2010 August » Tax Research UK

Torrents of abuse

Aug 242010

I note the right wing blogosphere is seeking yet again to question my integrity – this time because I have run limited companies – which it is suggested ‚Äòcould not be justified but for tax reasons’ (or words to that effect). It’s some indication of the lack of commercial experience of these people that they don’t a) ask and b) realise that there might be other reasons for running companies and c) realise I may not have avoided tax as a result.

For the record – of course I’ve owned and run companies. In the last decade these have been formed without exception for one reason – to differentiate my activities as a chartered accountant (undertaken in my sole name) from other activities undertaken. The reason has never been tax driven – it’s been to prevent confusion at the request of my professional indemnity insurers.

And yes – my wife has owned shares in these businesses – 50% in one, where we had hope the business would sell at least as much of her work as mine (in the event it didn’t sell much of either!), 10% in another where sure as heck she put at least that much effort in, and 1% in Tax Research LLP which I suspect massively under-rewards her countless hours of contribution.

Were dividends paid? Yes, in two cases, the last some years ago. In one company (which in the end mainly sold software I’d written) because the sums involved were so small the result was the same as if PAYE had applied, so not tax was avoided. In the other a salary was paid – and the dividend reflected the commercial substance of the deal as I perceived it then, and now i.e. this was speculative reward on an activity undertaken separate from that from which I earned my main income at the time – and on which main income I was paying NIC at the maximum required rate by law. In other words – the dividend put me in the same position as if the income had been received by my accountancy practice, as I’d have preferred (bar 1% NIC – I accept – and some things can’t be helped). I did not in other words seek to avoid the NIC that would have due if the income had been received by me in my accountancy practice, which would have been my preference.

When that situation changed – and it did because work on tax issues began to outpace and replace my work as an accountant in practice – then I also changed the structure of the businesses to reflect that fact and Tax Research LLP became my main trading entity – and has been since. It, along with my continuing income as a chartered accountant (and there is some) is taxed as income arises. This ensured that in this new scenario all tax and NIC due was paid when using a company and paying dividends may not have achieved that result because I considered that important.

Is that indicative of tax abusive behaviour? Well if you are an anarcho-capitalist apparently it does. For the rest of the world it reflects the fact that the substance of these issues accorded with the necessary underlying commercial situation largely imposed upon me if confusion on PII was not to arise. Tax was not a motive. In other words the behaviour was tax compliant in my opinion.

So what does this say? A number of things, I think. The first is that these people seem to have lost the argument so they’re seeking to play the man. Of course I’m not alone in being subject to such abuse. I note someone the other day bracketed me with Will Hutton and Polly Toynbee as people they like to abuse – and I can live with being in their company.

Second, it shows something more profound. I make no claim to being a paragon of virtue, or to having not changed my mind on occasion (if I’d been wiser, for example, the Tax Gap Limited would always have been an LLP – but I didn’t get that right at the time I incorporated it) or to having not learned from experience. Well, that puts me amongst the rest of humanity then doesn’t it? But apparently not for these people. If I am flawed like the rest of us – and if my thinking has changed over time (as it obviously has) and my behaviour with it then apparently I’m a hypocrite in their book – which is absurd.

So what’s the real issue?

First of all – as I’ve often said the issue is one of intimidation – they seek to propagate the message that if anyone stands up to their vicious form of capitalism they will seek to crush them. So much for a belief in liberty! It takes courage to stand up to such behaviour. They know that. They want to stop others entering the fray by behaving as they do. In that way they hope to crush our current democratic way of life in the UK, Europe and beyond, not least by eliminating debate.

Second, this is philosophical – or maybe ideological as I’m not sure to credit them with a philosophy is entirely appropriate. Their utterly incomprehensible believe in human rationality does not allow them to accept that the real human condition is far removed from their single minded belief in a singular, selfish purpose for life.

