The richest man in Britain has used so many loopholes in UK tax law that he has not only saved himself millions of pounds in potential tax but, in at least one year, he and his UK businesses ended up receiving more money from the Treasury than they handed over.
The government is now likely to come under pressure to change tax law after a Guardian inquiry which suggests that thousands of wealthy tax payers are using the same legal loopholes with the result that multiple millions of pounds of potential tax is failing to reach the Inland Revenue each year.
Hans Rausing, aged 76, earned one of the largest cash fortunes in human history six years ago when he sold his interest in 50% of TetraPak, the Swedish company which makes the cartons in which the world now drinks its milk. He and his immediate family, who were already multi-millionaires, shared a cash windfall of some £4,500 million (equivalent to the gross domestic product of Malta and Zambia combined). This year he has once again been ranked the richest man in Britain by Forbes magazine and the Mail on Sunday’s Rich Report and the second richest by the Sunday Times Rich List. But Rausing, who has lived in England for 20 years, pays UK tax on only a fraction of his wealth.
Like most rich people, Rausing has arranged his fortune through a network of off-shore havens and on-shore loopholes. We have tracked parts of it. We have found some evidence which the Inland Revenue may want to investigate but more than that, we have uncovered yawning gaps in UK law which allow the very rich to treat UK income tax as an optional obligation, paying dramatically less than the 40% rate set by Parliament, legally holding on to a fortune which would otherwise enrich our public sector.
* All of the income and capital gains which Rausing keeps in the rest of the world have been allowed to escape UK tax because, although he is resident in the UK, he is still ‘domiciled’ in Sweden for tax purposes;
* the profits of his finance company in London have escaped tax because they have all been donated to his own family charity;
* his two other UK businesses, both farms, have paid no tax simply because they made annual losses;
* in the meantime, these farms have been allowed by the government to claim hundreds of thousands of pounds in UK agricultural grants, tax breaks and VAT refunds.
Rausing himself told us he had never been interested in tax questions and had simply applied the law. “Is it correct to accept the rules and regulations of the state and Treasury?” he asked. “If it is correct to accept them, I cannot reasonably be attacked for doing it.”
This is the story not only of one man’s prolific tax avoidance, but of a society which has sprung a multi-million pound leak. Britain has become a tax haven for the very rich partly because, for those who can afford the expert advice at up to £600 an hour, British tax law contains notorious gaps; and partly because the newly globalised movement of capital makes it easier than ever to shovel money through those gaps. People like Hans Rausing don’t break the law; they don’t have to. In the globalised economy, they just walk through it.
For 20 years, Rausing has lived quietly in a purpose-built palace at Wadhurst Park in east Sussex. His private grounds stretch so far that the boundary is ten and a half miles long. Deer lounge in his pastures which roll down through his own private valley to his own private lake. Inside the palace, Rausing walks on marble floors, warmed in winter by under-floor heating and five wood-burning stoves, taking his leisure in the gold-fitted jacuzzi or in the indoor pool or among the tropical plants in the conservatory hothouse, served throughout the year by his housekeeper, his secretary, his chauffeur and his part-time cook.
Rausing is no kind of stereotype. Sometimes he is almost comically careful with his money. He wears a cheap Timex watch, gets his hair cut by Graham the village barber and he likes to claim the cut-price rate for pensioners when he buys tickets for a public event. And yet, at other times, he is almost extravagantly generous. He paid for his gardener’s mother to buy her council house simply because she could not afford it. He lent his housekeeper the cash to buy a car.
When it comes to tax, he seems to be moved by two different forces. First, he is the ultimate capitalist, and he does not like it when the state obstructs him. When the Swedish state tried to bring in a law to allow workers to take over their factories, the Rausings constructed a cunning escape-route and shipped themselves and their capital out of the country. In Britain, even though he has spent 20 years using the roads, police, courts and other parts of the infrastructure of the state, he instinctively does all he can to cut his potential tax bill. His second reason for avoiding tax is simply that he is so rich and, in Britain in 2002, the rich routinely find legal routes to buy their way out of taxation.
Parliament has decided that anybody who earns more than £33,935 a year should hand over 40% of their income in tax. Two and a half million middle-class professionals do so. But, while wage-earners work on Pay As You Earn, the rich Pay As They Like.
Some pay for the welfare of the nation by making donations to charity. Recently, the Rausings have joined their ranks, giving some £17.3 million in the last three years.
