Tax Research UK

The American right wing turn on the old – and it’s a trend we’re bound to see copied

Feb 072012

This video shows the new line of thinking from the American right on the cause of our economic problems – blame the old.

To understand some more about the speaker, just click here. This is Koch Industries at work.

But mad – and bad – as this logic is expect it to be followed. The idea that we ‘can’t afford the elderly’ is growing rapidly. It’s the inevitable outcome of the ‘we can’t afford pensions’ argument. And morally it takes us toi places I’d rather not go – but will if I have to, because I sure as heck do not think we consign the old to destitution, even if the right do.

Hat tip: TJN

The EU makes clear it is at war with Swiss banking secrecy, whatever Dave Hartnett thinks

Banking, Switzerland, Tax evasion 2 Responses »

Feb 062012

Bloomberg has reported this morning that:

Switzerland must eliminate banking secrecy and renegotiate tax accords with the U.K. and Germany that clash with regional initiatives, according to European Union Tax Commissioner Algirdas Semeta.

While Switzerland agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development, bilateral agreements signed in September with Germany and the U.K. allow client identities to remain secret.

“Banking secrecy that allows companies or individuals to hide taxes has no future,” Semeta said in an interview in Brussels.

I wonder which bit of that Dave Hartnett and george Osborne, with their appalling tax deal with Switzerland don’t understand?

Nor come to that, which buit those from Switzerland who defend such deals in comments on this blog don’t understand.

Swiss banking secrecy has to die because it exists to facilitate tax and other crimes. Now let’s move in to kill it.

We won’t be selling QE’d gilts back into the economy – it just won’t be possible

Economics 15 Responses »

Feb 062012

Larry Elliott is writing about gilts this morning as he (like me) is sure there will be more quantitative easing announced this week.

Let me say straight away, that like Larry, I question the need for this: we should be stimulating the economy instead, but having made that point I also then disagree with Larry.

As he notes:

The fact that the Bank is even considering a further easing of policy is testimony to the profound weakness of the UK economy. For the past three years, bank rate has been 0.5% – comfortably the lowest level on record – and despite the pain being felt by savers there is no sign of it going up any time soon. The Bank has bought up some 20% of the gilts market already in an attempt to boost the money supply. Meanwhile, the Treasury has borrowed £500bn since the economy went into recession in early 2008.

In other words, net borrowing is not £500bn, it’s £500bn less QE which may well be £350bn by the end of this week, as I have argued. So we have not got the debt crisis the government argues we have. We do have a deficit: we don’t have a debt crisis.

And that’s why Larry is wrong to say:

at some stage the Bank will need to unwind the monetary easing of the past three and a half years, selling gilts back into the financial markets. This is going to be tricky to achieve without leading to a collapse in the price of government bonds, and the more bonds the Bank has to sell the trickier it is going to be. This matters because the price of gilts goes in inverse proportion to the yield or interest rate payable on them. When the price of gilts goes down, long-term interest rates go up, so the challenge for the Bank is to unwind QE without triggering a run on gilts that would push the economy back into recession.

We’ll never sell those gilts back. The IFS says we have £280bn of new gilts to sell over the next three years to fund the deficit. There is not a hope we’ll add £350 billion of resale of gilts on top of that. The only likelihood is in fact of more QE: over that period there is no way the market can absorb £280 billion of new debt.

That means that the reality is that QE will lead to cancelled debt. Every single penny of the gilts repurchased will, I am sure, be cancelled. Nothing else is possible. It’s just a matter of time before the lightbulb gets universally switched on to that fact that the debt repurchased under QE is no longer debt at all. There’s just new cash, and given that the economy needs that cash we’re not going to cancel it now, or in five years time. So let’s get real about it.

And let’s also remember there’s nothing odd about cancelling gilts: it happens all the time. They’re time limited loans. All we’d be doing by cancelling them is declaring time early. Let’s not overstate the fact that this is completely possible, and more than that, it’s desirable, and bar being early, totally normal. Then we can have a real economic debate.

This Thursday in Norwich

Development, Tax avoidance, Tax Havens No Responses »

Feb 062012

‘U STOP Poverty – How Many Multinationals are Keeping the Poor, Poor’ on Thursday 9 February, 7.30 pm – 9.00 pm is part of a series of events in the city organised by Christian Aid to inspire and inform those working to relieve poverty, and to begin a process of networking which will lead to ongoing mutual support.

Richard Murphy (pictured), who is an anti-poverty campaigner, tax expert and the author of‘The Courageous State: Rethinking Economics, Society and the Role of Government’, will explore how the current economic situation can be changed so that developing countries no longer lose out in aid from companies avoiding the payment of tax.

