“If the Press finds out about our deal with the Chancellor, maybe we should offer the job to him.”
Both men laughed.
“So did our advisers tell you how much tax will we pay on London Softwear’s profits in the future once the Chancellor has given his final assent to our proposal?” asked Alleyne.
“I have always considered ‘nugatory’ a very useful word,” said Velder serenely. “No one has the least idea what it means.”
“But we will of course continue to employ two thousand people. And they will get improved health care. Maybe we should open another charitable foundation?” hazarded Alleyne.
“You can’t have too many of those. Good to have plenty of pictures of our charitable works in the company’s annual report. I’d rather the shareholders focused on our good works rather than on the directors’ emoluments.”
Both men laughed again and by this time we were in New Oxford Street. Shortly afterwards, we dropped our two passengers at the entrance to Sicilian Avenue which, unusually for a street in Central London, is pedestrianised.
“You can take the coach home, driver,” Velder called up to us. “I shall walk back home from here and Mr Alleyne will take a cab to his house.”
We drove the coach into twelve Bloomsbury Square, stabled the horses and returned to Queen Square. Then Holmes and I sat over cigars while he elucidated the discussions we had heard:
“The factory, it would appear, is safe. London Softwear are in the process of agreeing a special deal with the Chancellor whereby they pay their profits into a company in the Netherlands and in exchange for that, they have agreed they would not move the finishing process out of London.”
“But, Holmes, their sales are made in this country, their manufacturing is carried out in this country. Surely they should be paying their taxes in this country?”
“This is what is known as a diversion of profits. The company pays a royalty to a company in the Netherlands which wipes out its British profits and accordingly it pays no tax in this country. The company in the Netherlands pays its profits to a company in a tax haven so no taxes are due in the Netherlands either. The profits therefore accrue in the tax haven. The British company then borrows against its balances in the tax haven to pay its dividends. It is sometimes called a Dutch sandwich because most of these arrangements work through the Netherlands as the Dutch allow payments of this kind into tax havens without a withholding tax. The London Softwear Company has clearly just agreed such a deal with the Chancellor in return for keeping its factory in Bloomsbury open.”
“But Mr Lawler will be pleased by the result as the factory will continue to employ a large workforce in his constituency.”
“We shall see. I will send a note around to him to come to Baker Street tomorrow. I shall ask him for twelve noon to make it easier for you to join us. I would not be without my Boswell for a case like this.”
Mr Lawler was as punctual as ever. When Holmes explained the deal that London Softwear had been in the process of making with the Chancellor, a mixture of confusion and anger came across his face. “While I am delighted for my constituents that the jobs at the factory are likely to be saved, and would also congratulate you on your new appointment, Dr Watson, I am outraged that a major company should be able to blackmail the government on its tax bill in this way. Only a big company could do this. It is not as though ...” - and I could see Mr Lawler trawling his mind for a wildly improbable example to illustrate his objection to London Softwear’s practices - “... a small London coffee shop could claim that there is a special coffee-bean roasting technique for which it must pay royalties to a company overseas. Such a thing is preposterous!”
“I take it there is no other matter you wish to pursue on this case, Mr Lawler?” asked Holmes.
Lawler sat back in his seat and pondered.
“I wonder,” he said at length, “how widespread such deals really are between major companies and the British government. I would be interested in raising a question about it in the Houses of Parliament. Would you be able to provide me with help on that score, Mr Holmes? And, as always, I would welcome your assistance in this, Dr Watson. The honest and overburdened British taxpayer needs protection from such predatory practices.”
When Mr Lawler had gone, I turned to Holmes. “How are we going to investigate something like this?”
“We will have to make a visit to one of the large firms of business advisers in the City. Let us go and get some business cards made up. Inspired by Mr Lawler’s apparently random idea of a coffee retailer exporting its profit to a tax haven, I shall call myself Mr Lysander Starr of Topeka, whose name you will associate with the small matter of the Three Garridebs, and claim to represent a chain of American coffee shops.”
“But Holmes! You said there never was such a man!”
“Indeed so, Watson, and there never was such a chain of coffee shops. As a matter of equally arbitrary choice, let us style you as Mr Buck who can be Mr Starr’s British business partner.”
Not many hours had passed before, fitted out with business cards advertising Holmes and me as Mr Starr and Mr Buck, we ventured into the City of London. In a shorter space of time than I could have imagined possible, we found ourselves in the magnificently appointed offices of the famous City advisers, Pitt & Waterman, which command a splendid view over St Paul’s Cathedral from their site on Pater Noster Square.
After we had presented ourselves at the reception, Holmes and I sat in the foyer looking at the firm’s literature, which extolled its charitable work as well as providing a listing of clients. Holmes slipped a couple of the documents into his pocket. Very soon we were ushered into a spacious meeting room and found ourselves speaking to the firm’s managing partner, the fair, slim, elegantly dressed Mr Christopher Marler.