Most opt out of the 40% game. Hans Rausing and his family are the richest people in Britain. Setting aside the fortune which they already owned before they sold their share of TetraPak, if they invested their 1996 windfall of £4,500 million at a yearly return of, say, 5%, they would receive an annual income of £225 million – rather more than £4 million a week. In other words, even if their windfall has failed to increase since 1996, they could pay 40% tax in full, give the Treasury some £90 million a year (enough to build eight new secondary schools or to hire five thousand new nurses) and still keep £135 million a year for themselves. That would give them £370,000 a day to get by on. But, so far as Hans Rausing himself is concerned, that is not what happens.
Hans Rausing pays tax. By the standards of ordinary mortals, he pays a lot. But by the simple standards of 40% taxation, he pays only a tiny fraction of his potential tax debt to the UK Treasury. In one recent year which we have studied, this enormously wealthy man was able to declare taxable earnings at the same level as a company executive with a salary of £656,000 – high compared to the rest of us, but merely a fragment of Rausing’s annual earnings. And even then, he managed to reduce what he finally paid.
You have to understand that good tax advisers have the skill of an Astaire at dancing on verbal pin heads. The two original Vestey brothers, for example, who were as famous for avoiding tax as they were for selling meat, were pursued through every court in the land in the 1940s by the Inland Revenue, who had uncovered assets in secret trusts in Paris which it claimed were taxable in the UK. The taxman won every round until finally they reached the House of Lords where the Vestey lawyers tried one final verbal manoeuvre. They noticed that the law referred to ‘an individual’ and, since the two brothers were bound up in a partnership, the lawyers said they could not be described as ‘an individual’…. And the Law Lords agreed. The Vesteys kept their hidden millions.
Watch how this kind of verbal shimmying extinguishes Hans Rausing’s potential UK tax liabilities. First of all, although he was born in Sweden, he is a resident of the United Kingdom. He has been here since 1982. His home is here. His family are here. In tax terms, there is no dispute that he ‘resides’ here. And normally a UK resident is required to pay tax on any income or capital gain which arises in the UK or anywhere else in the world. But, say Hans’ advisers, this may be Hans’ home, but legally it is not his ‘domicile’. And with this one vital, verbal distinction, Hans is allowed to escape paying UK tax on all of his income and on all of his capital gains in all of the world outside the UK, if he so chooses.
To take advantage of this, all Rausing had to do when he moved to the UK in 1982 was to fill in a form for the Inland Revenue to demonstrate that he had not severed his connections with Sweden – that he still owned a house there and intended to go back there some day. Even if he plans to go back only as a corpse in a coffin, the taxman will take that into account.
Although the Inland Revenue has accepted Rausing’s ‘non-domicile’ status here for 20 years, his link to Sweden is not very strong. He and his wife told me in one tape-recorded interview that they would never go home to Sweden again, but in another interview, he told me he would go back one day so that he could die in his house in Lund in the south of the country.
The result of getting non-domicile status is that a man like Hans Rausing can earn a fortune in the rest of the world and, as long as he does not bring his income or gains into the UK, with very few exceptions, he is allowed to pay absolutely no UK tax on them. He can do this for as long as he likes. He has already done it for 20 years. The Irish Republic inherited the practice from the UK, but we can find no other country in the world which allows this to happen.
While he has been resident in the UK, Rausing has earned enormous wealth overseas. For his first 15 years in the UK, he was the head of Tetra Pak, which was selling up to £5,000 million worth of cartons a year around the world; through trusts, he and his heirs owned 50% of the company and earned up to £50 million a year in dividends; he also received a handsome salary; but as long as this income remained outside the UK, this non-domicile rule meant he was required to pay not one penny of it to the Inland Revenue.
On January 1 1996, when he and his heirs sold their stake in the trusts which owned the company, for some £4,500 million, he could have been liable to pay 40% tax on his net capital gain (and this must have been one of the largest capital gains ever enjoyed by a British taxpayer). Indeed, the Sunday Times Rich List temporarily made the error of assuming that Rausing had paid the Treasury £1 billion in tax on the deal. But Rausing was safe: as long as the proceeds remained outside the UK, the legal difference between being resident and being domiciled meant that the question of his paying tax to his adopted country simply need not arise.
Defenders of this loophole claim that by encouraging wealthy foreigners to live in the UK, it also encourages them to invest here and to create jobs. The Rausings, however, tell a different story. When Rausing started to set up his palace in Sussex, in the late 1970s, he also shifted the headquarters of Tetra Pak out of Sweden – and into Switzerland, not into the UK. When, at the same time, he set up one small business in the UK – a 1,800-acre arable farm in Kent – he was anxious to try to reduce the number of workers he hired there. He says now that he and his wife and three adult children, all living in the UK, employ a grand total of only 52 people.
