, and created new ones. All kinds of subsidies have been made available, and private businesses have been able to benefit from the on-going process of outsourcing and selling off of state assets - providing even more opportunities for them to get their hands on public finances.

By now, it is accepted fact that the Labour government is first and foremost, "business-friendly". So as it completes a full decade in office, it is worth attempting to draw a balance sheet of this policy. Just what was the extent of its generosity to the capital class over this decade and how has it used the levers of power to help the rich get richer?

Robin Hood in reverse

The basic rate of income tax has been cut by 5 percentage points since 1997, in fact - from 25% to 20% - the last cut being legislated this year.

But these cuts in the basic rate do not actually benefit the poorest in society - i.e. the 40% adults who are not liable for income tax because their income is too low. In fact, even among income tax payers, they do not always benefit mostly the poorest: for instance, following this year's budget, those on £18,500/yr and below lost out, while those with incomes between £18,500 and £35,000 were slightly better off.

In other words, these cuts are primarily designed to please the middle classes - and no doubt to prove that Labour's is not a "tax-and-spend" administration, as Tory politicians often claim.

As to the upper rate of income tax, it has remained at 40% since 1997. But this is still a very far cry from the rates used during most of the Thatcher era (up to 60%), not to mention the exceptional 83% rate introduced in 1979. And since the gap between low-earners and middle-earners has increased under Labour, those concerned by this rate do not have much to complain about.

Those who have really gained from Labour's tenure are the super-rich. They are best placed to dodge tax and they do. There is, after all, the domicile rule - by which around 110,000 British residents who have "non-domicile" status only pay tax on the amount of money they bring (officially) to Britain. The rest can be stashed in an offshore tax haven or invested in yachts or property - and therefore is liable to little or no tax. The top accountancy firm, Grant Thornton (and they should know) estimates that these "tax asylum seekers" get away with saving as much as £126 billion as a result of non-payment of tax. And of course the Treasury loses this - an amount which is 22% of the total annual government budget (£553 billion in 2007)!

As Madeleine Bunting put it in the Guardian 's series on "The New Wealth", "Tony Blair and Gordon Brown have happily presided over an unprecedented golden age of wealth accumulation in this country - on a par with the US in the Gatsby's Roaring Twenties".

Bunting points out that in April this year, the IMF effectively defined the City of London itself as a "tax haven" because its generous tax concessions have attracted so many of the super-rich, that it has become a billionaire's playground. She recalls Peter Mandelson's remark in 1998 that Labour government ministers were ".. intensely relaxed about people getting filthy rich".

As for National Insurance Contributions - which comprise 17% of government receipts (as opposed to 28% for income tax), these reflect the same kind of bias in favour of the rich. While every worker must pay them on his or her earned wage, they are not payable on dividend income, on income from interest nor on company profits. And higher earners pay less, in proportion, than low earners do - because of especially low "upper earnings limits". For instance most workers would pay 11% on their earnings - but on everything earned above £30,300, only 1% is payable!

When NICs and income tax are taken as a whole, the way that the well-off are favoured by the tax system becomes much clearer. For example, the top 30% of households, pay 24.8% of their incomes in tax. But they earn 23 times more than the bottom 30%, who pay 23.2% of their incomes in tax!

Feeding exploitation

Since corporation tax is the main tax on company profits, the way that any government applies this tax says a lot about its current relationship with the bosses.

Corporation tax at present only contributes 9-10% of the government's tax receipts. It had already been cut substantially during the Tory years, from a high of 52% for big companies and 40% for small ones.

When Labour came to power in 1997, the rate of standard corporation tax was 33%. But Brown set about cutting this immediately. In his very first budget, it was lowered by 2%, to 31%. Then it was lowered by another 1% in 1999, to 30%. It remained at 30% until this year, when it was cut to 28%. So Brown has cut standard corporation tax by a total of 5 percentage points during his 10 years in office.

