The blog might be quiet for a few days.
Tax Research LLP is moving today. The hope is that BT will get broadband on at the new office as soon as possible. But we’ll have to see. They say it can take 15 days…………and we only exchanged contracts on Tuesday.
I’ll be back as soon as soon as possible.
For the record, as from Friday, Tax Research LLP is at:
The Old Orchard
Bexwell Road
Downham Market
Norfolk
PE38 9LJ
UK
And the new phone number (available from 30 August) is 01366 383500
Any writer likes to be read. It goes with the patch. So I can’t help but say that it’s been good to note that the last two days have been the busiest in the life of this blog.
What’s got people going? Well, inheritance tax is always a sure fire winner, but that’s not number 1. The number one point of interest has been Jersey. Most precisely, someone in the offshore world has clearly been drawing attention to my article entitled More Jersey hypocrisy published on Monday and its related article on sham trusts published a couple of months back.
It looks like just about every firm of lawyers and a fair few of the accountants in Jersey have been to have a look as a result. And so too have 16 people from Liechtenstein, quite a number from Gibraltar and Cyprus and the Swiss, not to be outdone, have also been popping over for a look. In fact, over the last couple of days people from 41 countries have looked at this site. Well, I’m pleased, and not just because I want readers for the sake of it. I sincerely hope some of those who have read what I wrote have thought about it.
My article did not, and was not intended to, criticise any one person. In particular it does not criticise the Jersey Financial Services Commission for creating a Code of Conduct for trust practitioners in Jersey. In microcosm I am sure the JFSC and all those who work in the trust companies, lawyers and accountant’s offices in all the tax havens that have been reading my comments see themselves as complying with some form of Code of Conduct already. But, there again, that’s exactly how the offshore system works. You might be able to tick the box to say you’ve done the things required by a Code of Conduct, but as Senator Carl Levin said in his introduction to the US Senate report Tax Haven Abuses: The Enablers, The Tools & Secrecy:
I believe the findings are explosive: the report blows the lid off tax haven abuses that make use of sham trusts, shell corporations, and fake economic transactions to help some people dodge taxes owed to the U.S. Treasury.
He could, of course, have referred to the Treasury of any major country. I am happy he used a phrase I’d already used on this blog with regard to Jersey trusts.
I also note the incredulity in his comment with regard to one of the schemes his committee investigated:
Each of the facilitators — the lawyers, bankers, and brokers — played critical roles, pulled in hefty fees, but then acted surprised at what the Subcommittee found when it lifted the lid off the black box. … The professionals hid behind shaky legal opinions to justify their roles and donned blinders to block out indicators of the sordid business they were involved in. Each participant essentially told the Subcommittee: “I was only responsible for my little piece of this. I didn’t know the other parts. It’s not my fault.”
I know that this particular transaction took place in the Isle of Man. It could as easily have been in Jersey or Guernsey.
The point I’ve made, and will make again and again, is that ‘ticking the box’ to comply with any number of codes makes no sense when the whole of your economy is designed, as Carl Levin puts it, to help some people dodge taxes owed to the U.S. Treasury.
That’s the difference with Jersey and the offshore world. And until those accountants and lawyers who staff and run the trust companies there and elsewhere realise that nothing will give what they do respectability, bar of course stopping it, then I hope to continue to rattle their cage.
I’ve been in discussion with several people about my post on the Joseph Rowntree’s flat tax report, and have been challenged to say what I would have done if them. That is relatively easy to do.
Their work recognises something I, and all serious researchers in this area know – which is that the highest marginal rates of tax in the UK fall on the poorest in our society. What is more, they pay very high overall levels of tax. This is because of the unjust combination of direct, indirect and council taxes and the withdrawal of tax credits and other benefits as income increases. This problem needs to be tackled. But their report does not, I think, suggest the right way to go about it.
First of all, combining the tax and national insurance systems looks attractive, but in that case serious attention has to be given to the additional tax burden this would create for the elderly who are not liable to pay national insurance. Unless this is tackled any combination is politically and socially unacceptable.
Secondly, if tax credits are, in effect, to be included in the tax system then it has to be ensured that this is done in such a way that those they are meant to benefit win from that change. That is unlikely to be the case if the ‘tax wedge’ for those who are poorly paid and at the margins of employment is as high as 37%. This ‘tax wedge’ is quite acceptable in the UK for those on high pay; indeed, it is lower than the liability currently due for most higher paid employees, and as surveys have shown, such rates are no disincentive to work or tax compliance. The answer in that case is obvious. Any simplification, if it is desirable has to be on the basis of progressive rates of tax.