When they received their 1996 flood of cash, he and his two daughters, Lisbet and Sigrid, invested it in search of yet more – but not in the UK. There was so much of it that it took them ten months to set up a structure to handle it. They opened what was effectively a private bank and brokerage house, Arctic Services AG, based in Bleicherweg, Zurich where they hired a small staff to move their billions around the planet in search of profit.
For example, they embarked on a massive project to buy up prime arable land. An internal Rausing memo set out the objectives. “Losses are unacceptable,” it said, adding: “Cheap labour, subject to proper ethical safeguards, is acceptable.” The memo then went on to consider the quality of land, availability of water, profitability, labour costs and the environment but never once suggested that the family ought to invest in the UK: “We prefer working in English and neo-English countries (eg Australia, Canada), but we are willing to work in less stable political environments if the increased political risk is offset by price discounts and excellent long-term prospects.” In New Zealand alone since September 1999, they have spent just over $21 million on more than 7,000 hectares of farmland.
Sometimes, their investments are said to have been bad: one source close to the family says they kissed goodbye to millions when they invested in the Asian economies just before they crashed in 1997. But they carried on trading: in stocks and bonds, in crystals, telecoms, food processing, milk packaging. They own houses in the USA, Sweden, Switzerland and Barbados. If they lived anywhere else in the world outside of tax havens, they would be liable to pay at least some tax on the profit from this massive programme of global investment. But, for any of them who have chosen to register Sweden as their domicile, the UK agrees to ask them for nothing as long as the money stays abroad.
At first sight, however, this gaping legal loophole still creates a trap for Hans Rausing and his non-domicile kind: their cash is safe from UK taxes only if they leave it outside the country, which means they cannot spend it on their day-to-day lives. Ah, but the verbal jive has only just begun. The reality is that, even if he has invested most of his fortune elsewhere, Hans Rausing has brought millions of pounds into the UK – to create his palace.
Rausing likes to present himself as the frugal billionaire: he has no private plane, no ocean-going yacht, and he is clearly offended by the behaviour of fellow billionaires whose eyes stand out with fatness. But there are limits to his abstention. He has spent the equivalent of several National Lottery jackpots creating his sumptuous home at Wadhurst Park in east Sussex with an indoor pool which cost the best part of £1 million, a guest wing, a converted coach house for his children, two helicopter pads and a playground for his grandchildren which is reported to have cost £25,000. Even though he bought the place in 1975, in the three years to April 2000, he was still bringing in an average of £1 million a year to improve his home.
And, if he has paid tax on any of that money, he has done so only from the goodness of his heart or the stupidity of his advisers. But how can this be, if the law says that a non-domicile must pay tax on any income or capital gain which he or she brings into the country? Ah, but look carefully at those words. The law says ‘income’ and it says ‘capital gain’. It says nothing about ‘capital’. Non-doms with a decent adviser stash all of their capital in well-labelled accounts overseas before they arrive in the UK. If the money earns interest or any other kind of profit, it is paid into a separate account and they can bring in the capital by the million and still pay no tax on it. Just because it isn’t ‘income’ or ‘gain’. And the law is happy.
His children would be allowed to do the same. His two daughters, Lisbet and Sigrid, in the last six years, have spent some £54.1 million on housing themselves in this country, including picking up what at the time was the most expensive home in the history of London as well as nearly 90,000 acres of prime Scottish highland. They may have elected to choose the UK as their domicile, they may have chosen to pay tax on every penny which they brought in, but the law, as currently written, would be happy for them to declare that their domicile is Sweden and to bring in all of that money without declaring any of it to the taxman, just as long as it is designated ‘capital’.
Even so, it looks as though the non-dom with expensive tastes will still suffer the irritation of losing touch with the new income which is generated each year by their capital (bank interest, stocks, bonds, business investments). But it depends what you mean by ‘income’. Years ago, the Court of Appeal ruled that the Inland Revenue were not actually entitled to levy tax on ‘income’. Their target, instead, must be ‘the source of income’. The tax lawyers danced through the verbal gap.
It works like this… In Year One, as above, you keep your capital in Account A and transfer the income it has earned into Account B. Then, just before the year ends, you transfer all this accumulated income to Account C at a different bank, and you close down Accounts A and B. So the ‘source of income’ – ie that particular bank – is gone. Therefore, there is no legitimate target for the tax man. At the start of the new tax year, what was your income is designated as your capital. It sounds illogical. But life’s like that when you’re rich enough to hire the best advisers. Each year, you repeat the same trick and you can bring in millions more without paying tax. People like Hans Rausing hire staff whose primary purpose is to shuffle their money through dozens of different banks around the world and, as one tax adviser put it, “to sit on the end of the phone and make sure that the bank manager at the other end actually does it before the deadline passes”. And it is all legal. At least, it is in the UK – Ireland, for example, has banned this kind of ‘income capitalisation.’
