A secret Inland Revenue strategy which for years has allowed some of the wealthiest people in Britain to escape paying their full potential tax bills, was in tatters last night after a senior High Court judge declared that it was unlawful.
An elite group of superrich taxpayers was given ‘forward contracts’ which allowed them to pay a fixed sum in tax each year without having to declare their real earnings like all other UK residents. Effectively, they were allowed to opt out of the tax system, depriving the exchequer of multiple millions of pounds.
Although the Treasury continues to conceal the truth about the contracts, tax specialists have told the Guardian that those who enjoyed them include the Hinduja brothers, close associates of New Labour; and the billionaire Syrian arms broker, Wafic Said, a close associate of the former Prime Minister, Margaret Thatcher. One tax adviser claims that the Inland Revenue agreed that Mr Said could receive a regular £33 million each year before he needed to consider paying any UK tax, although Mr Said’s office says it has no knowledge of any such arrangement.
But in the Edinburgh court of sessions yesterday, the most senior judge in Scotland, Lord Gill, condemned the contracts. They had been agreed with taxpayers who were able to arrange their wealth so that they need pay no tax at all. In effect, he said, the Inland Revenue had “stepped outside” its statutory duty to collect tax and simply accepted a payment in return for which it had agreed not to do its job.
“It cannot be a proper exercise of the Inland Revenue’s statutory powers and duties for them to make an agreement with an individual by which he can in effect operate outside the tax system,” he said. Making a deal without even attempting to assess the true earnings of a taxpayer meant that the tax man had “entered into the contract blind and contracted to remain blind during its currency”.
Lord Gill’s judgement came in a case brought by Mohammed Al Fayed, the billionaire owner of Harrods, who complained that the Inland Revenue were trying to cancel the forward contract which he has had since 1985. The most recent version, struck in 1997, allowed him and three members of his family to pay an annual total of only £240,000 and to make no declaration at all of their income and gains in the rest of the world. Their agreed payment, Lord Gill, said was “little short of a random figure” accepted without any serious attempt to investigate the Al Fayed’s wealth.
Despite the ruling, the Inland Revenue has no plans to go back into the tax affairs of those who have benefitted from them. Nor will they cancel those contracts which are still in place. Those which have expired since the beginning of the Al Fayed case two years ago have been allowed to lapse, but Revenue spokesmen refuse to say that they will never be used again. “Never is a difficult word,” said one.
The contracts have never been mentioned in any Inland Revenue manual, and the government continues to do its best to conceal the truth about them. The Treasury Minister, Dawn Primarolo, has repeatedly refused to answer parliamentary questions about how many wealthy tax payers have benefited from them. Officials suggest privately there were “only a couple of dozen”, but specialist tax advisers insist that there were more. Primarolo told MPs that the first deal was struck in 1988, but that is clearly wrong. One tax adviser told us: “The first agreement that I negotiated was in 1987, and it was not new to the Revenue then. Nor was it new to the specialist tax barrister who reviewed it for me.” The Al Fayed deal was struck in November 1985.
The Revenue has also obscured the number of agreements which are still in place. Last month, Primarolo told the Liberal Democrat MP Norman Baker: “Three agreements involving fixed regular payments were made since the start of 1997, but none of these is now considered current. Two have expired. The Inland Revenue are contending in court proceedings that the third is invalid.” If that implied that only three taxpayers had been enjoying forward contracts and they were all finished, the answer was doubly misleading. First, the al-Fayed agreement, which was being challenged in court, covered four members of his family. Second, her officials then admitted that there were other agreements which had not originated since 1997 – five from 1996 alone, for example.
Most of the contracts were given to foreign-born residents who claim ‘non domicile’ status. The chancellor, Gordon Brown, has ordered a review of the law after the Guardian disclosed that Britain’s richest man, Hans Rausing, who claims to be domiciled in Sweden, was claiming more from the Treasury in grants and VAT rebates than he was paying in tax.