Julian Bryant, of Christian Aid, explains: “£101 billion a year could fund the UNs’ Millennium Development Goals several times over, eradicate malaria or make significant differences in relation to solving major issues of poverty in developing countries. Yet, it has been estimated that £101 billion is being denied to developing countries by various multinational corporations that use tax haven secrecy to avoid paying taxes.

“Developing countries are losing more from companies avoiding the payment of tax than they receive in aid. Imagine what a difference it would make to a developing country to actually receive the tax they are due?”

The event is free and open to all with no booking necessary. For more information contact Julian Bryant, Christian Aid on 07940 848829 or email jbryant@christian-aid.org.

Kings Centre (Kings Church), Kings Street, Norwich, NR1 1PH

Nigel Lawson – an exercise in wantonness

Economics, Uncategorized 12 Responses »

Feb 062012

I often think Nigel Lawson lives on a different planet to the rest of us. He wrote this in the FT this morning:

Capitalism works – and works far better than any other system – because the discipline of the marketplace keeps greed, folly and incompetence in check. When this is lacking, when businesses are considered too big, too important, or too interconnected to fail, this crucial discipline disappears, and disaster is almost inevitable.

Maybe he hasn’t noticed that what happens on the theoretical black board of capitalism, which is what he describes, is not the same as the capitalism we inevitably get in practice, which is a very different beast altogether. But to argue for the blackboard version of capitalism as if it would solve the problem it inevitably creates is indicative of one of two things and they’re either wanton inability to understand the real world or wanton deception to support the abuse that happens in the real world of capitalism. It’s one or the other and since I’ll assume Lawson is honourable it’s inability I have to go for.

Either way, lawson is a long way past his usefulness, if he ever had any.

Stop corporation tax relief on high pay

Economics, TUC 12 Responses »

Feb 062012

The TUC has published a new report this morning called Bonus Season. The summary says:

Ending corporation tax relief for pay and bonuses worth more than 10 times average annual earnings (£26,200) could raise around £1.7bn a year if applied to the banking and financial services sector, according to a new TUC report published today (Monday).

The TUC report Bonus Season uses data from the Labour Force Survey to show that over a third (36 per cent) of employees earning more than £250,000 a year in the UK work in banking and finance.

The report then uses HMRC data to estimate that around 81,000 people have incomes of over £262,000 (10 times average annual earnings) that come primarily from employment, including 29,000 people in banking and finance.

The report finds that total pay on earnings above £262,000 in the finance sector – which the TUC believes should be disallowed as a deductible expense for corporation tax purposes – is around £6.8bn a year.

Ending corporation tax relief on earnings over £262,000 in the banking and finance sector would raise £1.7bn a year – vital revenues towards paying back the deficit created by the financial crash, says the TUC.

The report also estimates that extending the scrapping of corporation tax relief for top pay and bonuses over 10 times average earnings to all UK companies would raise around £5bn a year.

With the government effectively cancelling out its own levy on bank balance sheets by cutting the rate of corporation tax from 28 per cent to 23 per cent by 2014, the banking and finance sector is no longer making a proper contribution towards paying off the deficit it played a key role in creating, says the TUC.

A previous TUC report The Corporate Tax Gap showed that banks already pay well below the headline rate of corporation tax and that that the scale of bank losses at the height of the crash has allowed them to knock £19bn off their future tax bills, despite an £850bn bailout from taxpayers and the Bank of England.

The fact that banks are back recording big profits and handing out billions of pounds in bonuses proves they can easily afford a new tax on big bonuses, says the TUC.

The TUC believes that making earnings more than 10 times average annual earnings liable for corporation tax would not only raise revenue but also tackle growing pay inequality by encouraging companies to spread pay across the workforce, rather concentrating it on those at the very top.

As well as calling for top pay to be liable for corporation tax, the TUC believes the following changes would help tackle the growing pay divide between top executives and the rest of the workforce:

Bring a much-needed dose of economic reality to executive pay decisions by introducing worker representation on to remuneration committees.
Make executive pay more transparent by publishing the ratio between top pay and both median company workforce pay and the lowest paid members of staff.
Tackle the closed shop of non-executive directorships (NEDs) by forcing companies to advertise positions externally.
Make rates of pay increase for directors reflect those of other employees, with an explanation given in the remuneration report should this not be the case.

I think such a policy would be a valuable constraint on high pay. But I should add that I advise the TUC on such issues so my agreement is unsurprising.

The message though is a simple one: if all politicians agree high pay is a problem we should simply stop subsidising it. What’s the problem with that?

There’s no point HMRC saying they’ll penalise people when they don’t

HMRC, Uncategorized 11 Responses »

Feb 042012

The news was full of the story that 1 million people will pay £100 fines for submitting their tax returns late yesterday.