In fact the standard rate of corporation tax has usually only applied to profits over £1.5m. There is a graded intermediary rate for profits between £300,000 and £1.5m. Then there has been a bottom rate for profits below £300,000 - the so-called small companies' rate.

In his first budget, Brown cut the small companies' corporation tax from 23% to 21%. He cut it again to 19% in 2002. However, that year Brown made a really bad gaffe. He decided he would be really popular if he cut the tax rate on profits less than £10,000 to zero.

This meant that at least 1.2m people who were then registered as self-employed could save over £500 per year in tax by turning themselves into a company. And if they did, over £2.5bn could be lost in tax revenue. Brown's advisors were horrified and pointed out that someone with an income of just under £15,000 could pay no tax if they set up a company, whereas an employee with the same income would pay £3,827 in income tax and National Insurance contributions.

The number of new companies formed between 2002-2003 jumped to over 325,000, which was a 45% increase on 2001-2! And out of the estimated 4.3m business enterprises in the UK at the beginning of 2005, as many as 3.2 million had "no employees" - and a sole proprietor or owner-manager!

Brown backpeddled. Finally, in the 2007 budget, the small companies' rate was increased to 20% and by 2009 it will be 22% - "to tackle individuals artificially incorporating to minimise tax"... In other words Brown has almost gone full circle.

Corporation tax could be, potentially, the biggest source of revenue for the government - but thanks to all the tax breaks extended to the capitalists, in recent years, it has only been about a tenth of the total tax collected by government. Though total profits of the FTSE 100 companies increased seven times over, between 2002 and 2006, the corporation tax collected in 2006 was only half as much as in 2002. Or to put it another way, corporation tax now amounts to a mere 2.5% of national income, the lowest level ever.

Yet more allowances

One can say that the bosses are never happy, no matter how far the chancellor may bend over for them. So, for instance today Digby Jones (just made minister for trade) calls for corporation tax rates to be cut yet again - even if they are slightly below the EU average.

But in fact companies seldom even pay the full whack, since there are so many ways to avoid doing so. And these ways of cutting the tax bill are perfectly legal.

Successive governments have brought in more and more generous "Capital Allowances" so that companies can offset certain expenditures against their taxes, and sometimes, do this well into the future. So, for instance, they can claim for the depreciation of their plant, machinery and buildings against their taxable profits, although the special allowances on building depreciation are at present undergoing a very belated reform. Obviously, far from depreciating these days, the value of buildings (even dilapidated ones) is more usually shooting ever-upwards.

Brown's March 2007 budget left him open to some criticism from businesses, because of the way that he adjusted some of the Capital Allowances. For instance the allowance on the purchase of plant and machinery for large companies was cut from 25% to 20% from next April. Small and medium sized enterprises will no longer get their much larger allowance of 40-50% from next year and will thereafter receive the same deduction as large companies.

This means that capital intensive (manufacturing, transport, communications and utilities) companies lose out, though not on balance. What they have gained from the cut in the rate of corporation tax, they lose in the cut in allowances.

However, large profitable companies like financial consultancies and pharmaceuticals as well as most service companies will escape unscathed from the cut in allowances and benefit very well from the cut in the tax rate.

Anyway, Brown softened the blow of this reduction in allowances for small and medium companies by announcing a new Annual Investment Allowance - so they will be able to offset expenditure of up to £50,000 against their taxable profits.

At the same time, to create even bigger opportunities for avoiding tax on profits, a tax credit will be given for losses incurred through expenditure on "environmentally friendly technologies".

The R&D scam

But all this is chickenfeed compared to the tax relief that companies can get if they can claim that expenditure qualifies as money spent on "research and development" (R&D).

Under the guise of supporting innovation and scientific research, and giving the UK a "high-tech" niche in the world market, Brown first introduced R&D tax credits in 2000, for small and medium sized companies (SMEs). These companies were allowed to claim tax deductions of 150% on their expenditure!