Hans Rausing says he has no idea how much tax-free capital he has brought into the UK. He claims he deliberately brings in taxable income because “I don’t feel it’s fair to live here without paying tax”. He also suggests that he simply does not know whether his non-domicile status has cut his tax bill at all: “It probably does,” he told me.
There are senior people in government who are outraged by the law on domicile with its associated rules on income and capital. One told us: “There are some incredibly rich people who spend their lives in the UK and manage to pay virtually no tax at all, because of the domicile rule and other loopholes. Clearly, it is not fair. With long term residents, it is almost a scandal.”
As shadow chancellor, in November 1993, Gordon Brown suggested that the Treasury could be losing £1 billion a year as a result of loopholes on domicile and residence. He said then: “The question is: ‘Is Britain’s tax system in need of being cleaned up?’ The answer is Yes, but the Tory party doesn’t have the will to do it.” Since May 1997, the Treasury has allowed the issue to lie dormant.
And there is more. UK tax law is so full of wrinkles for foreign millionaires that it begins to look like an attempt to turn the whole country into a playground for the wealthy nomads. For example, the law allows the rich to divert their wealth into any of the 70 or so ‘off-shore’ havens, from the Channel Islands to the Caymans, from Liechtenstein to the Dutch Antilles, where they can pay zero tax. Without this, non-domicile status would be worth very little: they would escape UK tax only to incur it elsewhere. As it is, they can get a global tax break.
Hans Rausing’s father, Ruben, used trusts to divert the ownership of Tetra Pak out of the Swedish tax jurisdiction and into Liechtenstein, where the company’s assets were held for the benefit of all those of his heirs who were born in wedlock. Tax free.
As Hans himself acquired personal wealth, he diverted it to new trusts. We have found two of them, named Serebro and Zemlij, both administered in the Cayman Islands. Their trustee is a company, named Greenland, also registered in the Cayman Islands and administered by the senior partner in the Grand Cayman office of Rausing’s tax advisers. Greenland controls at least three companies in the Caymans – Zirundium, Lactus and Lacum – which, in turn, have held the ownership of farms Rausing has been running in England and Portugal.
His eldest daughter, Lisbet, has a Caymans company, originally called Verdandi, which bought her estates in Sussex and Scotland for her. His youngest daughter, Sigrid, has a Jersey company, Kincraig, which bought her Scottish estate for her.
As long as the off-shore trustees follow the correct procedures, this wealth can be spent according to the wishes of the beneficiaries in the UK and yet it can lawfully remain beyond the reach of the taxman. So, for example, when last year Hans Rausing sold his 1,800-acre Kent farm for several million pounds, he was liable to pay no capital gains tax at all on the deal because the farm was owned for him by Zirundium, which was, in turn, controlled by Greenland in Grand Cayman.
The non-domicile rich win even when they are dead. Their off-shore assets are no longer held in their name and therefore their heirs do not have to pay inheritance tax on them when they die. They might get caught by inheritance tax if they bring any of their trust’s assets into the UK. Even a ‘non-domiciled’ resident like Hans Rausing can get caught by inheritance tax if he lives here for 17 tax years or more. But there is no problem: they bring in their off-shore cash as a loan. That way, when they die, it all goes back to the offshore company which somebody else owns on their behalf. Hans Rausing’s company accounts are scattered with perfectly lawful deals which consist of his off-shore companies sending loans into the UK, usually at zero interest. His farming business in Kent, for example, received multiple loans from his off-shore company in Grand Cayman and £200,000 from his Portuguese farm, which is ultimately owned by two more off-shore companies in Grand Cayman.
The only difficulty with this world of off-shore loopholes is that there are rules which have to be obeyed. If a man like Hans Rausing does not arrange his affairs carefully, he may find himself being investigated by the Inland Revenue. An example of the fine line which he has to walk is the case of the two reservoirs which, in the spring of 1996, he decided to build at Morghew Farm, the 1,800-acre spread which he was then running near Tenterden in Kent. On the face of it, this was a straightforward investment which would improve the productivity of the land. However, this land did not belong to Hans Rausing. Until it was sold last year, it belonged to Zirundium Co Ltd of Grand Cayman.
Zirundium is the kind of brassplate company which has made the Cayman Isles the fifth largest financial centre in the world: it lists no shareholders and no directors; it publishes no accounts; it pays no tax to the Cayman authorities. It has no staff, no phone, no fax and no office other than the staff, phone, fax and office of a local firm of accountants.