Except they won’t.

I did some research on tax penalties a year or so ago. The data here all comes from my report on small company administration (around page 50). It is all based on parliamentary answers. These showed the following with regard to penalties issued for corporation tax over a number of years:

Vast numbers of penalties were waived: they were simply for returns not due, or that could not be traced.

But staggeringly of those due, almost no recovery was made. Years worth of unpaid penalties were outstanding at each year end.

That’s the price of not having enough staff to collect debt at HMRC. But just think what could have been done with that money if it had been collected. And without a shadow of doubt if HMRC had kept on top of this issue much more could have been collected than was, and cost efficiently too.

In the meantime, assume that due to mismanagement at the top of HMRC the £100 million opportunity for the state that lat payment penalties represent at this moment will just be more money squandered away.

How to tackle the crisis in small business taxation

Corporation Tax, HMRC, Small business No Responses »

Feb 042012

This weeks ‘scandal’ at the Student Loan Company, where a director who appears to be an employee has been paid through a personal service company has excited lots of attention. I know there will be more similar stories: I have been called about them.

But I’m not interested in the stories of the people involved; I am more interested in the systemic issues. There are two of these. The first is the problem that small business tax is too complicated and fails to reflect the economic reality of the way in which many small businesses work. The second is that the government through H M Revenue & Customs and Companies House is simply failing to collect the tax due from small companies.

I deal with the first here. I wrote the following in 2007 when H M Revenue & Customs had lost its last major anti-avoidance case against the use of a small limited company to both receive the income of what was claimed to be a disguised employment and which then split that benefit between a husband and wife. I wrote then:

The Arctic Systems case has been widely reported, but much of the comment made upon it has been high on emotion, but low on analytical content.

I wrote on this case, and as a result was challenged to produce a suitable response. That I have now done. The full paper is available here. The summary says:

This paper analyses the way in which the owners of many small limited companies reward themselves and members of their families out of the income that their labour generates for those companies. This is particularly relevant in the light of the recent House of Lords ruling in what is known as the ‘Arctic Systems’ case. The paper shows that many of these arrangements do constitute tax avoidance because the rewards paid do not much the underlying economic substance of the transactions that are taking place.

In the interests of promoting tax justice for all taxpayers HM Revenue & Customs have a consequent duty to promote new arrangements that will encourage tax compliant behaviour in this sector. Tax compliance is defined as paying the right amount of tax (but no more) in the right place at the right time where ‘right’ means that the economic substance of the transaction accords with the declaration made for taxation purposes.

The paper does then show that this problem is almost insoluble whilst these businesses are operated through the medium of small limited companies which were not designed for and are unsuitable for the type of activity they undertake.

As a result this paper proposes that:

1. A change in company law to allow the re-registration of small limited companies as LLPs. An LLP is tax transparent: its income is taxed as if it belongs to its members even though it is a legal entity that is separate from them for contractual purposes;

2. The introduction of new capital requirements for the incorporation of limited companies undertaking trades, and over time forced re-registration of those that do not meet that standard as LLPs;

3. The introduction of a new investment income surcharge at rates broadly equivalent to national insurance charges that would have the benefit of reducing the incentive to split income, restore the taxation balance between income earned from all sources and allow a reduction in the base rate of income tax without adding substantially to the burden of administration for taxpayers since those liable will, in the vast majority of cases, already be submitting tax returns;

4. Create new, economically justifiable and verifiable standards for splitting income in LLPs so that the risk of legal challenge to such arrangements will be substantially reduced whilst recognising the significant role that the partners of those who supply their services through owner managed corporate entities play in the undertaking of that activity.

If this were done then:

a. The administrative burdens for many small businesses would be reduced;

b. The certainty of the arrangements under which they can operate would be increased;

c. The rewards that they rightly seek to pay to those who contribute to the management of these companies from within domestic relationships will be rewarded, but within appropriate constraints;

d. The attraction of freelance status in tax terms would be retained;

e. The current injustice that sees income from labour more heavily taxed in the UK than income from capital would be eliminated in large part without prejudicing the required favoured status of pensioners;

f. The incentives for tax planning would be reduced, so simplifying tax administration;

g. The tax yield might either rise, or a reduction in the tax rate might result.

The challenge in creating such a system is significant because it requires cooperation across government departments, but far from insurmountable. It is part of the challenge of creating an enterprise culture that meets the needs of the UK in the 21st century, and that is a challenge that any government needs to meet.

As I note at the end of the paper, suggestions and comments are welcome. But please do read the paper first and not just the summary.

That invitation still stands: the problem remains. I remain sure I have offered a viable alternative. I know it was well read and discussed in the Treasury at the time. Is this the time for change?