Liebrary: Do tax deals with tax havens deal with tax dodging? Here's how the UK's hoped for £3.2billion tax haul from the UK- Switzerland deal disappeared

Legend has it that the Forty Thieves, who were ultimately extinguished by Ali Baba, once had a lucky escape. The cops had them surrounded in their cave. They had them bang to rights, holed up with their loot. However the cops knew the Forty personally, since when the cops got bored of finding hidden loot they joined other firms whose business was to hide the loot in the first place.

So the cops proposed a deal to their once and future friends:

• Hand over the loot
• Stop hiding more loot
• We will let you go, and we won’t even ask who you are

Most importantly, the cops said they would go away and come back in a year and a bit to collect. The Forty naturally agreed. They said they wanted to be de-criminalised, and they wouldn’t do it again. The cops went away, and when they returned…..the cave was empty! 

Is this the nonsense of fairytales? Actually, no. It is the nonsense of Her Majesty’s Revenue and Customs (HMRC). This was pretty much how the British tax authorities contrived to turn the pursuit of criminal tax evasion into a game of children’s hide-and-seek. They didn’t count to 10, nor even to 100. They closed their eyes and counted to just over 39 million (the number of seconds between the deal in October 2011 and the return date in January 2013).

In 2011 HMRC proudly announced they had finally got the better of rich individuals hiding their wealth in Switzerland. The Swiss-UK deal was signed on 6 October 2011 by the UK Treasury Secretary David Gauke and the Swiss Finance Minister Eveline Widmer-Schlump. It was scheduled to come into force on 1st January 2013. HMRC's cops had given the dodgers over 1 year's notice that they were a-coming with their bells a-ringing.

Our boys in blue pinstripe were ecstatic. The government made a press release titled "Agreement with Switzerland to secure billions in unpaid tax":

"George Osborne, Chancellor of the Exchequer, said:

Tax evasion is wrong at the best of times, but in economic circumstances like this it means that hard-pressed law-abiding taxpayers are forced to pay even more. That is why this coalition government made it a priority to go after those who don’t pay their fair share. We will be as tough on the richest who evade tax as on those who cheat on benefits. The days when it was easy to stash the profits of tax evasion in Switzerland are over.

David Gauke, Exchequer Secretary to the Treasury, said:

I am delighted that, through our constructive discussions with the Swiss Government, we have secured the best possible deal for UK taxpayers. This historic agreement will enable us to collect billions of pounds from those who have for too long evaded their responsibility to pay UK tax by abusing Swiss banking secrecy. The message is clear: there is no hiding place for tax cheats.

Dave Hartnett, Permanent Secretary for Tax at HMRC, said:

The world has changed for tax evaders. A few years ago, nobody would have anticipated that we would conclude an agreement with Switzerland to tackle tax evasion. However, with the clear wish of Switzerland as well as the United Kingdom to ensure that tax is paid as it should be, we are embarking on a new course which preserves important principles for each jurisdiction, and will be fair for all UK taxpayers. Our strategy is working. We will secure significant sums of tax that some had thought we would never see. Not only does this agreement settle past liabilities and make arrangements to secure correct taxation in the future, it also gives HMRC more scope to find out about Swiss accounts."

They had flushed out the dodgers' hidden cash! Or had they? They ignored the warning of other tax campaigners, including a detailed prediction by the Tax Justice Network on how this agreement would be dodged. 

And they also ignored the cheesy Swiss smirk. The Swiss Bankers Association welcomed the agreement, noting among its primary benefits:

"the bilateral treaty gives clients of banks in Switzerland who are taxable in the United Kingdom a path to tax compliance while maintaining their financial privacy.

......

the agreement provides for easier market access in the bilateral relationship and the decriminalisation of banks and their employees – an important basis for future growth in the cross-border business with the United Kingdom."

Osborne, Gauke and Hartnett had signed over to the Swiss the right to keep their clients' identities secret (presumably to protect them from divorced spouses seeking alimony, their children in need of support, and other creditors and business partners), declared them to be 'not crooks', and given them greater cross-border access to the UK. 

So keen was HMRC to accede to keeping identities hidden it agreed the number of questions it would ask the Swiss about dodgers "shall be in the low to mid hundreds and shall not exceed 500 per year". What fun! First the pursuit of tax crooks reduced to "hide-and-seek", and now investigatory rights reduced not to "twenty questions" but "not more than 500 questions".

So, after the October 2011 agreement was signed what happened next?

• October 2011: Tax agreement signed.
• April 2012: Britain proudly throws its weight around, getting the Swiss to agree to "raise the minimum rate to legalise untaxed assets from 19 per cent and 34 per cent to between 21 per cent and 41 per cent." This was because Germany had cleverly negotiated these higher rates - though the German Parliament subsequently threw the whole agreement out. The Swiss were unconcerned. Being better at maths than our Treasury they knew that 41% of nothing much is about the same as 34% of nothing much.
• January 2013: Agreement comes into force. Switzerland makes initial payment on account of £342 million. Note this 'payment on account' is not taken from dodged tax, but was paid directly by Swiss banks as the cost of this deal. The banks would have this money refunded to them once dodged taxes had been collected.
• June 2013: UK government books the £3.2 billion in receipts "The payments are currently estimated by the Office for Budget Responsibility to be £3.2 billion and although the cash is anticipated to arrive over the coming year, under National Accounts rules the full cash amount is being accrued to May 2013 when the liability fell due". 
• June 2013: This imagined £3.2 billion flatters the national accounts allowing George Osborne to claim austerity is working and impose more of it in his spending review.
• July 2013: Swiss Bankers Association press release states "First indications from selected banks in Switzerland show that there are fewer untaxed UK assets in Switzerland than had been previously assumed. This is mainly due to the fact that many clients have resident non-domiciled status." (This claim about 'non-dom status' is absurd, as the UK provides a separately concocted loophole for non-doms which means they don't pay tax on offshore loot and so it would not have been due in any case).

In relation to that £342 million paid by the Swiss banks 'on account' that would be refunded to them based on taxes actually collected, the same July 2013 statement by the Swiss Bankers Association goes on to state:

"The possibility can therefore not be ruled out that either none or only a small part of the banks' guarantee payment of CHF 500 million [i.e. that £342 million] will be recovered. "

Of course the banks will regard CHF 500 million as a small fee to carry on with their usual business. Perhaps Swiss and UK governments will claim the dodgers had relented and brought their taxes in to the Treasury in wheelbarrows. This would not be very likely, as the UK government was still expecting the full £3.2 billion from this scheme at the time of Osborne's Spending Review only two weeks before the Swiss government made its admission. Not wanting to appear more of a buffoon than nature made him, Osborne is unlikely to have made this error knowingly.

Incompetence? Maybe not. Governments of all odour react to scandal by making pronouncements that ultimately amount to nothing. There was an outcry about excessive pay to bankers, with promises of a clampdown. And yet the Banking Commission's report in June 2013 showed that bankers' salaries had still gone up.

The Treasury has form in collaborating with the tax avoidance industry. The Treasury claims it is because it is too incompetent to formulate tax law without collaboration. We remain unclear whether the issue is their rank incompetence finding dodged tax, or their sublime competence identifying which dodged taxes not to find. But as Margaret Hodge MP commented, the whole business of 'poacher turned gamekeeper turned poacher' stinks:

So how to fill the gap left by the dodged taxes? The gap will be filled with more austerity including more cuts to the NHS, to benefits, and to the poor bloody infantry.