Despite Cayman secrecy, there is no doubt that Zirundium is part of Rausing’s off-shore set-up. In its first incarnation, it was named after his palace in Sussex, Wadhurst Park. The company is registered at the Cayman office of Rausing’s accountants, Rawlinson and Hunter. It is funded by trusts which are overseen by Rawlinson and Hunter’s senior partner, Philip Prettejohn, aged 50, who is Hans Rausing’s personal tax adviser and who has declared that, in handling the Rausings’ foreign operations, he has always wanted to tell the Inland Revenue as little as is legally possible.
Back in England, Hans Rausing has spent the last 20 years as chairman of a UK company called Wadhurst Park Ltd. From its Grand Cayman office, Zirundium treated this company with eye-watering generosity: it gave it £750,000 of start-up capital; it bought the land at Morghew Farm and then allowed Wadhurst Park Ltd to farm there for more than 20 years without ever charging it a penny in rent; it loaned the company £1.4 million without ever charging it a penny in interest and then wrote off the loans.
But, so far as tax law is concerned, Zirundium has nothing to do with Hans Rausing. He can sit in the UK surrounded by pie, he can put in his thumb and pull out a fistful of plums and then simply explain that it may be his thumb but they are Zirundium’s plums and anyway the entire pie is managed and controlled by various individuals at the offices of Rawlinson and Hunter at 1 Capital Place, George Town, Grand Cayman, which has nothing to do with him.
The key words are ‘managed and controlled’. If Rausing were to exercise central management and control of the business of Zirundium from the UK, then the tax man would say the company was resident in the UK and so all of its worldwide income and capital gains would be liable to UK tax.
Now, look at those reservoirs. You have to understand first that whatever the facts may appear to be, the law is all grey – and infested with lawyers who rejoice in their skill at proving that, technically speaking, black is really white. We have gathered evidence which appears to raise serious questions about the handling of Zirundium but in the context of tax law and off-shore secrecy, it is impossible finally to come to a firm conclusion.
The land at Morghew Farm on which the reservoirs were to be built belonged to Zirundium – not to Rausing or to Wadhurst Park Ltd. Our evidence suggests that Zirundium’s off-shore directors had not agreed to dig reservoirs into three and a half hectares of its land when, in May 1996, Wadhurst Park Ltd (chairman: H Rausing) commissioned a civil engineer to drill bore holes in the land to see whether it would hold water; nor in June, when they paid the engineer’s bill and commissioned detailed work on a design which would involve erecting banks 3.25 meters high across the Cayman company’s land; nor in July, when they applied to Ashford Borough Council for planning permission and to the Environment Agency for permission to divert winter water into the reservoirs.
In the same way, our limited evidence indicates that Zirundium still had not approved the plan for the land that was recorded as theirs when, in September, the board of Wadhurst Park Ltd, having been given planning permission, formally agreed to build the two reservoirs (rather like a tenant in a rented room formally agreeing to build an extension on the landlord’s house). In a gesture of apparently irrational philanthropy, Hans Rausing then agreed to arrange £100,000 of funding for this improvement of somebody else’s property. “I will have to pay for it directly,” he wrote in a letter on September 29.
On October 10 1996, bulldozers started to rip 22,500 cubic meters out of the land that was supposed to be owned, managed and controlled by Zirundium. There is no doubt about that: we found photographs of the bulldozers at work. And they are date logged. On October 11, with the work already in progress, Rausing’s tax adviser, Philip Prettejohn, tried to sort out the paperwork with Grand Cayman. Twelve days later, with Zirundium’s land now deeply scarred, we have found that Prettejohn was still asking Zirundium’s directors to approve the project and asking the trustees of one of the Rausing off-shore trusts, Zemlij, to authorise the funding.
To anyone who is not an accountant or a tax lawyer, it looks as though Rausing was making decisions about the business of the offshore company.
It is not known, however, whether there is any legal justification for this which would enable Rausing to establish that his actions did not amount to ‘management and control’ – that these decisions were not fundamental to Zirundium, for example, or that he was merely acting as Zirundium’s agent. It is up to the Inland Revenue to decide whether Rausing was managing and controlling Zirundium from the United Kingdom. They may well investigate and, if they conclude that he was managing it, then the Caymans company would be liable to UK tax. On the sale of Morghew Farm last year, for example, Zirundium would be liable to pay tax on a gross capital gain of several million pounds. However, in this complex area, nothing is certain.
Similarly, there is a worrying appearance to the handling in 1998 of Zirundium’s decision to purchase a second Kent property, Woolwich Farm, which borders Morghew Farm. There is no doubt that at the end of the day, the Zirundium off-shore directors approved the deal before it took place. What is surprising is that in its early stages, the transaction was handled so that it gave all the appearance of being a decision for Wadhurst Park Ltd, a UK company with UK directors and UK tax obligations.
