2006 October » Tax Research UK

PWC, Switzerland and its ‘enticing tax benefits’

Ethics, PWC, Tax avoidance, Tax Havens 8 Responses »

Oct 312006

Every now and again you have to be reminded of the anti-social, anti-democratic forces we’re up against. So, I thought I’d give some publicity to a seminar being run today and tomorrow at the Institute of Directors in London by PWC, Credit Suisse and Development Economic West Switzerland.

What’s on offer? This:

international companies pay less than 10% tax and can enjoy a 10 year tax holiday at 0%. This seminar will explain how to utilise a Swiss company for European and global business, presenting international case studies.

And who is a star turn? Why, PWC who offer two seminars. The first is:

Enticing Tax Benefits & Corporate Taxation – everything you need to know

The second looks even better for the high net worth individual:

Private Client – Lump sum taxation. Inheritance Tax. Ordinary taxation. Pensions. Real Estate Investment

Credit Suisse join in with:

Switzerland as a banking centre – myths and truths. Banking secrecy and what it means today?

This is about using sovereign territory to undermine the legitimate taxation income stream of other countries. The perpetrators are regular members of what we call ‘the pinstripe mafia’. The event is held at the IoD, always an opponent of social reform of any sort, and it’s been promoted by, amongst others AccountingWEB, the largest UK accounting website. I happen to have been a contributing editor of the latter and am still paid by them for contributions I make, so I must declare an interest. I have no control whatsoever over their adversing policy. But this event casts all associated with it in poor light. You can’t be a responsible citizen and undermine the state and your hands aren’t clear of corruption if you are associated with the mechanisms by which it may be undertaken, even if you don’t believe you sell them yourselves.

Banking secrecy, tax holidays, low tax rates, aggressive tax planning, capital flight and the secrecy of the Swiss Cantons involved are all mechanisms used to undermine the well being of most people in the world. We still have a long way to go in tackling this enormous abuse perpetrated by the great, good and respectable within our societies against the ordinary people of the world.

Why cash accounting is bad for business

Accounting, Tax management 19 Responses »

Oct 312006

Emily Coltman, who suggested AccountingWEB’s campaign for cash accounting has posted a comment on my feature on this subject. Because I think it worth drawing to wider attention I am posting my response here.

Emily seems to concede my point that the management of working capital (debtors, creditors and stock in the UK, receivables, payables and inventory in the US) is vital in small business, and that accountants have a duty to talk about them. But she then says:

Not including them in the accounts is a different matter entirely.

I have to disagree. Tax is a powerful influence on behaviour, especially in the business community. So the choice of accounting method is very important. If people are allowed to account on a cash basis for tax they will do these things:

delay collection of debtors
advance payments to creditors
overstock
buy too many fixed assets if 100% capital allowances are implicit.

What is more, some accountants will tell them to do this. The outcome will be disastrous for UK small business. There can be no doubt some will go bust as a result. These strategies are designed to drain these businesses of money. Nothing can guarantee failure as quickly as that.

But more than that, if accountants can (and would) educate them to do this even though it would be suicidal, small business people can clearly demonstrate their ability to grasp issues relating to these matters. It’s just that most accountants can’t be bothered to tell them about them. I have always tried to advise my clients of the basis on which their accounts have been prepared, because I think this important. For example, I attach the notes to the accounts (which are menu driven and so not always used in all cases) which I have appended to unincorporated business accounts in the firms I have been involved with over the last decade. Their purpose is simple. The notes are about client education, and people do read them and learn from them. But I’ve never seen anyone else do anything like this. Why not, I wonder? Wouldn’t the problem be solved if we did this?

The case against cash accounting

Accounting 6 Responses »

Oct 302006

AccountingWEB is starting a call for cash accounting for small businesses in UK tax returns. It’s calling it Cash Accounting for Small Enterprises, or the CASE for Cash. I’m surprised that Taxation magazine are joining in.

I have to admit I think that this campaign is misguided for these reasons.

