FAQs and statements
Vodafone and tax
Vodafone pays the taxes due in every country in which we operate. We paid around £2.3 billion in taxes around the world last year (FY11/12). Our effective tax rate also increased, to 25.3% from 24.5%: so, for every £4 we make in profit, we pay £1 in corporate taxes globally.
The amount we paid into the public purse worldwide last year rises to £14 billion if you include payroll and sales taxes as well as fees for radio spectrum
UK corporation tax
In our 2011-12 Annual Report and Accounts, we reported that our UK corporation tax charge for this year had fallen to zero. There are specific reasons for this, a number of which were overlooked in the initial media coverage.
As is the case for all businesses, our UK corporation tax liabilities reflect statutory allowances for capital investment and interest costs.
- Our capital investment in our UK business increased during 2011-12 to £575 million, up from £516 million the year before.
- We spend £1.8 million every day on improving the network and systems relied upon by our UK customers.
Spectrum and interest costs
- Governments have the choice – either collect up-front spectrum auction proceeds, which are amortised against future tax liabilities, or allocate spectrum for free/more cheaply (as happens in Spain) and then collect much higher annual tax payments.
- We're still paying almost £1 million every day on interest costs from our UK 3G licence bought over 12 years ago.
- We would be paying £100m UK corporation tax per annum if the Government had not instead chosen to raise £6bn in the 3G spectrum auction process.
Those infrastructure investments, plus offset allowances for interest costs incurred, are quite properly reflected in our liabilities under UK tax rules which are designed to incentivise business investment for growth as well as to raise revenue for the Exchequer.
Furthermore, companies are taxed on their profits. Although the UK only accounts for 4% of our global operating profits, we contribute around £700 million to the UK Exchequer each year in fees for radio spectrum, payroll taxes, business rates, VAT and other taxes.
In 2013, Vodafone will also pay £790 million to the UK Exchequer for 4G spectrum following the UK spectrum auction.
It's also notable that, as an international company, we also reported an increase of more than £300 million in the tax payable outside the UK in 2011-12. Simply put, we make more money elsewhere, so we pay more taxes elsewhere.
Separately, Vodafone has been the focus of media allegations regarding tax-related activities in Switzerland. Those allegations are wholly untrue.
The Swiss office is a branch of our Luxembourg subsidiary and plays no significant role in the financial management of the Group, and has not done so for a number of years.
Furthermore, there has never been any reduction in Vodafone Group's tax contributions to the UK Exchequer as a consequence of these arrangements. Her Majesty's Revenue and Customs has always been entirely aware of our operations in Switzerland and all other territories of relevance.
HMRC legal dispute
In 2010, Vodafone and Her Majesty's Revenue and Customs (HMRC) concluded a long-running legal dispute, focused on a specific point of UK and European tax legislation, with a full and final settlement of £1.25 billion. The settlement between Vodafone and the UK tax authorities has since become the focus of a number of allegations which are unwarranted and unjust, particularly in light of Vodafone's longstanding and significant contribution to the UK as whole.
Vodafone has never received a tax bill for £8 billion or for the more commonly misquoted figure of £6 billion – a number HMRC themselves describe as an “urban myth” - nor have we ever been "let off" any such amount.
There was no "sweetheart" or "handshake" agreement with HMRC. The Vodafone/HMRC settlement was focused on some of the most complex tax legislation anywhere in the world. It involved nine years of legal argument through two independent UK tax authority appeals, three court cases (before the European Court of Justice, the UK High Court and Court of Appeal), followed by an application to the UK Supreme Court. Further detail of the legal case is provided below.
This detailed examination of the points of law involved was then followed by a full and rigorous technical and legal review by HMRC, whose senior tax experts examined all of the relevant facts, circumstances and evidence. The outcome was a full and final settlement with HMRC of £1.25 billion, reflecting all relevant liabilities. Sir Andrew Park has subsequently reviewed this settlement on behalf of the UK National Audit Office and concluded that the outcome was good for the UK taxpayer.
Sir Andrew Park review of the HMRC settlement
In December 2011, the UK National Audit Office (NAO) was asked to report to the UK Public Accounts Committee on the reasonableness of recent tax settlements concluded by HMRC. The NAO, which was assisted in its review by Sir Andrew Park, examined five settlements with large companies to determine whether or not:
- each settlement was reasonable given the circumstances of the case;
- each settlement was consistent with HMRC’s Litigation and Settlement strategy
- appropriate legal advice was sought and acted upon; and
- HMRC followed its own procedures.
On 14 June 2012, the NAO published its report. The NAO concluded that Vodafone's 2010 agreement with the UK tax authorities was “good” from the perspective of the UK taxpayer and "represented fair value for the wider taxpaying community". Sir Andrew also noted that that HMRC "were right to settle at this amount [£1.25 billion] because, if the case had not been settled, it would have gone to litigation. If this had happened, there was a substantial risk that the Department [HMRC] would have received nothing."
Further details of the NAO report can be found at: http://www.nao.org.uk/publications/1213/settling_large_tax_disputes.aspx.