We have seen a sequence of 1998 letters between Rausing (the chair of Wadhurst Park) and Richard Bezant (its managing director), in which they discussed the possibility of buying Woolwich Farm. Rausing asked detailed questions about the value of the land – “What realistic return on capital are we talking about? What total investment are we talking about?”. Acting on Rausing’s instructions, Bezant and Anthony Hyde (another Wadhurst Park director) produced a feasibility study for the 230 acres. Bezant then opened negotiations with the owners of Woolwich Farm.
They may argue that they did all this merely so that they could advise Zirundium on the sale. What is odd is that the letters we have seen never mention this. Indeed, they never mention Zirundium at all. What is just as odd is that when Bezant finally struck a deal with the owners of Woolwich Farm, he consulted Rausing and then wrote back to the owners undertaking to buy the farm, still without pointing out that it would be Zirundium which would make the deal and Zirundium’s directors who would have to approve it. And he did this on Wadhurst Park Ltd headed paper. It was a week later before Wadhurst Park Ltd contacted Zirundium to bring them into the picture.
Again, none of this ultimately is clear. But, in the same way, there is an earlier question mark over whether Zirundium was being managed and controlled from the UK in November 1989, when the board of Wadhurst Park Ltd took a formal decision to reconstruct a semi-derelict building, Heronden House. It belonged to Zirundium on the land at Morghew Farm. Wadhurst Park’s managing director wrote to Hans Rausing asking for £100,000 for the project to be sent from Zirundium, and Rausing simply went to the family finance advisers and asked for the money. But where were the directors of Zirundium who were supposed to be managing and controlling the use of their property?
However, nothing is certain in tax law until the last court has ruled. It is possible, for example, that the off-shore directors had given him some kind of standing authority to make these decisions. When the Guardian interviewed him, Rausing himself casually referred to Morghew as ‘his farm’. However, he insisted that he had always tried to follow the law and the rules. “I am certain – I hope, at least – that everything has been handled correctly.” Whether it was, may yet be put to the test.
For those millionaires who, unlike Hans Rausing, are domiciled in the UK, the off-shore havens are also a potential boon, although on the face of it, the law obstructs them. UK law says that a domiciled resident must declare any income or gain from off-shore investments. But those who are unscrupulous know they can hide their wealth with very little chance that the taxman will even suspect it is there and even less chance that he will penetrate off-shore secrecy if he does begin to suspect. And those who have clever advisers can engage in infinitely complex transactions in order to shift profits into the hands of off-shore ‘partners’ who owe no tax.
While domicile loopholes and off-shore havens may seal off the rest of the world from the Inland Revenue, the rich are still liable to pay tax on income or capital gains which arise within the UK. But there is some fancy footwork here, too. Watch how it enables the richest man in Britain to end up receiving more from the Treasury in rebates and grants than he pays in tax.
Hans Rausing has set up three UK businesses. One of them is an investment company named Alta Advisers, which oversees the movement of the Rausing fortune around the globe and handles personal finance and insurance for Hans’s family. It is a flourishing business with an annual turnover of nearly £4 million, able to pay its chief executive an annual bonus of up to £1.4 million. Since it started work in April 1996, Alta’s published accounts show a total taxable profit of £1.1 million. However, the UK Treasury has not benefited from the hundreds of thousands of pounds which it would normally have received from such a business in corporation tax and income tax. This has been achieved by entirely lawful means with graceful simplicity (and with a neat poke in the eye for the Inland Revenue).
Simply, Alta has donated all of its taxable profits to charity, and that charity is… the Marit and Hans Rausing Charitable Foundation. (Marit is Hans’ wife). This charity was set up by Hans; its trustees are all appointed by Hans. Every year, it receives, according to its published accounts, ‘income in the form of a covenant equal to the taxable profits of Alta Advisers Ltd’. The taxman receives no corporation tax; he keeps no income tax: the cash which might have been spent by the government according to the wishes of the elected government is, instead, spent by Rausing’s trustees, according to their own lawful wishes. If the message to the Inland Revenue were not already clear, the charity has donated some £400,000 to right-wing political think-tanks which are campaigning, among other things… for lower taxes.
Apart from Alta Advisers, Hans Rausing has set up two other UK businesses. He chairs the company which until recently ran Morghew Farm in Kent where he was growing crops and rearing wild boar and freshwater crayfish on behalf of its off-shore owner, Zirundium. He also has a deer farm, which he runs in the grounds of his palace at Wadhurst Park east Sussex. Neither of these businesses has ever paid a penny in tax for the simple reason that both of them have consistently made losses. However, in the hands of skilled advisers, a business which makes a loss then becomes a tax-saving opportunity.