1. This is not a tax issue, but an accounting one.

The rules for accounting are not set by our taxation authorities. They are set by the DTI, who by default have delegated them to the accounting profession by the effective adoption of UK GAAP into company legislation. By inference this means that the same GAAP (as expressed for the vast majority of UK businesses through the Financial Reporting Standard for Smaller Entities) applies to all unincorporated UK businesses, although that standard provides almost no guidance on how that should be done.

To therefore raise this issue as one relating to taxation is wrong. It has to be raised as an accounting issue. In that context it’s also important to note that many of the frustrations in small business accounting and tax of late have arisen out of accounting issues e.g. the UITF 40 debacle was entirely of the profession’s creation. The Revenue simply had to sit back and watch the mess we made.

2. Accountants should not give up on ‘true and fair’ accruals accounting

I have to admit that I presume that this issue has been promoted by tax accountants with no interest in business. Anyone who is interested in business knows that to ignore debtors and creditors, as cash accounting systems might suggest appropriate is to prescribe a disaster for small businesses. Those who do not keep the closest eye on debt, stock control and creditors fail. It’s as simple as that. Running out of cash is the biggest cause of small business failure. And cash accounting would, if promoted, encourage that. It would be negligent of a profession that claims to have the best interests of the small business community it serves, and which provide it with its lifeblood, to promote such a standard.

Of course it is true that for some small businesses (as the promoters of cash accounting note) the cash basis is almost identical to the accruals basis of accounting. But what sort of argument is that for cash based accounting to be applied generally? For these people accruals accounting is not a burden anyway – they are effectively on a cash basis. But to ask others to prepare wholly misleading accounts to come into line with those for whom accruals based accounting is not, as a matter of fact, needed seems a nonsensical argument.

And for accountants to believe that the sole purpose of their work is to agree tax affairs seems to consign the profession to a role as mere technicians at best, and maybe irrelevance at worst. I would hope that we think accounts of substantially more use than that. If we don’t, it says little for us, and nor does it convey the important message that even for small enterprises where debt, liabilities and stock need managing accounts are one of the vital tools that enhance the prospect of business success. We should be promoting this understanding if we want a healthy enterprise economy, not shooting ourselves and our clients in the foot.

3. Cash accounts are not simple.

I have to point this out. Cash accounting requires a cash receipts and payments record. But it also requires that these receipts be analysed between sales and other income, and that the expenses by analysed by type to ensure their appropriateness for tax deductibility. On the sale side this therefore requires either a takings record or a sales listing (lets call it a sales day book). Any practitioner worth their salt will want to either do a sales ledger control account or cash account to ensure the completeness of income declaration by their client. To not do so is, I think, negligent. So, an accruals basis will have to be used in many cases. And if it isn’t, the Revenue might well have questions to ask later. As for payments, a record of all purchase invoices and receipts will be needed as evidence of the appropriateness of the claim being made for the expense. The only difference between an accruals and cash basis will be that an accruals basis might bring forward a claim for some of the expenses. That should help compensate for the cost of having to keep the record, and having to analyse it in detail, as will still be required.

In other words, debtors and creditors remain vital in accounting on a cash basis if cash based accounts are to be correctly stated.

That leaves accruals and prepayments (less than 10 minutes work in my experience for most small businesses, and highly predictable as to their nature) and stock and WIP. The latter is a pain – and UITF40 has made it absurd. It is clearly inappropriate for smaller enterprises and unincorporated ones. But that’s not a justification for cash accounting. It’s a justification for a simple method of accounting for stock and WIP. Candidly, until UITF40 came along I think we had that. Let’s restore it. It’s simply ‘the lower of cost and net realisable value’ and be done with it. And income recognition must be on the basis of invoices. And again, let’s be done with it.

Then there is really no saving from cash accounts that can justify the change.

4. Cash accounting may well lead to more accounting errors.

Dealing with the Revenue on bank deposits is hard enough now. Under cash accounting you can imagine it will become just about impossible. All deposits will be taxable; that’s the premise of the system.

And you can also imagine that people will think the difference between the year opening and closing balance if their income. Talk about creating an expectation gap. Those misled will face serious investigations. The profession will be asked why it takes so long to deal with something they claim is simple, when it isn’t. You can imagine the downward pressure on fees that will create.

