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Vodafone: HMRC statement fails to halt protests

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Protestors continued to target Vodafone stores in the UK at the weekend despite HMRC’s statement that claims of an unpaid tax bill of £6 billion were ‘an urban myth’.

Eight people were arrested and bailed after a sit-down protest outside a Vodafone stores in Brighton, the BBC reported. Four stores in central London were forced to close because of the demonstrations, ‘sparked by a campaign on Twitter and Facebook’. Other stores were closed in Brighton, Bristol, Edinburgh, Glasgow, Hastings, Liverpool, Manchester, Oxford and York.

A Vodafone spokesman was quoted as saying there had been protests outside a small number of UK stores. He added: ‘We temporarily closed some of them and diverted customers to other locations so they were not inconvenienced.’

The protests appear to have been inspired by a report published in Private Eye in September, which alleged that a settlement agreed by HMRC and Vodafone in the summer understated the true liability. ‘The bill for all other taxpayers in lost tax is likely to be at least £6 billion,’ the report alleged. But HMRC said in a statement last week that a liability greater than £1.25 billion was never established. The figure of £6 billion was ‘an urban myth’, an HMRC spokesman said.

An online petition calling on the Government to require Vodafone ‘to pay their tax obligations to the UK in full’ attracted almost 3,000 signatures.

Vodafone was not immediately available for comment today, but last week the company said: ‘Vodafone will pay a sum of £1.25bn to settle a case concerning “controlled foreign companies” which was agreed after a full and rigorous examination of the facts and circumstances by HMRC, followed by intensive and tough negotiations about the complex legal issues involved. It is incorrect to suggest that there was an outstanding tax bill of £6bn, as this was never the case.’

Court of Appeal decision
In May 2009 the Court of Appeal overturned a High Court decision that the controlled foreign companies (CFC) rules could not apply to income received by a Luxembourg subsidiary, Vodafone Investments Luxembourg SARL (‘VIL’) but confirmed that such rules could not apply if the facts demonstrated that the company was actually established and carried on genuine economic activities in Luxembourg. 

The case is reported in Simon’s Tax Cases as Vodafone 2 v Revenue and Customs Commissioners (No 2), [2009] STC 1480.

Ten years ago Vodafone Group plc acquired Mannesmann AG through Vodafone 2 Ltd (‘V2’), a wholly owned subsidiary company. V2 itself was UK resident, but the shares in Mannesmann were acquired by VIL, a wholly owned subsidiary of V2.

The CFC legislation is designed to counter steps taken to reduce UK taxes by diverting profits from the UK. The Court of Appeal held that it was possible to interpret that legislation so as not to restrict V2’s freedom of establishment enshrined in EU law. Therefore, ICTA 1988 s 748(3) should be construed in such a way that was compatible with Article 43 of the EC Treaty.

In its annual report for the year to 31 March 2010, Vodafone Group plc reported that V2 had argued that the CFC regime was incompatible with EU law and that HMRC's enquiry ought to be closed. Vodafone Group plc added that in May 2009 the Court of Appeal held that the enquiry should be allowed to continue. The Supreme Court refused V2 permission to appeal in December 2009.

The annual report continued: ‘The Vodafone 2 enquiry and other enquiries involving similar holding companies in Luxembourg are ongoing. The outcome of these enquiries, including whether further legal proceedings will be required to ultimately resolve them, is uncertain at this stage. We carried provisions of £2.2 billion (2009: £2.2 billion) in respect of the potential UK corporation tax exposure at 31 March 2010.’

In July this year, the Financial Times reported that Vodafone had agreed to pay a tax bill of £1.25 billion in a deal ‘hailed as early evidence of a rapprochement between big business and the new Government over tax’.

The paper reported: ‘The settlement, which was far less than the provision of £2.2 billion carried in Vodafone’s accounts though still the largest of its type ever agreed in the UK, is a sign of a more conciliatory approach recently adopted by Revenue & Customs, according to people familiar with the situation.’

Signs of ‘greater flexibility’ by HMRC were ‘expected to encourage’ many of the roughly 150 companies locked in similar disputes to settle, it added.

The FT report said multinationals that manage intellectual property out of low tax countries are ‘particularly likely’ to be embroiled in CFC disputes, especially if the operations concerned have few employees.

Writing in Tax Journal in August, Chris Morgan, KPMG’s Head of International Corporate Tax, said: ‘With HMRC seeking to maximise cash flows and to resolve long-running issues more quickly and efficiently and a new CFC regime on the horizon, there is a new landscape and opportunity to actively engage with HMRC to agree open issues.

‘Many UK-based multinationals have outstanding CFC issues, including those who have adopted a filing position based on decisions in [cases concerning] Cadbury Schweppes and Vodafone 2. For those with the appetite, now is potentially a good time to explore settlement options with HMRC.’

Dispute resolution
‘There is absolutely no question of HMRC softening its approach to tackling avoidance and HMRC will continue to ensure that everyone pays the right tax,’ a spokesman told Tax Journal today.

‘Before a tax settlement will be agreed by HMRC, all the facts are rigorously examined and an intensive process of negotiation will have taken place to test the arguments of both parties,’ he added.

‘HMRC will pursue litigation where HMRC has a strong case and agreement cannot be reached by other means. However, such disputes are time-consuming and expensive for both sides and HMRC will always seek to resolve issues if possible without recourse to litigation.

‘HMRC is exploring alternative ways of resolving disputes – but with the aim of getting the right answer for the Exchequer and for the taxpayer, recognising that there is sometimes room for negotiation on what the right answer is.’