Rausing may be entitled to pay no tax on his earnings in the rest of the world. His three UK business may pay no tax. But he does pay personal tax in the UK. It appears (but is not certain) that each year he declares to the tax man the pension which he receives from the old family business, Tetra Pak. This comes to him from two sources. Part is from Sweden, where it is taxed, so there is little or no extra tax to pay if he brings it into the UK. The rest comes from Switzerland, where it is not taxed en route to the UK. This Swiss pension is worth some £650,000 a year. In one year which we have examined, 1998/99, he paid tax as though as he had a UK income of £656,000. Paying tax at 40%, he owed the tax man some £256,000. It is at once galling and fascinating to watch what happens next.
It starts with the deer farm in the grounds of the Sussex palace which has become the physical equivalent of a legal loophole, allowing Rausing not simply to avoid tax but quite lawfully to claim money back from the Inland Revenue and also from Customs and Excise, who are responsible for collecting VAT.
When Rausing originally bought the land for his palace, in 1975, he diverted its ownership to the same off-shore company which was to own his farm across the border in Kent. Apart from spending millions on the main house and five other houses on the estate, he also landscaped the gardens and introduced seven different breeds of deer – 1,500 of them – which roamed his fields to keep the land in good order. By 1989, however, his tax adviser had suggested that for various tax reasons, he should put the estate back into his own name. And he should start to farm the deer there as his own personal business.
The Inland Revenue allow special tax breaks for individuals who personally carry on a trade, like farmers. If their farms lose money, they are allowed to set the losses against any taxable income they may have from other sources. So, for example, if the farmer were also an author earning £50,000 a year from books and his farm lost £20,000, then he would have to pay income tax on only £30,000 of his income from writing. In Hans Rausing’s case, his deer farm has repeatedly lost money – an average of £65,000 a year since he declared it was his business in March 1989. So, in the first place, since the farm has made no profit, it has not had to pay any tax. But because these losses are attached to his personal trade as a deer farmer, Rausing can legally delete some £65,000 a year from any other income which he was declaring to the Inland Revenue. Paying tax at 40%, he was saving himself £26,000 (which would have paid a teacher’s salary, for example.)
At one point, Rausing and his advisers were worried that the Inland Revenue would not be happy about their use of the deer farm in this way. Tax rules say that a farm’s losses can be set against income tax only if it is ‘a trade with a view to the realisation of profits’. In December 1994, Rausing’s personal tax adviser, Phillip Prettejohn, wrote to him: “It is still open for the Inland Revenue to argue that the deer farming activity is not being carried on as a business with a view to profit. Should they do so, the losses would not be allowable for tax purposes… I asked Richard Bezant (Rausing’s manager) this question and he said it would be difficult to provide … a strong argument to counter such a challenge by the Revenue.”
The fact was that the deer farm never did make a profit. There were times when it could have increased its income, for example by charging Rausing’s friends to shoot deer, but it chose not to. When I asked Rausing recently if he regarded the deer farm as a business, he said: “No, no, no, it does not pay its own costs. I have to put in money every single year.” He said the farm was ‘nothing of economical importance at all’. Whether this all means that the farm was not being run with a view to making profit has never been decided.
The Inland Revenue allowed Rausing to use the losses from his deer farm to cut his tax bill for five years, the maximum allowed by law, saving him a total of some £150,000 in tax. Even when the five years was over, his tax adviser found the presence of the deer would still allow him to classify the farm as ‘agricultural land’ which meant Rausing could cut his income tax by using ‘extra statutory concession B5′. Simply, he was allowed to tot up a list of specified costs at the Rausing estate – repairs, insurance, office admin and phone – and set them against his income in the familiar way. This new tax break turned out to cut his tax bill by some £26,000 a year – almost exactly the tax break which it was replacing. Now watch how Rausing’s 1998/99 tax bill started to shrink.
As we said earlier, for 1998/9, for the fragment of the global earnings which he declared, Rausing started with a potential tax bill of £256,000, possibly linked to the Swiss part of his Tetra Pak pension. By the time that his tax adviser had finished using accumulated losses from the deer in Hans’ pastures, that bill had been cut by £65,000, leaving Hans with only £191,000 to pay. Since he had overpaid his tax the previous year, that was then reduced by a further £41,000, and Rausing ended up with a bill of only £150,000. But in the strange world of UK tax, there were still more gifts in the pipeline for the richest man in Britain.
The same government which allows the non-domiciled rich to avoid paying tax to the state also allows them to set themselves up in business and then to claim money back from the state. Hans Rausing did this. Simply by pulling the levers which the government offers any businessman, he reached a point where, in the year which we have studied, the state gave him more money than he gave to it.
