HMRC has reported that it will not receive a single penny in taxes when Vodafone sells its 45 per cent shares to Verizon Wireless. The British-based firm is able to avoid tax liabilities through several loopholes in British tax laws despite the fact they will receive £84bn in revenue.
The deal is certain to spark controversy amongst British public and financial analysts, especially given HMRC are clamping down on tax evasion and crippling small businesses. So how do large corporations get away with such huge profits without paying taxes?
In this particular instance, Vodafone are selling their shares to a US company that has a holding company in The Netherlands. Subsequently, the deal does not generate any UK tax payments despite Vodafone being a British-based company. The only tax Vodafone will be responsible for is a $5bn deposit to the US authorities – despite the deal ringing in around $130bn.
Vodafone has reported that it will be dividing the sale profits out amongst its shareholders – around 500,000 of whom live in the UK. A law passed in 2002 by then Chancellor Gordon Brown, allows companies with substantial shareholdings to pay dividends to investors without paying any tax. Exceptions in the Financial Act do seem to favour large corporations, but there are ways for small businesses to lower their tax liabilities as well.
Reduce tax liabilities
If you own at least a five per cent share of a company and five per cent voting rights you can claim entrepreneur´s relief on the first £5 million of the sale. If you qualify you will only be expected to pay 10 per cent tax on your gains rather than 28 per cent. Entrepreneurs relief is a lifetime tax so you only get the benefit up to the first £5 million generated through sales of a business. Therefore if you sell one business now for £3 million and another business in five years time for £3 million you will be liable to pay tax on the £1 million that exceeds the limit.
The more appealing option is to live overseas and become a non-UK resident. To qualify as a non-UK resident you must leave the country for five complete and consecutive tax years and not spend any longer than 46 days in Britain in a fixed residence. If you do overstay the 46 days and have a permanent address, new laws that will soon be introduced against expatriates will mean that you are liable for UK tax regardless of where you reside in the world.
You are however permitted to sell your assets within the first year of your non-residency and not be liable for tax. However, there may be tax liabilities to pay in the UK and the country you want to live in depending on the relationship between the two countries. The other option is to become a permanent traveller whereby you do not qualify as a tax resident anywhere.