Darling – cheap jibes won’t do

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Alistair Darling has given his first major interview to an accountancy paper, and has used it to tell Accountancy Age that:

claims that the UK was a tax shelter were seriously flawed’. ….[T]he IMF does not categorise the UK as a tax haven. This was suggested by some organisations on the back of some seriously flawed experimental methodology for identifying tax havens. The government is committed to ensuring that everyone pays their fair share of tax.

Since I was the person who first drew the attention of the press to the report from the IMF that labelled the UK a tax haven I feel some right to respond to this (and thank Accountancy Age for having already let me do so in their pages).

1) It’s true that the report referred to says it does not represent official IMF opinion. But it was written by an IMF staff member in IMF time using IMF resources and was published on IMF paper on the IMF website. So OK, that does not make it official, but you can bet your bottom dollar that someone approved this work, someone monitored it as it went along, plenty of IMF people input into and reviewed it and it was not put out without some thought as to its consequence. With all respect to Alistair Darling the IMF is not ‘some organisation’. Our current prime minister chaired it for some years. The UK is a leading member. And it’s not noted for being radical. If anything it is biased towards the status quo, and its research tends to be cautious.

2) The methodology used in the IMF report sought to overcome subjective tests for what might be a tax haven by using an objective measure. That measure was that the financial services sector in the country tested was larger than that needed to service its domestic economy. This was indicated by it having a financial services sector proportionately larger than one standard deviation away from the norm for all economies tested. There were faults in the test, of course. For example, some of the obvious small island targets could not be tested due to lack of data. This meant they were not listed in the results which therefore under-reported the likely number of havens. Some data had in some cases to be imputed using what were, however, statistically acceptable methods. This is obviously a little problematic, although this did not affect the UK analysis. But as an objective measure most scholars in this area (and I know a lot of them) think this paper was solid, reliable and broke new ground. No one I yet know suggests that the result was flawed. If it is then the Chancellor has duty to say why, and not just throw cheap jibes.

3) The test threw up all the usual suspects as tax havens, bar two. They were the UK and Latvia, who were added to the list. On reflection neither is surprising. Latvia has sought to attract financial services business. So has the UK. Indeed, that’s what we seem to survive on now (and heaven help us in the long run). It’s undoubtedly true that the UK has a financial services sector that is much bigger than we as a country need. And it’s obviously true that we export those services: our invisible earnings have shown this for years. It’s also true (and I’ll be blogging this over the coming days) that we create structures that allow this to happen. The test gives the right result.

So what is Alistair Darling denying? That selling financial services makes us a tax haven? Maybe that might be right. But even if it is it makes us an offshore financial services centre without doubt (and we’re even an island, although I’d stress, that’s not a necessary condition as Luxembourg proves). And such places are broadly synonymous with tax havens and are associated with low tax rates for some but not all people. This means that these laces are good at ensuring that those who are resident pay all their tax tax and those who are not, or are marginally so can be “ring fenced” from that tax bill by offering advantages not available elsewhere or tho those truly resident. In addition, they tend to offer light regulatory regimes with regard to the services needed to avoid tax obligations. This, as I’ll show, is exactly what the UK does.

It may be true that the government is “”committed to making sure everyone pays their fair share of tax” in the UK. But that’s not the point here. The point is that this has to apply to those using the UK whether they are based here or not. That’s the test of a tax haven and those of us who understand this are getting fed up with the UK being used as a centre for abuse. And the press now understands that this is what is happening. Old bluster and cheap jibes won’t work any more. It’s time the Treasury raised its game and its rhetoric and acknowledged its policy on this issue, or changed it.