In 2002, the restrictions on company size were removed and large companies were allowed a tax credit of 125%. So even the biggest companies now had a new and very large potential loophole for tax avoidance - and one which was increased in the last budget to 130%, while the small and medium sized companies will be able to claim a tax deduction of 175% from April 2008. So, for instance, a small company with profits of £150,000 and investing £50,000 of this in R&D will pay tax of just 15%!

Any company wanting to take advantage of the R&D allowances, regardless of whether it actually does any R&D or not, just has to engage a good accountant, to make sure the expenditure on its self assessment form fits the definitions. All of the City accountancy firms, like Deloitte and PricewaterhouseCoopers offer their services in this respect, of course, while underlining how complex the application process is! PwC in fact claims that only 33% of eligible companies claim their R&D tax credits and has been advertising its services far and wide.

However, by 2006, there had been 19,000 claims under the SME scheme and around 3,000 under the Large Companies' scheme, which amounted to a combined claim of £1.8bn. A tidy sum!

No wonder this aspect of the budget drew praise from the chief executive of GlaxoSmithKline, who said the policy was "helping to put the UK at the forefront of scientific breakthrough". He did not mention GSK's profit "breakthrough", though - the company made £7.8bn profit last year, up 15% from the previous year.

The money that the government has put into university research can also, as they put it, "be turned into commercial opportunity". Indeed, 25 companies, valued at £1.5bn in total, have "emerged" from universities in the past three years and been floated on the Stock Exchange.

Perfectly legal loopholes

Capital Gains Tax is a tax that is meant to be paid on money which is made on the sale of assets by individuals. (Capital gains made by companies are subject to corporation tax). In 1998 this taxation was reformed by Gordon Brown, by the introduction of a taper system which reduces the amount of capital gains tax paid, the longer an asset is held.

For non-business assets this holding period is 10 years. But for business assets, this is now only 2 years having been cut from 4 years in Brown's 2002 budget. Not only can the asset be disposed of quickly, but only 25% of the profit made via this sale is actually liable for tax - and at the low rate of just 10%!

The 10% rate on only a portion of the gains from the disposal of business assets is the loophole which private equity millionaires have jumped through, in order to be able to announce that they pay less tax than their cleaners.

It was not until very recently that the Treasury "discovered" that taper relief was costing it £6.3bn in lost tax per year, which is equivalent to more than 2p on the basic rate of income tax!

But there are other breaks offered which are nothing if not surprising. For instance, in the context of today's housing price boom and the severely detrimental effect this has had on the availability of affordable homes, it is rather extraordinary that the profits made from selling a house are totally exempt from capital gains tax.

And Brown just added a new means for "small" investors to speculate on property in a "tax efficient" way. Real Estate Investment Trusts, or REITs, which already exist in many other countries, came into being in January this year. They own and manage either commercial or residential property and the income they get is mainly through rent.

This taxable income (at least 90%) must be distributed to shareholders through dividends - in return for which the company is largely exempt from corporation tax!

Of course, most of the tax breaks which the Treasury provides are given in the name of "encouraging investment". Entrepreneurs investing in start-ups and therefore taking a "risk" with their capital get a discount on their corporation tax and are exempt from tax on profits made from selling assets. However these "venture capitalists" have earned a well-deserved reputation of acting like cowboys, and playing havoc with the livelihoods of any workers involved in their sometimes hair-brained adventures which inevitably ended up stripped of all worth.

The Treasury was forced to restrict many of its favourite tax breaks in the latest budget, since its counterparts in Europe accused it of breaking EU rules in its generosity to the profiteers. But to reassure business that, whatever happened, they would not lose out, the government promised that any savings to the state would be passed back to the private sector in the form of increased tax breaks for research and development!

Setting the avoidance example

The complex tax regime - which is not entirely Gordon Brown's fault (it dates back to 1799, so the many rules have accumulated over 200 years!) has spawned a whole industry devoted to helping companies and rich individuals to pay - and not to pay - their tax.