Holmes led the conversation.
We wanted, Holmes explained, once initial pleasantries had been exchanged, to set up a chain of coffee shops to serve the City of London. We would serve artisan quality coffee made using beans that had been subject to a special proprietary roasting process, the owner of which was based in the Netherlands. What did Mr Marler think was an appropriate level of royalty the UK business should pay to the Dutch owner for the rights to the process?
“How much is the margin that you envisage each shop making?” asked Mr Marler.
“In the United States, our shops’ margin runs at about thirty-eight per cent,” said Holmes.
“I understand that is a fairly standard margin in businesses run by our American cousins, but I assume your British outlets would be mere purveyors to the public of this proprietary process which is housed in the Netherlands?”
“Yes,” said Holmes cautiously. “It is certainly possible to perceive their role in that way. Roasting coffee beans using our technique is a complex task, whereas making cups of coffee with the roasted beans is, by comparison, a simple one.”
“In fact,” expanded Marler, “is it not possible to say that without the proprietary process, the shops would probably not exist and that, accordingly, the business’s unique selling point sits outside British jurisdiction?”
“Once again, Mr Marler,” said Holmes after some thought, “it is certainly possible to see matters as you describe.”
“It is very hard for the mere sellers of coffee to show a significant margin, Mr Starr. Competition in the sector is fierce and it is only by means of the proprietary process, the ownership of which sits in the Netherlands, that you are able to show a significant level of profit. The Dutch owner of the process is surely entitled to his share of the reward. I can see no reason why your coffee shops should pay a royalty of less than, shall we say, thirty-seven per cent of revenue to reflect this.”
“And will there be no one to challenge that level of royalty?” I asked.
“If your company additionally gives us the mandate to
act as your statutory auditors, Mr Buck, then we will hardly be in a position to say that the royalty deal was not transacted at arm’s length.”
“But surely,” I responded to Mr Marler in some confusion, “your audits are conducted by clerks and their supervisors, who have wide-ranging commercial experience, while the audit team will include specialists in the business sector our company will operate in. With their depth of knowledge, they will be able to assess the level of the royalty’s appropriateness for the complexity of the process and also to compare it to similar arrangements in other companies. This would enable them to query whether our royalty reflects an arm’s-length transaction which would be a requirement if it is to be a taxable expense?”
“My dear Mr Buck,” said Mr Marler, “the so-called front end of our audits are conducted by people with no business experience at all. They have normally barely completed their education. They are required to conduct the audit to a tight time-scale and the last thing they want to do is exercise any commercial judgement such as deciding whether a transaction between related parties is at a fair valuation. They would then require time-consuming clearance of it at a senior level and this would prevent them completing their work in line with their budget.”
“So if your staff are, in fact, not seasoned businessmen, how can they perform an audit?”
“For a cash business like yours, Mr Rogers, our staff will check the cash, make sure that no large supplier invoices relating to the previous period have been received in the first three months of the following financial year and ...” - Mr Marler paused here to take a pinch of snuff, and I assumed he would continue to outline further audit steps, but instead he continued - “... that is all they will need to do to satisfy themselves that your accounts show a true and fair view. One of our partners will then sign off the accounts based upon the evidence that is presented to him.”
“So does that not make your audit rather generic? Does that not mean that anyone would be capable of carrying out such a service?”
“On the contrary, Mr Rogers; our audit approach is a highly individual one. It was devised in the Netherlands and this firm is required to pay a hefty royalty there in order to be able to make use of it. Indeed, in order to pay the partners here any profit share at all, the firm has entered into substantial borrowings and has to provide heavy security to its lender in the form of overseas deposits.”
“And will her Majesty’s tax inspectors not be inquisitive about our activities and indeed about yours?”
“The firm of which I am proud to be a partner conducts a quarter of the audits of major companies in this country,” said Mr Marler loftily. “Due to the recent government efficiency drive, the number of tax inspectors is at an all-time low and their pay has not been increased for the last five years. I should be most surprised if they had the resources to investigate you and even more surprised if they had the stomach. To do so would call into question the probity of the accounts of every company in the country and suggest that His Majesty’s Inspectors’ past scrutiny of them has been indigent in the extreme. Indeed, the thought that any tax inspector or anyone else with any association with tax collection might cross our own threshold for any purpose other than to apply for a position here is entertaining,” Mr Marler paused to take another pinch of snuff, “but utterly preposterous.”
Holmes rose and said to Mr Marler: “Your insights have been most illuminating. We will be sure to involve your firm in our next steps.”
“Please feel free to do so,” said Mr Marler with a bow as we took our leave. “You will find our charges are levelled at a rate at least as competitive as the rate of charges levelled by our competitors.”
“What did you make of that?” I asked Holmes as we headed towards North London.