5. The Revenue won’t wear it.

Let’s be candid. The Revenue is not going to buy this, and as a campaigner I never recommend backing a lost cause. The reasons for its unacceptability are obvious:

- It will be easy to avoid tax by simply stacking the deposits to be paid in the first day of the next accounting year. No revenue authority is going to allow a system which makes avoidance that easy.

- Cash accounting has to imply 100% capital allowances, or it’s not cash accounting. But this removes a tool of economic management. I can’t see that being foregone. No flat tax state does, for example, give automatic 100% capital allowances even though they are inherent in the theory of that system.

- The transition rules from a cash system to an accruals system as a business grows are too horrible to contemplate. Think about the claims people will start making for transitional relief. These can be avoided by having just one income recognition system.

- It’s just about impossible to believe corporate accounting could be on a cash basis and that any meaningful concept of limited liability and the protection of creditors could be maintained and so the chance of their being cash accounting for corporates is highly unlikely. I can’t see the Revenue wanting entirely different accounting concepts for small entities dependent upon their choice of trading media.

This list could be extended, very easily.

6. People will still need accrual accounts.

I have a strong suspicion that cash based accounts won’t be accepted for lending purposes because they are too easy to manipulate. In that case two entirely separate sets of accounts will be needed, one for tax and one for a true and fair view of income to be presented. Which client is going to thank us for the additional work and cost involved in preparing two sets of accounts?

Summary

There are exceptionally good reasons for believing the accounting standards setters in the UK are getting the accounting requirements of all smaller entities (not just micro ones) wrong, and that the profession (not anyone else) are imposing undue burdens on business as a result. But cash accounting is the wrong solution for an accounting profession that still believes it has a role as all-round advisers to small business because such a system of accounting would significantly harm that sector.

Can we instead look at a really simple accounting standard that is appropriate for small and micro entities, building perhaps on the one the UN has developed? I will return to this theme.

Enough of this self-congratulation in the Square Mile

Ethics, Tax management Comments Off

Oct 302006

It’s 20 years since ‘Big Bang’ in the City of London, which helped give rise to the overgrowth of our financial services sector. The Observer noted this in a thoughtful leader yesterday. As they noted, amongst the hubris and celebrations the City is saying:

[It] is the jewel in Britain’s economic crown, [] creating jobs and fortunes that trickle down to everyone. But, warn the City burghers, government must not be complacent. More deregulation and lower taxes are needed for the engine of wealth to keep running.

The Observer notes:

British surgeons, scientists, actors, software engineers, inventors, TV producers, architects and writers have all being doing as well as, if not better than, the City. Exports of highly skilled services in post-industrial sectors of the economy – the so-called knowledge services – have trebled to £76bn over the last 10 years. Only China boasts export growth on such a scale.

The City is not exceptional in other words. And yet:

both Labour and the Conservatives compete obsessively to be seen as the City’s preferred stewards of economic policy.

As the Observer rightly notes, this is wrong. It said:

All businesses like deregulation and lower taxes, but such things are decided in the interests of the country as a whole, not as a favour to one sector, especially one that claims so much but delivers so little for the majority of people living in Britain.

I think that sums it up pretty well.

Tax compliance, avoidance and evasion. Getting the language right.

Tax avoidance 3 Responses »

Oct 302006

After my return from a few days away I had my attention drawn to an article in The Times by Anatole Kaletsky, who wrote on 19 October that “If Mr Brown wants to stop businesses leaving Britain for tax reasons.. he should state explicitly that tax avoidance is a respectable aspect of business planning.”

I banged off a letter to The Times, as is my habit, but it looks like I was too late to get it published, so I’ll share my thinking here instead.

I am afraid that the Kaletsky’s perception of reality is flawed. The reason is simple. Accountants and lawyers (and maybe Rupert Murdoch), to whom he is clearly pandering, might argue that tax avoidance is a normal part of business planning but that is simply untrue. Tax compliance is the part of business planning that is normal and respectable, for when one pursues tax compliance one seeks to ensure that a business is paying no more tax than it need to, but that it does so in the right place and at the right time. Tax avoidance on the other hand seeks to ensure that less tax is paid than might be required by law, and that it is very often paid on profits declared in the wrong country, and is often paid some time later than a proper interpretation of the law might suggest appropriate.