Thirdly – and building on that second point – their belief that all of life is rational does not of course allow them to accept that a person can change, develop, learn or progress. When economic equilibrium is their goal – a stable, steady state of nirvana, only capable of fulfilment when all are utterly selfish – then progress is complete anathema to them. Yet, we all do progress – and I’m quite willing to acknowledge the fact that I have. Indeed if you want real evidence of that they should read Accountancy for October 1985 and realise that in some ways I am the architect of the one person, dividend paying company phenomena for I wrote just about the first article exploring how to do it. I have come a long way since I was 27 – thankfully. And I’m not apologising to anyone for having changed my mind for the better on a great many issues on the way.

Fourthly – and most importantly – they are recognising that they’re losing by having to reduce the argument to this level. I guess I’ll take this as a sign of success.

But that, I think is enough on these issues – and I suspect there will be no more from me on them, because a) there is nothing to find, as I’ve said before and b) there are real issues to tackle – which they’d rather I did not address.

They’re mistaken if they think that won’t happen.

More on whistle blowing

HMRC, Tax gap, Tax management 13 Responses »

Aug 242010

I wrote a blog a few days ago on whistle blowing and tax, based on an email received from an informed commentator.

Response to the blog was informed, welcome and (odd exceptions apart) took the idea seriously.

The latest two responses are sufficiently interesting to require highlighting, focussing on the experience of tax whistle blower schemes in the USA. I suspect that both come from informed revenue authority insiders – but have no way of being sure. First, the so called Mr T Grasser from the USA:

Greetings from across the Pond. I was perusing whistleblower websites and stumbled across this one. May I compliment the author and commentators on the high quality of the articles and commentary though there seems to be some misperceptions as to how the US tax WB system operates. You are really on to something but, respectfully, many commentators are getting lost in the weeds. The first step is to have a program that rewards whistleblowers handsomely. The information will flow in and capture all sorts of avoidance and a fair amount of evasion, based on the US experience. For example, UK residents that claim non-residency (a la Mr. Guy Hand) would be a prime target. The reasons why the WB reports, snitches, rats, acts pro patria, don’t matter a whit: its about the quality of the facts. Any promoter, investment bank, bank client liason officer, accounting firm, etc., that presents a scheme or plan would be at risk because he has immediately made each member of his audience a potential WB. Every tax manager, accountant, lawyer, advisor is also a potential WB. Think how fast that would clean up the huge problem that undoubtedly exists in the UK. These schemes rely heavily on secrecy and how can there be any of that when the potential reward for turning in the client is so attractive?

I work in the area as a consultant and, which has now become a cottage industry in the US due to the extremely high mandatory awards (15-30% of the recovery). Through April 2009, the value of claims submitted to the US Tax Whistleblower Office (WBO) was about $65B. It has jumped to over $100B according to as yet unpublished US Government report. The actual figure that will be collected by the IRS will probably exceed this as WB tend to be conservative in their estimates so as not to misrepresent the value of claims to the IRS and thereby risk retaliation for wasting the US government’s time. So, WBs will be rewarded to the tune of minimum approx $10B to max $20B. Since there were approximately 1500 WBs that would average to between $7M to $14M per WB. Obviously, this is simple match and some claims are worth more and some are worth less, but the point I was trying to illustrate is the scope of the reward claims. I wager that there are similar claims that are lying in wait in the UK even if the volume of claims is not as high as in the US.

To make the situation worthwhile, legislation would need to set a dollar minimum limit. In the US this is $2M. This weeds out the small claims where the recovery is not worth the time involved. In fact, in my experience, to get the WBO office interested in the US, the value must be at least $20M of taxes avoided.

Transparency of the claims process is key to its success. The IRS was hostile to WBs. It makes them look bad for not catching the crooks before the WB walked in the door. However, that attitude has changed as the benefits of the glory of catching tax cheats has really turned their corporate heads. After all, it makes them not the WB (who remains anonymous) look good. They are not searching around looking for the issue-the specific WB information makes less not more work IRS agents, something remarked to me recently on a case. However, the process needs to be overseen by the courts to make sure WB don’t end up on the wrong side of Government wrath.