“For the first time in my life,” replied he, looking a little downcast, “I find myself cursing the uniqueness of my intellect. I seem to be the only person in the land who really cannot claim that the intellectual property which drives my business is housed in the Netherlands. My intellectual property is self-evidently housed in my own skull, which is immutably located in London and which is where I conduct most of my cases.”
I had been wondering if I should ask Holmes’s advice on whether I could claim that my fledgling medical practice had intellectual property in the Netherlands and could accordingly pay royalties there to obviate the requirement of paying tax in Great Britain. Given his comment, I thought better of it. Instead I asked him why American businesses apparently still showed a genuine commercial margin in their accounts while for British companies such margins seemed to be a matter of altruistic choice.
“American companies,” said Holmes, “are taxed on their worldwide income so there is no benefit for them in diverting their profits to different, more sympathetic jurisdictions. Doubtless they find other ways of rendering their tax liabilities nugatory.”
I asked him what he was going to say to Mr Lawler.
“We shall have to inform Mr Lawler that the sort of practices the London Softwear Company are engaged in are standard in British commerce. Given the facility with which it is possible to make such an arrangement, the shareholders of London Softwear are even entitled to ask why the company did not avail itself of this set-up earlier. The directors of a company are under a fiduciary duty to minimise its tax liability and in fact Mr Velder and Mr Alleyne appear to have been somewhat dilatory in this matter if their business has been going for five years and they are only now considering such a step. This may be why Alleyne feels his position is under threat even if this scheme they are discussing with the Chancellor enables the company to avoid taxes.”
I joined Holmes the next afternoon in Baker Street and Mr Lawler arrived at the appointed hour.
“Your endeavours have again been of great service to me, Mr Holmes,” he said after Holmes had appraised him of the situation. “A stand must be taken against this. I shall go into battle armed with the sword of justice in my hand and the interests of the British taxpayer in my heart. Thrice armed is he who knows his cause is just. I am sure there will be great interest in making the public aware of what is happening.”
“Might you not cause problems for your constituents if your efforts cause the setting aside of the arrangement London Softwear has arrived at with the Chancellor and the consequent closure of the factory? And might not any exposure of this arrangement render the position of your Chancellor difficult?”
“Politics, my dear Mr Holmes,” said Lawler smoothly, “is the art of the possible. There is nothing more to say, but much still to do.”
He picked up the dossier on the case which Holmes offered to him and, with a sweeping bow, he was gone.
The next day, The Daily Telegraph carried a front-page story about the arrangements certain companies had made to minimise their tax liabilities. Under the headline, “A Fraud on the Taxpayer”, the newspaper ran an article of which the first paragraph read as follows:
“Large corporations have the ability to agree with the government an amount that the latter will settle for rather than the amount that would be due if the tax were calculated on the true amount of revenue less a fair deduction of expenses. A basic British principle of justice is equality before the law. How can this be upheld when tax liabilities for large corporations are arrived at based on arbitrary agreements reached behind closed doors in smoke-filled rooms, whereas small companies pay the full rate? Such arrangements are an affront to natural justice.”
The article went onto name a number of companies who had made such deals with the government although the London Softwear Company was not among those named. I had every idea where The Telegraph had its core information for the article from, but no idea how it had identified the companies which had benefited from the arrangements it was condemning. It was many months later when I was writing up this case from my notes that Holmes helpfully pointed out what excellent use Mr Lawl
er had made of the client list of Pitt and Waterman, which was in the dossier which Holmes had prepared and that Mr Lawler had taken with him.
A government spokesman issued a statement to say that no further special deals would be entered into and that all the present ones were subject to review.
For all the political upheavals, I still had my house to maintain and my wife to keep. Accordingly, I decided to keep my appointment at London Softwear that day, even though I realised it was possible that the directors would gather the work force in the central courtyard on the pretext of celebrating the company’s success only to tell them that their employment was being terminated. I now saw the cordoning-off of the central courtyard and my appointment as Company Doctor entirely from the point of view that Holmes had articulated. Given the precautions the company seemed to be taking against the workers’ possible reaction to their termination, I was filled with dread as to how they might respond and had the darkest visions of what revenge they might wreak on the person of anyone who seemed to them to be in a position of authority.
I walked through the arch into the central courtyard and, as I did so, I heard the leaden sound of carriage wheels behind me which, when I turned round to look, I saw came from heavy windowless coaches which were being drawn by massive Shire horses. The coaches drew up in the cordoned-off area of the courtyard. The fountain, I noted, had been encased in a protective structure of a robustness which to my eyes was utterly disproportionate for the winter covering of a water-feature.
With my misgivings further increased, I presented myself at the reception and asked for Mr Alleyne.
“He is due to come down at any moment. The workforce is being gathered in the courtyard for a major announcement,” said the receptionist.
As I looked at the various corporate notices on the wall, I observed that none of them related to anything after 31 December 1907. I was about to look for an excuse to leave when I heard the sound of footsteps and I turned to see Mr Alleyne coming down the stairs.
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