First, there is VAT. In the old days, before the deer farm became his personal business, he simply lived at Wadhurst Park and had to pay 15% VAT just like anybody else. But as soon as the deer became a business, he was allowed to reclaim from Customs and Excise any VAT which he spent on supplies for the farm. Since the deer farm collected very little VAT, he started to receive regular cheques from Customs and Excise – even more so since VAT has risen to 17.5%. In the four years from April 1996, for example, the VAT man gave Hans Rausing a total of £185,302.96 in refunds for amounts spent in relation to his deer farm – about £46,000 a year.
Half an hour down the road, in Kent, the government was providing Rausing with the same VAT bounty at Morghew Farm, whose losses similarly allowed it to reclaim money from Customs and Excise. Between March 31 1997 and May 26 2000, his business at Morghew Farm claimed a total of £191,038.53 in reclaimed VAT – some £60,000 a year. He even applied for a government scheme to pay his electricity bills in advance to avoid VAT on them. Rausing says he knows nothing about VAT refunds, he simply left this to his advisers.
Finally, the state offered Rausing an array of grants to encourage him in his farming business: drainage grants, organic farming grants, set-aside grants, woodland grants, arable area grants. In 1999/2000 alone, Hans’ business at Morghew Farm was given £176,095 in government grants. Over the three years to May 2000, these grants totalled nearly half a million pounds (£459,827.87) – 26 payments varying in size between £6.61 and £118,642.14. An average of more than £150,000 a year in grant income from the state. Rausing suggested to me that it would have been ‘immoral’ for his farming business not to have taken the grants: “If you are running a commercial farm business you run it commercially. If not you shouldn’t run it.”
Now come back to the financial year of 1998/9 when, as we have already seen, he succeeded in cutting his income tax bill down to just under £150,000. Rausing can pay that in full. In that same year, however, he and his businesses were paid refunds of £33,572 in VAT at the deer farm; £49,971.77 in VAT at Morghew Farm; and £136,158.71 in grants at Morghew Farm. A total income from the Treasury of £219,702.48. Total surplus, after deducting £150,000 of income tax: £69,702.48.
The man who started with a possible tax bill of many millions a year has paid no millions at all – no ‘40% of any income or capital gain which arises in the UK or anywhere else in the world.’ Nothing like ‘eight new secondary schools or five thousand new nurses.’ Indeed, the Treasury gave him more than he gave them. And the law let him do it.
Rausing told me that he could not imagine that he had made a profit out of the Treasury. “I definitely feel that this is a very, very wrong conclusion,” he said. He refuses to discuss what fraction of his global earnings he is paying UK tax on. He claims that his family have given more in charitable donations than they could have paid in tax. Certainly, it is true that, in the last few years, his family have been giving substantial amounts to universities, art galleries and other causes which have caught their eye. But the sum of Hans Rausing’s donations is nowhere near the total which he might have paid in tax over his 20 years in England and which would have been distributed according to the wishes of the democratically elected government.
Rausing claims that high taxes ultimately penalise the poor more than the rich because they undermine enterprise. He says Sweden was once the richest country in Europe and is now close to the bottom to the table: “It is a fine example of what high taxation can achieve.” His bottom line is a cruder one: “I am paying high taxes here. If England would change the tax system, I would simply go away. I am not going to allow the tax system to destroy our company. I think England understands this perfectly well.” Later, he suggested that he had saved himself no money by being non-domiciled and, therefore, he would stay in England even if the rules were changed.
Years ago, the Law Lords pointed their judicial finger at the moral ambiguity of lawful tax avoidance. Lord Simon declared: “Of recent years, much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country… without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are ‘entitled’ to do so.
“There is, of course, no doubt that they are within their legal rights but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is of course to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire or do not know how to adopt these manoeuvres.”
From year to year, the detail of Hans Rausing’s tax schemes may differ. He may not always do so well. He may bring in more income which is taxable. He may pay tax on capital gains within the UK. In principle, he may do even better. Behind the shifting of his annual tax return, the background picture has been clear. Payments to the Treasury by him and his interests: on income held in the rest of the world – no tax due; on capital gains held in the rest of the world – no tax due; London finance company – no tax due; Kent arable farm – no tax due; Sussex deer farm – no tax due; on company pension and other income and gains imported into the UK, some tax due. Receipts from the Treasury by him and his interests: Sussex deer farm – £26,000 a year from the Inland Revenue and £40,000 a year from Customs and Excise; Kent arable farm – £65,000 a year from Customs and Excise and £150,000 a year from grants. And it is all legal.
Additional research by Max Houghton