Rumour has it that the US WBO has been in secret discussions with HMRC for a number of months discussing the possibilty a UK WBO, based on some White Paper published by the Blair government.

Finally, remember if you have knowledge of US wrongdoing using for example, UK shell corporations or partnerships or trusts a reward may be waiting for you in the US! Of course the US would likely tax you on any reward, but 65 percent of a lot is also a lot. And then you could profess to live in Guernsey and begin the cycle all over again!!

In response the equally unlikely named Virtus non Stemma said:

Mr T Grasser, your contribution to this debate is very welcome, you are obviously able to give us – here in the UK – a rare insight into some of the workings of the US system. You did not say whether you are actually from the IRS or whether you are from one of the many legal firms that interface with the IRS – by representing the WB. Either way I believe you are an important commentator and hopefully you can tell us more about the US experience.

The figures that you give are really quite astounding. Claims of over $100 billion for the single year ended April 2009 would suggest a noticeable contribution to the US deficit, not just the actual annual tax gap. Is it further possible that you might actually mean the aggregate claim value rather than the uncollected tax itself? If the latter, then the situation is even more interesting as that would suggest uncollected tax in the region of $300 to $600 billions.

There is always going be a difference between tax due and tax actually collected, also the US appeals process is lengthier than it is here. There are a number of factors that would work to modify the eventual statistic. Not only that but the statistics themselves require very careful analysis as the year in which claims are made is not the same as the year in which the proceeds arrive.

Nevertheless the seriousness of this contribution to the US tax gap seems to be undeniable – and as one poster here has commented, it really seems to be a “no-brainer” for us. The UK economy is smaller and as you say the likely volume of claims would be correspondingly smaller. But like you I would guess that there are some huge amounts ready to spill out of the woodwork. Furthermore, because our HMRC are able to look back over 20 years in the case of deliberate concealment, the benefit in the first few years of implementaion could be quite interesting – to put it mildly.

So why aren’t we doing this. What is it that is different about the US.

Well, firstly you don’t seem to have such a powerful tabloid press. Taking your average figure of WB payments of between $7 to $14 millions per WB, it is easy to see a moral outcry along the lines of “Government pays 10 million pounds to Whistleblower!!!” – conveniently putting aside the fact that the government might have collected between 30 and 60 million pounds sterling (that it would otherwise have never seen) from that one WB alone. Let us imagine that the UK government were happy with say a mandatory minimum 2% inducement rather than the 15% minimum built in to the US system. We’d still be looking at this kind of headline even though the government were then collecting fifty times more than they were paying out to the WB.

Can you tell us how the US taxpayer perceives the US tax whistleblower program? Is it generally recognised that – like other serious crime where secrecy prevails – if you want to get the upper hand then you have to pay for information that would otherwise be unavailable. (When I mention serious crime, I am referring to large scale deliberate evasion aka tax fraud) Is it possible that the American public are less tolerant of “tax havens” than we are here? Now that the results are starting to come online, has public perception of the program changed? Does the government make any statements as to the overall benefit of the program, or are they likely to do so when the unpublished report you mention becomes available. The last report appeared in September 2009, so you are presumably referring to the next annual report due shortly.

Your point about the IRS being initially hostile to the WBO is interesting. I don’t know whether this would be the case here with HMRC if a “UK tax whistleblower program” was introduced as there are some very real incentives at the current time to moderate the program of public expenditure cuts. You make a very powerful point that the initial hostility because “it makes (the IRS) look bad for not catching the crooks” was quickly moderated when the benefits started to roll in and the sheer efficiency of the exercise became apparent.

Can you possibly expand upon the point you make about the “WB ending up on the wrong side of government wrath”? This may be a reference to some early problems you’ve had that we could learn from.