Of course, those self same accountants and lawyers will deny this, trotting out the defence that “avoidance is legal and only evasion is illegal”. But to be sure one is not evading one has to work within the letter of the law. That is tax compliance. When one seeks to work between the letters of the law as tax avoidance does then one always faces the risk of having committed tax evasion, as those whose tax avoidance schemes fail find out, to their cost.

Put simply therefore, tax avoidance is not a right, as Kaletsky claims “to take advantage of whatever freedom [taxpayers] enjoy in current tax laws” because those pursuing such activities seek to avoid such laws, as the name implies. They do not therefore seek a freedom “in” current tax laws but instead want to undertake an activity “outside” such laws. That is at best unethical conduct unbecoming any professional person, at worst taking risk as to the legality of the action being pursued. In either case the practice is anti-social and any government has the duty to crack down on it, as this one has.

Sometimes people say nice things about you

Accounting Comments Off

Oct 262006

I’ve just realised I am in Accountancy Age twice this week. The second mention comes within the context of my considerable concern about the IASB’s new proposed IFRS for small and medium sized enterprises, which I believe wholly unsuited for purpose for reasons I’ve already discussed here.

I’m amused to note that Accountancy Age say:

Vice-chairman, Tom Jones, told Accountancy Age criticism was levelled by ‘pontificators’.

Sorry Tom. That’s just not true. You should have been at the UN where most people were simply amazed at the arrogance of the IASB presentation and their obvious lack of willing to listen to the criticisms raised by almost all present, from both developed and developing countries.

I’m also pleased to note that Accountancy Age spoke to the EU. I made sure I did so at the UN. They’re really not with the IASB on this one, and as I was told, neither they or any member country are under any obligation to adopt this IFRS. I think that might be a real shot across the IASB’s bows.

But what did I really like about this article? Well, it was the contrast between being ‘a pontificator’ and the description Accountancy Age made of me as:

Richard Murphy, the campaigner

I can live with that description.

US require tax risk to be reported

Accounting, Tax avoidance Comments Off

Oct 262006

I wrote the main opinion article in Accountancy Age this week. The subject was simple – that the US now require companies reporting under US accounting principles to assess uncertainties that exist in the tax claims that they have made to tax authorities worldwide, and to disclose them in their accounts.

It’s unsurprising I am in support of this proposal. When over 115 submission letters on this proposal had been received by the Federal Accounting Standards Board all but three opposed the requirement to disclose this risk – and all came from big business of big accountants and lawyers. I wrote the first draft of the resulting Tax Justice Network submission that was in favour of the standard.

Why do we want this? Because it’s good for investors, it’s good for tax authorities and so it’s good for society as a whole. It’s bad for reckless managements, which also means it’s good for society of course. And it’s bad for accountants and lawyers. Sorry, but we’re not weeping about any constraint on them.

The seven deadly sins – and tax and morality

Ethics 2 Responses »

Oct 262006

Apparently Ghandi defined the seven deadly sins as:

* Wealth without Work
* Pleasure without Conscience
* Science without Humanity
* Knowledge without Character
* Politics without Principle
* Commerce without Morality
* Worship without Sacrifice

Many accountants would argue with the one I have highlighted. Take this from a partner is E & Y South Africa:

It is my view that morality has no place in the application of tax law since morality is largely subjective.

Which is terribly convenient. Because if there is no morality in the application of tax law it means there’s no right or wrong. And so there need be no guilt for breaking it. And it can be claimed no penalties are due when tax law is broken, because what is the crime? You can then claim that the application of tax law (which is all tax practitioners do) is victimless when abuse takes place (as it does). You can see why accountants, lawyers and bankers like this view.

And absolutely anyone else, bar the amoral, can see why they’re wrong.

Bono, Tax Research and the Observer

Ethics, Tax avoidance Comments Off

Oct 252006

It may have been obvious I have been away for the last few days. As a result I now need to blog Sunday’s news. Nick Cohen did a great article in the Observer on Sunday about Bono and his “efficient tax planning”. I admit it was all based on a discussion Nick and I had last Friday morning and entries on this blog, but I’m happy about that. Who said blogs had no influence?