Although anonymised, the Vodafone settlement is clearly identifiable and is discussed in detail under "Case D" in Appendix 1.
Vodafone response to Sir Andrew Park’s report
Vodafone is one of the UK's greatest international success stories. Yet for more than a year, we have been falsely accused of improper conduct. As we have consistently stated, those attacks were unwarranted and unjust, particularly in light of Vodafone's longstanding and significant contribution to the UK as a whole. We acted with the utmost propriety throughout the HMRC settlement process, and the National Audit Office has now concluded that the outcome was good for the UK taxpayer. We welcome this vindication. Vodafone has always been a responsible company with a strong commitment to managing our affairs properly and diligently within the law and with full disclosure to all relevant tax authorities.
There are four basic points of principle which should be taken into account when considering the Vodafone/HMRC settlement.
1. EU law and policy allows and encourages companies to operate across borders
One of the founding principles of the European Union is that individuals and companies should be free to trade and operate across borders and to locate their businesses wherever they choose to within the EU. This has been central to the whole philosophy of the European single market for more than 30 years.
2. Companies have a duty towards their shareholders
All companies, big and small, have a legal and moral duty to create value for their shareholders. Almost half of Vodafone's investors are UK residents. We have more than 500,000 individual shareholders in the UK and Ireland, and virtually every major UK pension fund is a Vodafone shareholder.
In 2012, Vodafone returned £6.7 billion in cash to our shareholders. We are now the biggest dividend payer in the FTSE 100, paying out almost £1 in every £8 of cash generated for the investment funds relied upon by millions of UK pensioners and savers. Over the last four years, we've returned more than £26 billion to our shareholders.
3. Companies have a duty towards the societies within which they operate
Whilst 96% of our operating profit, 95% of our customers and more than 90% of our employees are outside the UK, we're strongly committed to the country where Vodafone first began. We have been headquartered here for 28 years. We employ more than 9,000 people in the UK and provide indirect employment for tens of thousands more.
4. Tax planning is a basic right
All individuals and companies are obliged to respect the tax laws of the countries in which they operate. Within those laws, individuals and companies have the right to structure their commercial affairs in a way which is tax-efficient. This has been a fundamental principle of tax legislation around the world for generations.
Further background on the HMRC case
In 2000, Vodafone bought the Mannesmann conglomerate in Germany for £112 billion – one of the biggest takeovers in history. This was an all-share transaction involving no borrowings or loans from our UK business, with the share capital transferred to our wholly owned subsidiary based in Luxembourg.
There was never any reduction in our contributions to UK tax as a consequence of these events.
In 2000, the UK tax authorities challenged our motives for establishing our Luxembourg subsidiary. We explained that it had been established as the main financing company for our many operations around the world. More than twelve years later, it still fulfils that role: in fact, we now run our global financing, procurement and roaming operations from Luxembourg, and employ more than 200 people in our offices there. We also told the UK tax authorities that we had complied fully with EU law throughout, and that the UK was bound under treaty to reflect the primacy of EU law in this area.
A protracted, detailed and highly complex legal dispute followed.
1. We appealed to the Special Commissioners. The Commissioners are independent UK tax experts who act as an independent appeal tribunal.
2. The Commissioners recognised that UK tax rules were potentially in breach of EU law and sent our dispute to the European Court of Justice (ECJ) for guidance.
3. However, before our dispute reached the ECJ, the Court looked at a similar dispute – brought by Cadbury-Schweppes – and ruled that UK tax rules could only apply to “wholly artificial arrangements” intended to avoid UK tax. Our Luxembourg subsidiary was never designed to do this - and has never done this.
4. Our dispute then passed from the ECJ – whose Cadbury-Schweppes hearings were fully public – back to the UK Special Commissioners for decision.
5. The Commissioners re-examined the limits on the UK tax rules in light of the ECJ’s Cadbury-Schweppes ruling. The Commissioners then came to a split decision, before eventually concluding that, on balance, the ECJ ruling applied to our case under UK law.
6. We believed the Commissioners' interpretation of the ECJ ruling in our case was flawed, and appealed to the High Court in the UK. The High Court agreed with us, concluded that UK tax rules broke EU law, and overturned the Commissioners' decision. The High Court hearings were fully public.
7. HMRC then took the High Court ruling to the UK Court of Appeal. The Court of Appeal overturned the High Court decision but clarified that subsidiaries that were "actually established" and carried on "genuine economic activities" in lower-tax EU member states were not to be considered artificial tax avoidance schemes. The Court of Appeal hearings were fully public.
8. We were refused leave to appeal to the UK Supreme Court in 2009.
9. As all routes of appeal on the points of law – up to and including the UK Supreme Court – had been exhausted, Vodafone and HMRC resolved to work towards a full and final settlement, as summarised above.
10. In June 2012, the National Audit Office concluded its review of large settlements with HMRC and found that the Vodafone settlement was "good" from the UK taxpayer's perspective, adding that if Vodafone had pursued further litigation, "there was a substantial risk that the Department [HMRC] would have received nothing."