Hopefully you can assist further with this debate.

For my three penn’orth worth, I’d add firstly that I think a whistle blowing programme is worthwhile, second that it is ethical, and thirdly that it musty be funded by penalties – I’m happy for half of all penalties to go to whistleblowers – but not the tax itself.

Thoughts?

What did tax do for you today? #3 – emptying the bins

Joy of Tax 11 Responses »

Aug 242010

Waste disposal is one of the big issues in UK local politics. Is it one collection a week, or once a fortnight we need? There’s no doubt where public opinion lies.

My bins have just been emptied – which is why I thought of this blog.

Waste disposal – and recycling – can be managed by contractors but only paid for by tax. As we saw in 1978/79 a world without refuse collection is grim.

The Joy of Tax is that communal service can be provided for the benefit of all at much lower cost than would be possible with any other delivery mechanism.

And I think that makes tax something that’s absolutely critical to our well being.

A realist on the MPC

Economics Comments Off

Aug 242010

The First Post Daily reports:

One of Britain’s most respected economists warned yesterday that it would be foolish to rule out the possibility of a double-dip recesssion. Dr Martin Weale, the newest member of the Bank of England’s Monetary Policy Committee (MPC), also fears that the Bank’s forecast for growth of about 2.8 per cent in 2011 and 3.2 per cent in 2012 is too optimistic.

Asked if there was a danger of a second economic downturn, Weale said that it was a "real risk". He added: "People would be foolish to say that it can’t happen or that it is definitely not going to happen."

Weale said the risks include a renewed hike in unemployment as well as declining house prices and another banking crisis. "That could be a sovereign debt crisis or it could be a new liquidity crisis in the private sector."

At least we have a realist on the MPC.

A debt crisis is likely – but it won’t be the UK that causes it, that’s for sure.

Offshore has no place in UK politics because it undermines trust

Politics, Secrecy jurisdictions 5 Responses »

Aug 242010

The Guardian reports this morning:

The founder of a large hedge fund, who was once criticised as a "hard and calculating man" by a judge, was one of the Tories’ biggest donors in the general election.

Jon Wood, who established the SRM Global hedge fund after a successful career as an investment banker at UBS, gave £500,000 to the Tories on 4 May – two days before the election. This made him the second most generous Tory donor during the election – JCB Research gave £803,000 – according to figures released today by the Electoral Commission.

The Conservatives, who faced embarrassment last week when the former tax exile David Rowland resigned as the party’s next treasurer, were bracing themselves for a fresh round of damaging headlines when Wood was named today for the first time as a donor.

And continued:

Wood’s hedge fund was initially established in the tax haven of Monaco, but Wood’s spokesman said last night the fund was registered to the FSA a year ago, and given formal approval in the UK earlier this year. The spokesman said Wood has been personally domiciled in the UK for tax purposes for well over a year, allowing Wood to be registered a voter in Britain and free to make political donations.

He was criticised by a judge when he launched an unsuccessful £100m lawsuit, known as the Gadget Shop case, against the entrepreneurs Sir Tom Hunter and Chris Gorman. Ruling against Wood, the judge described him as "unreliable" and "evasive" as a witness, and a "very hard and calculating man".

The last one is hardly surprising: I’d have associated that characteristic with most hedge fund managers.

And before anyone gets too excited I will add that the Guardian also reports:

Labour secured seven of the top 10 donations, four of which were from the unions. Unite, Unison and the GMB and Usdaw provided £4.7m between them. Lakshmi Mittal, the steel magnate, and Nigel Doughty, the founder of the private equity firm Doughty Hanson, each donated £1m to Labour.

Now I happen to think that unions act as agents for their members in this so that their donations are non-issues. But I do have problems with Mittal, and have publicly recorded it. Bias is not an issue here.