Despite all the Treasury's repeated promises that it is closing tax loopholes and insisting on disclosure of every new tax avoidance scheme, consultants offering these services are estimated to help companies "save" between £25bn and £85bn a year - in other words, the missing tax could amount to double what is actually collected from companies in corporation tax. No wonder companies and wealthy individuals find the fat consultancy fees well worth paying!

Of course, the seriousness of Labour's claim to be closing the tax loopholes can be judged by its lack of action over the biggest one of all - the offshore tax havens. But then again, the biggest tax haven of all is on-shore - the London City!

Thirty of the seventy tax havens worldwide are British Crown Dependencies and Overseas Territories, with close links to the City - Gibralter, the British Virgin Islands, the Channel Islands, etc. But what has Brown done to restrict their operations? No one knows how many billions are lost to the public purse as a result of offshore tax avoidance. So respectful is the government of the "privacy" of these financial arrangements, they do not even give themselves the means to find out.

That said, islands like Jersey are dependencies of the British Crown and so cannot pass laws which allow the creation of sham trusts for the purpose of tax dodging - as happened in May 2006 - without the approval of the Privy Council.

True, HM Revenue and Customs (HMRC) is threatening to crackdown on offshore tax avoidance and has offered an "amnesty" to the owners of an estimated 400,000 bank accounts identified by the HMRC, provided they come forward. But so far only around 1% of them have done so. No wonder they do not take the threats seriously. This government, which is so indignant about so-called "benefit cheats", seems to be entirely blasé about "tax cheats".

Filling the companies' begging bowls

Companies do not have to rely on tax concessions or tax dodges to maximise their profits. There is a wide array of schemes doling out direct subsidies to them - around 3000 in all, administered by 2000 different bodies. These include the nine Regional Development Agencies and their subsidiaries, which distributed funds of £2.2bn to business in 2005/6. Subsidies are also handed out via local authorities - but this amounted to state aid of only £316m in the last financial year (officially!), expected to rise to £1bn this year, however.

It is these regional and local schemes which are regularly called upon whenever a company decides to close down, move or go bankrupt. In fact as soon as there is any sign that a company is threatening to go belly up, the government is expected to step in. So when MG Rover went into administration in 2003, the government actually paid workers' wages for a number of weeks, and will probably be bailing out the pension fund as well. This is all very well, since the workers and pensioners ought to come first (in fact the creditors come first!) But it inevitably allows company executives and owners to get off scott free - and take the money with them!

Probably the most outrageous "Labour" subsidies have been those paid to the privatised railway companies, including Railtrack in the years after it came to power, having promised in the 1997 manifesto to "renationalise" the railways. These amount to £22.5bn since 1997, more or less double what used to be spend on British Rail!

But far bigger in value than the amount of cash handed to business in subsidies, is what has been handed over in terms of state assets, under various forms of privatisation, even if the big privatisations of the utilities had already been carried out under the previous governments.

This outline of some of the handouts given to the capitalist class courtesy of the Blair-Brown partnership over the past 10 years is certainly not exhaustive. The mortgaging of state assets, in the name of PFI or PPP - which gives private companies access to secure interest repayments for up to half a century is just another way of channelling public funds into private pockets. But this government has actually created the conditions for the birth and growth of companies to service such projects, as well as take over what were previously state functions. And these companies are totally parasitic on the state. Their owners are now part of Britain's "new rich", who may well not even have maintained domicile status in Britain - and so may not even need to pay tax on their incomes!

It is not possible to put a figure on the total sum of money involved in the tax dodges and handouts to the rich. But it is probably not exaggerating to say that without these, the state's annual budget could be at least doubled.

As for the corrupt practices which Blair and Brown have presided over and which Brown will continue to preside over - there are no doubt countless many that have not been touched upon - and probably many that it is not even possible to know very much about.

Labour's critics on the Right of the political spectrum may complain bitterly about "Labour's stealth taxes", but in fact it is Labour's stealth handouts to the rich which are the real scandal.