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The government is outlawing a number of offshore corporation tax avoidance schemes, one of which has been operated by Tesco, the supermarket giant has confirmed.
The elaborate scheme uses Tesco subsidiaries registered in Luxembourg, the tiny EU state on the borders of Germany, Belgium and France, long regarded as a tax haven.
The magazine Private Eye this week published details of a collection of offshore holding companies and accompanying partnership agreements, which it said Tesco was using to pile up £50m a year free of corporation tax in the Grand Duchy.
The offshore entities created appear to have been named after Tesco office addresses. They are called Armitage, Cirrus, Delamare and Cheshunt.
Tesco buildings include Armitage House and Cirrus House, and its headquarters is located on Delamare Road, Cheshunt.
The tax loophole is being outlawed in this year's budget. Treasury minister Jane Kennedy described such a scheme to a House of Commons committee earlier this month, and said it was one of a number of "highly artificial tax avoidance schemes".
Tesco says that because the government has changed the law its income from the Luxembourg entity, Armitage English Partnership, will now be subject to UK income tax from March 2008.
The company says it has been using several schemes "to provide efficient funding" for its overseas stores, and this is common commercial practice.
This is the third avoidance scheme with which Tesco has been linked.
Private Eye previously identified what Tesco lawyers term an "entirely legitimate tax exemption". This involved depositing £1bn in a limited liability partnership, called Cheshunt Overseas, with a Swiss branch office in the tax haven canton of Zug. The partnership loaned the money out at interest to its overseas store operations, and accumulated the interest in the partnership.
The Zug scheme, so far apparently not challenged by the Revenue, could be costing the UK exchequer up to £20m a year in lost corporation tax.
Tesco has also been avoiding a different tax, stamp duty land tax (SDLT), while raising cash on big sale-and-leaseback property deals.
The retailer ran schemes involving partnerships and offshore unit trusts, designed to avoid more than £60m SDLT otherwise payable by the purchaser.
Tesco is suing the Guardian over allegations about its corporation tax arrangements. The Guardian has already acknowledged its factual errors, has apologised, and has offered to do so again.
Tesco has said "British companies need to plan and manage their investments, including those overseas, in a responsible but efficient manner in order to compete successfully on the world stage with all the wealth creating benefits that brings to Britain."
There have been repeated efforts by the UK government for the past eight years to tighten up on what it sees as abuse by multinational corporations of the tax differences between European states.
The issue revolves around the tax treatment of what are called "controlled foreign companies", or CFCs.
Tesco is far from the biggest combatant in what is becoming a prolonged war between governments who see their tax base eroding and companies which can pay accountancy firms typically up to £500,000 a time to devise these schemes.
Vodafone, the mobile phone company, is locked in litigation with Revenue and Customs that began in 2004, and for which it made provision of £2.2bn in its accounts, should it lose.
This, too, involves use of a low-tax Luxembourg subsidiary into which profits are flowing from a shareholding in the German firm Mannesman.
The confectionery firm Cadbury Schweppes won a landmark case against the Treasury on a CFC scheme in 2006, when the European court of justice ruled that the firm's Irish treasury activities were not subject to the UK CFC regime, unless it was the case that they were wholly artificial.
Companies can now operate on local tax rules throughout Europe, unless Revenue and Customs can show their structures are "wholly artificial".
This has led the UK government to attempt to recast its entire CFC regime, a move that has led to a chorus of threats from UK companies, including Shire and United Business Media, that they may relocate to Ireland.
This article originally appeared on www.guardian.co.uk
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