The use of secrecy jurisdictions is an issue and the Tories seem dedicated to falling over this banana skin. It is not by chance, and it not the sole consequence of hard work by the Tax Justice Network, myself, Christian Aid and others that secrecy jurisdictions have a poor reputation in the public eye. The reality is that secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

People may not put it that way themselves – it took me some time to come up with that definition. But they do know that secrecy jurisdictions – or tax havens as they might call them – facilitate what they think to be cheating. Some of that cheating is legal. No doubt all the Tory donors undertook entirely legal activity. I am not suggesting anything otherwise. But it is, in popular perception, cheating nonetheless even if entirely legal. Artifice may be legal, but artifice it still is. Artifice is what secrecy jurisdictions sell – because by definition offshore does not take place where it is recorded.

People don’t like offshore.

People don’t want offshore associated with public office.

People think trust is undermined when offshore is associated with public office.

People think this for good reason. Trust is undermined by the opacity of offshore. Democracy is undermined as a result. And democracy is also undermined by tax not being paid in the right place at the right time, even if it’s legal not to do so.

So the dependence of the Tories on funding associated with offshore – and Labour’s too come to that – is harmful.

Which is why the existing rules on funding are not good enough, the amount of money parties can spend must be restricted and state funding of parties must be allowed – with small top up donations on top being encouraged – which would include union payments if made as agent for their members.

Out on the fringes

Blogging, Politics 19 Responses »

Aug 232010

The political far right love blogs. That’s a truth universally acknowledged, to misquote Jane Austen.

And what is staggering is how irrelevant what they write is. Take an example. Earlier today I wrote about the things that tax pays for – and referred to roads. So this comment came back from a regular far right contributor:

Toll roads and Turnpikes (any place called a Turnpike used to be one end of a toll road) used to exist in the UK, people would pay for the directness and security (because they would be patrolled (remember that this is before Robert Peel formed the modern Police)) that they offered over ‚Äòcommon’ roads. http://en.wikipedia.org/wiki/Private_road_association So Private roads to towns, villages and hamlets do exist

There are also Toll roads in the US that are almost always faster, more direct and better maintained because it is in the interest of the owner that the interest of the customer is fulfilled.

The other day another of the breed, to make his point that democracy is not linked to the existence of society referred to anarchists in Catalonia as if the fact that a group of them existed for a while proved his point.

The arguments are typical of the offering of these people. It’s as if they really are dedicated to the extremes. A simple diagram helps:

Yes, that’s the normal distribution – a widely recognised statistical phenomenon. As Wikipedia says of this diagram:

Dark blue is less than one standard deviation from the mean. For the normal distribution, this accounts for about 68% of the set (dark blue), while two standard deviations from the mean (medium and dark blue) account for about 95%, and three standard deviations (light, medium, and dark blue) account for about 99.7%.

What this says is that if you observe a phenomena (almost any phenomena) most results cluster around something that might be called normality. But there will always be so data which is way out of the normal range.

Now I don’t ignore stuff way outside the normal – Black Swan theory teaches the importance of that – but equally, and quite candidly, the vast majority of the time we can identify the outliers in any population (like toll roads and Catalonian anarchists) and say they are absolutely irrelevant to the formulation of policy that is likely to have any consequence for real people right now living their lives in the normal range of expectation. Or to put it another way – we can safely ignore this stuff.

Not apparently though if you are from the political far right. This stuff is their stock in trade. The more the stuff they can find to fuel their arguments is from the far fringes of relevance the happier they seem to be.

But as such we can and should treat them as we do the data we knowingly dismiss as irrelevant.

Which is just what I do.

And thankfully the UK political mainstream does.

It’s a shame more blogs don’t do the same.

Reforming the EU Transparency Directive using country-by-country reporting

Country-by-country 1 Response »

Aug 232010

Tax Research LLP and the Tax Justice Network have made a joint submission to the European Commission this morning on their consultation on the future of the Transparency Directive. The full submission is here. The summary says:

This submission addresses issues of opacity within the financial reporting of multinational corporations quoted on stock exchanges which we believe should be addressed by revision to the European Union’s Transparency Directive.