And let me be quite clear, progressive rates of tax are not a complication in the tax system. Calculating tax due is simple arithmetic. Calculating taxable income is the hard bit. The Joseph Rowntree Foundation are seeking to tackle the hard bit; their error is in thinking that somehow fixed marginal rates of tax are a part of this process. They are not.
More work is needed to develop their thinking, which might be well worth doing. But that thinking would need to look at the impact of using variable rates of tax to ensure that the benefits of change went to those who really need them, who are the poor, or as the related IFS report shows (and which fact was ignored by all those who have reported the issue), the rich will be the only sure winners. That cannot be allowed.
I gather PWC are promoting their ‘Total Tax Contribution’ framework in Germany and elsewhere.
Let me be honest about what I think about this ‘framework’. I give full marks to John Whiting at PWC UK for trying to do something about tax and CSR. It marks him out from the crowd. And I suspect John had to fight long and hard to get PWC to consider such a thing. That might also mark him out as brave.
And there again, the product he has delivered is simply not good enough to be useful. There are some simple reasons why that is the case:
1) It’s merely curious to know how much tax a company has paid. The answer everyone wants to know is ‘has it made the right amount of tax?’ Of course the total tax paid by most large companies will be a big number. So what? If the number is half what it should be no one will be impressed.
2) It’s no good publishing a figure for tax paid if it is not compared with the underlying base data i.e. tax paid on profits is a meaningless number if we don’t know what profits are, and tax on payroll costs is likewise meaningless if we do not know what the relevant payroll expenses was, and so on.
3) It’s no good telling us what profit is (for example) if you don’t tell us where it is – because tax is charged nationally at different rates worldwide so only if we know where profits (and payroll costs and other tax bases) are can we tell whether the tax paid nationally (which we also have to know) make any sense.
To put it another way – to publish a Total Tax Contribution figure for a group of companies is meaningless. Such data can only make sense locally.
Which is precisely why the data requested in accounts by the IFRS I have written for Publish What You Pay makes a lot more sense. See comment letter CL1 here.
This comes from the only paper in Guernsey.
Are they paranoid?
I hope not.
I think the Revenue are doing just what it says on the page.
This article is worth reading. I don’t know the author. I strongly sympathise with his sentiments.
They are pertinent in the UK at the moment when tax advisors are being accused by HM Revenue & Customs of regularly abusing charity law for the benefit of their clients, and not others.
Offshore, charity law is abused routinely as part of the sham creation of ‘orphan’ off balance sheet special purpose vehicles used to manipulate debt by many large companies.
Stephen Byers wrote an article attacking inheritance tax for the Sunday Telegraph this week. Byrers, you might recall is one of Tony Blairs’ Cabinet failures, but is still close to No. 10. He brought out all the usual wrong arguments on Inheritance Tax that the right love, such as it being double taxation. I won’t repeat why he’s wrong here – I’ve already done so.
Pollu Toynbee wrote an excellent response to Byers for the Guardian. I recommend it. I once had little time for Polly Toynbee, which was when we worked together. I have to say these days she’s really on form.
But the most interesting thing is the response of Chris Wales to Toynbee’s article, published as a letter in the Guardian. Wales (who I know) is, in his own words ‘Former member, Treasury council of economic advisers; adviser to Gordon Brown on tax policy 1997-2003‘. For the record, he’s also a former Andersen’s partner, is rather proud of his doctorate, which is actually in mediaeval history, and was when last I heard, seeking employment. But it’s his closeness to Brown that is important. He says:
The reality is that it is a low-yielding tax ….. makes no political or economic sense.
He adds:
The tax system works best when it goes with the grain of the economy. Inheritance tax doesn’t. There is no doubt that it will be abolished.
And continues:
There is a strong case for a broad review and public debate about the taxation of capital and inheritance tax should be considered as part of that process.
Let’s be clear. This is from the man who already reduced capital gains tax to 10% in most cases, and put tax on pension funds to compensate – his two big achievements, both of which shifted the burden of tax onto the less well off. And this is from a man who has told me he is convinced the UK must have a 15% corporation tax rate. And who now wants no inheritance tax.
Do you see my drift? Brown’s favoured tax adviser for more than 6 years was intent on ensuring the tax burden on the well off was reduced and that on ordinary people was increased. Which, by the way, is exactly what Byers’ favoured reform of Inheritance tax would also do since he would levy environmental taxes on all as an alternative to Inheritance Tax on the very few who have the means to pay (always, since it’s almost always charged on the dead, and they have no further use for cash).
