Tesco: new claims of tax avoidance

Tesco, the retail and property giant, is facing new allegations of seeking to avoid corporation tax on millions of pounds of profits through an offshore scheme.

The magazine Private Eye this week identified what it said was a Tesco tax avoidance operation involving a complex web of offshore operations centred on the Swiss canton of Zug. These arrangements involved an English limited liability partnership (LLP) called Cheshunt Overseas. Cheshunt is the name of the Hertfordshire town where Tesco has its headquarters.

The Cheshunt Overseas accounts provide grounds for believing that the structure may so far have assisted the international retailer in sheltering more than £66m in profit from UK tax.

The supermarket company is currently suing the Guardian over allegations about its corporation tax arrangements.

If the profits in Cheshunt Overseas accounts were subject to corporation tax in the UK, Tesco could have been liable for £20m corporation tax. Those accounts state that Cheshunt Overseas paid £4m of foreign taxes, a saving of £16m. Most of this saving comes from one single full year of Cheshunt's existence to February 2007. Cheshunt Overseas accounts for 2008 have not yet been published. Tesco's lawyers told the Guardian: "Tesco rely upon [an] entirely legitimate tax exemption."

The highly sophisticated tax strategies of global companies have recently been coming under close attention. Tesco was previously disclosed to be running a set of schemes involving partnerships and offshore unit trusts, designed to avoid up to £63m stamp duty land tax otherwise payable by the purchaser on property deals.

The retailer launched a libel and malicious falsehood action against the Guardian when the paper incorrectly said Tesco was avoiding up to £1bn corporation tax on those land deals. Tesco described it as "a devastating attack on its integrity and ethics". The Guardian has already acknowledged its factual errors, has apologised, and has offered to do so again.

In a response to a series of points prompted by the Private Eye story, a Tesco spokesman declined to address details. He said: "The Guardian has already admitted a serious libel against Tesco after the last time it conducted an inept investigation into our tax affairs. It appears from these further allegations that the paper is waging a vendetta against Tesco in order to, somehow, justify this earlier libel.

"The truth is that Tesco pays a disproportionately high amount of tax in the UK - around £1bn a year including corporation tax, business rates and employer's NIC. As well as being materially inaccurate, the continued attempts to portray Tesco as a business devoted to avoiding UK tax are wholly and deliberately misleading.

"The legal case against the Guardian is ongoing which limits what we can say, but the information put to us continues to show a complete lack of knowledge when it comes to tax. It is also riddled with inaccuracies and designed to portray as unethical what is in fact entirely legitimate and commonplace funding of international companies by successful global businesses based in Britain."

The British government regularly clamps down on what are known as "controlled foreign company" schemes. Tesco might face a challenge to the arrangements relating to Cheshunt Overseas either now or in the future, if the government's ongoing consultations in relation to the taxation of foreign profits result in a radical revision to how those profits are taxed. A Tesco spokesman told Private Eye: "We believe this structure is compliant with the government's controlled foreign companies legislation."

The Revenue objects to "artificially located profits", according to its discussion paper on the subject last year. Tax officials are particularly anxious about what is called "mobile passive income", such as interest payments on loans, which can easily be organised to show up anywhere in the world, thus "divorcing profits from genuine economic activity".

Cheshunt Overseas' Alpine office is stated in its accounts to be the LLP's operating branch centre, and the accounts indicate the LLP lends £1bn. When the Guardian visited, the only evidence of the office was a local accountant's brass plate.

This is stated to be the "Swiss branch" of an English LLP with a main office in the UK, a structure which is likely to attract particularly low local taxes in Zug.

The accounts of Cheshunt Overseas say that while the partnership is registered in the UK, its "management branch" is in fact in a third country, Hungary.

Tesco Ireland Ltd, which operates stores in a fourth country, the Irish Republic, is one of the three Cheshunt partners, with a 99.8% interest. The other two members of the LLP are Tesco subsidiaries in Hungary, one of which operates Tesco stores in that country.

Tesco appears to have used the structure to channel £1bn debt finance to other divisions of Tesco. The company says: "This partnership is used to fund our overseas businesses." As interest of £66m accrued to Cheshunt Overseas in 2007 these arrangements appear also designed to enable Tesco to defer (possibly indefinitely) UK corporation tax of £20m.