We focus in particular on these issues:

1. The current opacity regarding ownership of such multinational corporations;

2. The opacity regarding the structure of such multinational corporations;

3. The almost complete lack of information currently available on the internal trading of multinational corporations, and;

4. The current absence of information of the geographical impact of the activities of multinational corporations.

We believe that in combination these weaknesses in the current reporting requirements of multinational corporations leave them unaccountable for their actions to any identifiable party and that this has in turn allowed them to operate in what we call the ‚Äòsecrecy space’.

The secrecy space that multinational corporations occupy exists for these reasons:

a. So that the ownership of interests in multinational corporations need not be disclosed. As a matter of fact the ownership of many multinational corporations is hard, and maybe impossible, to identify. We note the reasons for this and recommend the changes the European Union should demand to rectify this situation.

b. Existing regulation has, on the basis of research we have undertaken, made it almost impossible to identify in the majority of cases, or with any consistency:

   i. What companies comprise the group that the multinational corporation recognises to be under its management and control;

   ii. To what extent those companies are controlled by the multinational corporation, and how that control is exercised;

   iii. Where those companies that comprise that group are incorporated;

   iv. What trades or other activities those companies are engaged in;

   v. What level of activity those companies undertake.

This affords the management of multinational corporations the opportunity to undertake transactions that no one outside their organisation, and many within it, might never know about. There are substantial risks in this which we explain and explore.

c. The availability of considerable secrecy that verges on total opacity within tax havens, or as we would prefer to term them ‚Äòsecrecy jurisdictions’ (which term is used hereafter in this paper), considerably assist multinational corporations in hiding their activities. This is because:

   i. Their ownership of a multinational corporation can be disguised in secrecy jurisdictions;

   ii. Their activities in secrecy jurisdictions need never be disclosed;

   iii. The nature of their internal trading is, therefore completely hidden from view.

We explain the consequences of this risk.

To address these issues we make two fundamental recommendations. In the first part of this submission we argue that the beneficial ownership of interests in multinational corporations must be recorded. Beneficial ownership of such interests does, of course, differ in a great many cases from legal ownership but must always be identified for anti-money laundering purposes and as such this is not an onerous obligation.

In part two of the submission we propose the use of country-by-country reporting within the financial statements of multinational corporations. The nature of country-by-country reporting and the advantages that we believe will from its adoption are explained.

It is our suggestion that in the interests of financial transparency, which we define in this paper, these two recommendations should be incorporated into the European Union Transparency Directive when it is amended.

What did tax do for you today? #2 – providing roads

Joy of Tax 14 Responses »

Aug 232010

What did tax do for me today?

It provided the road I drove along to take my sons out this morning.

Nothing else will ever pay for roads in a rural area.

That’s the Joy of Tax.

It facilitates communication.

The alternative is:

No tax, no roads. No future.

Please pull the other one – because auditors do not compete

Accounting, ConDems 4 Responses »

Aug 232010

I listened to local government minister Bob Neill on the Today programme this morning claiming that abolishing the Audit Commission would save cost because of the competition this would introduce into the local authority audit market.

The man is talking complete nonsense. The “competition” will come from the Big 4.

As Prof Prem Sikka has noted:

Companies and major accountancy firms are increasingly willing to increase their profits through indulgence in price fixing, tax avoidance/evasion, bribery, corruption, money laundering and practices that show scant regard for social norms and even laws.

Are these the people to engage in such “competition”?

And when a major part of the role of these auditors is to address both efficiency and corruption do we really want firms who have all been either fined or investigated for abusive practices such as assisting tax evasion to be engaged in this market?

I don’t.

I can’t see why anyone else would.

And i don’t believe they’ll save us a penny.