Margaret Hodge rather undermines the Vodafone case here

Margaret Hodge, the chair of the Commons public accounts committee, said: \”If we got £4.5bn in, how much did we not get? That is what taxpayers will want to know, and I\’ll be raising this with HMRC through the committee.

\”Whilst it is in the interest of the government to collect monies, these are huge sums. If there were deals involved, we need to know that the companies paid a fair amount on the profits they made from their businesses in the UK.\”

For of course the Vodafone case had nothing at all to do with tax on any profit, business or activity in the UK. It was all about the money they made in Germany, selling phones from German shops to German customers.

So, of course, according to Margaret Hodge, there\’s no need to investigate any further is there? For she\’s only concerned with UK profits and UK tax.

The £4.5bn figure is believed to include a previously reported Vodafone deal which ended when the telecoms giant paid £1.25bn.

A committee of MPs was told that the Vodafone tax bill should have been £6bn or more. That figure is disputed by Vodafone.

And of course the £6 billion number was entirely made up. Purely out of thin air.

Just to recap the story. Vodafone had a Luxembourg subsidiary, through which is owned (and bought, I think) Mannesmann, a German company. The profits from that deal went into Luxembourg. So did interest that was lent to what became Vodafone Germany and so on.

In British tax law those profits were definitely taxable in Britain if they were brought into Britain. UK tax rate minus whatever tax had already been paid on the profits, dividends, interest, whatever.

Then there were the Controlled Foreign Company rules. CFC. These said that if a UK company had a subsidiary overseas and that subsidiary wasn\’t paying much tax then we\’ll charge UK tax on those profits (and interest etc) even if they\’re not repatriated to the UK thank you very much.

Everyone agrees that if this subsidiary were in Cayman then tax would be due. The point at issue was whether the EU\’s rules on freedom of establishment, free movement of capital etc, meant that the CFC rules could not be applied to an EU subsidiary. This went through the courts, Vodafone won a couple of times, Court of Appeal (or maybe Supreme, little hazy at this distance) said, well, mebbe. HMRC decided not to take this to the ECJ as losing on the matter of EU law there would open up the floodgates to at least 100 other companies arguing the same point. Better to negotiate perhaps.

The result of the negotiation was that Vodafone agreed to bring onshore (in order to pay dividends) some chunk of those Luxembourg profits. All agree that this is a taxable transaction and so, thankfully for HMRC, the law does not need to be clarified to the benefit of those 100 other companies.

And that\’s actually what the deal was. There was no £6 billion ever. It was not about profits made in the UK on anything at all. And the reason the Luxembourg profits did not get taxed is because EU law says they should not be.