Does Brown’s choice of adviser tell us a lot about the man? I admit I rumbled Wales the first time I met him (and he, I think likewise, me). Nothing has ever convinced me of the coherence of his thinking, let alone his proclaimed Labour credentials. His latest comments do not increase my confidence.
Professional bodies are unusual, at least in English law. They require a Privy Council charter to entitle them to operate. The ICAEW’s charter was granted in 1880. It’s latest summary of that charter says:
The ICAEW operates under a Royal Charter, working in the public interest. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy.
Why do I make this point? Well, only because Jason Holden and I have been having a debate in the comments on this blog about the duty of an accountant. Jason says :
"it is the government (of the day) that has a duty to society as a whole, and the professional advisor who has a duty to his/her client"
and I say accountants have
" an ethical duty to society first and their client second (and I think this is essential as it is the basis of the licence a society grants to a profession which enables it to extract its super-normal profits in return for the privileges it is given)".
Jason still disagrees with me, and that’s his right. But, look at how the ICAEW put this: they say the charter is for ‘working in the public interest’ and I cannot reconcile tearing the tax code to pieces with the public interest. Nor can I reconcile tax avoidance in general with that purpose. And it’s also clear from the interpretation of the Charter that the ICAEW itself uses that the public interest comes first.
There’s a lot of debate in the CSR world on companies ‘licence to operate’. I think it time we did the same for the professions, and that they took action to preserve that right. In my opinion, that licence is at risk and radical reform is needed to ensure its continuation. That will only happen if society sees it as worthwhile. And questions will continue to arise as to whether that is the case whilst accountants and other professional people continue to abuse the societies which grant them the licence to make super-normal profits.
The Joseph Rowntree Foundation have brought out a report on flat tax. The right wing of British politics are rubbing their hands with glee. And I’m not surprised. Despite some input from the Institute of Fiscal Studies this is a pretty poor piece of work.
Just three references are cited other than the IFS data on which the conclusions are based, and one of those is from a postgraduate student who claimed he was an Oxford academic whilst doing a period of study there, in the meantime producing an undergraduate quality (i.e. naive and simplistic) paper for the Adam Smith Institute. Anyone who buys that as authoritative is, I am afraid to say, ill informed on this subject.
But worse than that, this paper is also naive. Why? because the paper recognises that no one could introduce a flat tax at 37% in the UK, but does none the less seriously discuss its impact and suggests it would be good for the poor.
Well, on the criteria it uses so it might be. But, I stress the point about the criteria used. These can only really be found by looking at the associated Institute for Fiscal Studies report, which has received almost no attention. This tested four options, which I paraphrase as follows, all of which are meant to be revenue neutral:
1. Flat-rate income tax of 24%. The tax-free personal allowance is kept at its current level of £5,035 per year.
2. Flat-rate income tax and NICs including increasing the rate that applies above the current upper earnings limit (UEL) from 1% to the full rate on all income. The extra revenue generated by abolishing the UEL allows the flat income tax rate to fall to 22%, coincidentally the same as the current basic rate. In this option, income tax and NICs in combination produce a flat marginal rate of 33%.
3. Flat-rate income tax with universal tax credits. This option takes seriously the idea that tax credits are part of the income tax system, and flattens their combined rate structure. Instead of the current system, we flatten tax credits into a single tax/withdrawal rate. Thus each family is allocated a tax credit that is equal to their maximum eligibility under the current system. The personal allowance is raised slightly from the current level of £5,035 to £5,220, the point at which tax credits currently start to be withdrawn, to avoid creating losers among the working poor, and we estimate the flat tax rate at 37%.
4. Flat-rate income tax and NICs with universal tax credits. This combines options 2 and 3: the tax credit means test is integrated into the income tax rate, and the NICs rate schedule is also flattened, allowing the flat tax rate to fall to 35%.Thus there is a flat combined marginal rate of income tax, tax credits and NICs of 46% for contracted-in employees, whereas under option 3 the rate is 48% below the UEL and 38% above it.
The claimed benefits for the poor only happen in options 3 and 4. Before that they find exactly as I did on my survey of flat taxes for the ACCA. Under options 1 and 2 everyone bar the top 10% of income earners lose from a flat tax. The rich benefit enormously. And let’s be clear, no one is taking flat taxes of 37%, let alone 46% seriously. Especially on income of just over £5,000 per annum, as proposed here.
So this study proves that flat taxes always benefit the rich and that the tax system cannot be used in this way to benefit the poor. But the Joseph Rowntree Foundation have allowed their name to be used to promote flat taxes, when their survey shows they will do harm if they were to be introduced at any rate that is politically feasible.
As I said, I’m afraid I think that naive on their part. I hope they work hard to rectify the damage they have done.
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