2010 October » Tax Research UK

Johnson: better than Osborne by a mile, but could do better still

ConDems, Economics, Labour Comments Off

Oct 182010

Alan Johnson has launched Labour’s counter attack to George Osborne before the latter reached the despatch box.

He has said the coalition government is taking a "reckless gamble" with economic growth and jobs.

That’s the good news. I still think, however, that he’s overstated the importance of tackling the deficit.

Of course the deficit is important but jobs are more important and so is restoring prosperity to this country. You can’t do that by making the deficit the focus of your economic programme. You can only do that by making job creation and a new industrial strategy to focus of your economic programme. Do that, and the deficit cures itself. Ignore that and the deficit , inevitably, continues because private saving will increase, investment will remain at very low levels and the balance on the international trade current account will remain in deficit.If all those things happen then inevitably the government cannot, ever, clear its deficit as a matter of fact

That said, he did some good things. He said he would look again at the balance of tax and spending to achieve the reduction. The formula under his predecessor, Alistair Darling, suggested that 66% of the deficit reduction plan should be achieved by spending cuts, and 33% by tax rises. Johnson said that he believed a 60:40 ratio was "about the right balance". And he said "targeted tax changes" were needed because economic growth had to come first.

Most especially the reinforced my argument, published this morning by the TUC, that banks should be bear a greater part of the burden of reducing the deficit.

And the mood music in this statement is absolutely right:

We are constantly told that there is no alternative to the current economic strategy pursued by the government. But there is another way, a balanced approach that gets the deficit down, but recognises that growth and jobs are not a sideshow to an economic strategy, they are what it is for. And that approach requires thinking again about the role that capital investment plays and prioritising it. Without growth, attempts to cut the deficit will be self-defeating. A rising dole queue means a bigger dole bill. And less tax coming in. The Tory plan, for all its Liberal Democrat cheerleaders, is a huge gamble with growth and jobs.

So my concern is whether he’s got the cart before the horse, or vice versa, but what I do know is that he has definitely got them coupled together, and that’s a lot better than the ConDems have done.

Why are Keynesians “vulgar”?

ConDems, Economics 9 Responses »

Oct 182010

I did a quite lengthy blog on Friday explaining the absurd logic of those Tories in particular who are claiming thatthere will be no net cuts in government expenditure over the next few years simply because in real terms the value of government spending appears to be fixed at a near constant £630 billion in current prices a year over that period.

I note that Dominic Lawson in the Sunday Times (behind a paywall) is one of many commentators who appears to have picked up on this absurd claim: I also note that in the process he calls all Keynesian “vulgar”. Of course, it may be vulgar in the eyes of the Murdoch press to have concernfor the well-being of your fellow citizen, or even concern for the well-being of business in the UK, but outside the rather perverted viewpoint that Wapping has to offer empathy remains a virtue. In that case it seems worth reiterating,in a different way, the point I sought to make on Friday.

The reality is that any economy has a potential capacity it can fulfil at a point in time:

In a lot of the work that I do I like to represent potential as a circle. In this caseI designate potential as a circle called X.

Of course, no economy works at full potential. This might come as a shock to people like George Osborne and Sir Philip Green, but there is always inefficiency within an economic system. SoThe part of potential but is achieved is always smaller than that which is theoretically possible. In other words achievement might be the circle marked Y here, which is smaller than the potential circle marked X:

Keynesians seek full employment. As a result their goal is to maximise the size of circle Y and to minimise the difference between X and Y.

The ConDem government does not share that objective. It is seeking to maximise the well-being of bankers. Candidly, it is very hard to explain its behaviour in any other way.The consequence is that it is, as I explained in my previous blog, not seeking to maximise the size of circle Y, but is instead deliberately seeking to create a smaller economy, represented here by circle Z:

The quadrant made up of A and B representgovernment spending at about 38% of the economy, which it was under Labour before the banks causedthe economic collapseand which it will be if the ConDem forecasts are right (which, I admit, I think to be extremely unlikely). But note the important point: A is smaller than A + B.In other words, the proportion may be the same but that is absolutely irrelevant: the part of total economic activity that the proportion represents is smaller, so there are real cuts going on. This is the reality that people like Dominic Lawson are either ignorant of or wilfully misrepresenting.

But note something else that is as important: if a stimulus was provided to the economy then it’s not just we’d have the excess government spending – B – to enjoy, we’d also have the excess in the private sector – C to enjoy as well. As a result it’s not just we’d have the services we need – we’d also have, potentially, more of what we enjoy because more of us would be at work in the state and private sectors meeting the needs of society – which always happens best when the two work in harmony.

That’s what us “vulgar” Keynesians are calling for – a simple achievement of potential for the benefit of all of us using the resources that are available to do the job that are otherwise sitting idle in the economy. What is so vulgar about that? And why is it that they and the ConDems want us to run at so much less than full capacity? Is it that thy enjoy unemployment?

TUC says it’s time to change the UK’s residence and domicile rules

Domicile, Tax avoidance, Tax justice, TUC 64 Responses »

Oct 182010

As if one new TUC tax report is not enough for a day, over the weekend the TUC issued a second report by me, this one calling for abolition of the domicile rule in the UK and for radical reform of the UK’s tax residence rules. As the report notes:

The UK needs new tax residency laws.

The existing laws of tax residence are now so complex and reliant on conflicting legal decisions that few, if anyone, can claim to fully understand them – including HM Revenue & Customs. As a result tax avoidance is rife – especially amongst an elite who can afford to commute in and out of the UK from places like Monaco but pay little or no tax in the UK.

In addition, the rules on residency include the domicile rule, which has made the UK a tax haven for foreign oligarchs, allowed untold tax abuse and increased division in our society.

Uncertainty and abuse aren’t the basis for tax justice. Tax justice would deliver two things. The first is certainty for honest working people coming to and leaving the UK to earn their living. The second is a tax system that ensures all who enjoy what the UK has to offer contribute to its well-being according to their means.

It is for these reasons that the TUC is proposing radical revision to the UK’s tax residence rules which would, amongst many benefits, sweep away the domicile rule for good.

Our proposals are simple, effective and fair. They will raise money and stop abuse. First we propose that everyone who has a UK passport should be tax resident in the UK, automatically, wherever they live in the world. That means they would always have liability to pay tax in the UK on their worldwide income, gains and wealth, just as all US citizens do in the USA.

However, because we also recognise that tax needs to be simple and pragmatic we also suggest an important exception, which is that those UK passport holders living in a ‚Äòwhite list’ of approved countries would pay no more tax in the UK as a result. The tax they paid in that other country in which they lived and worked would, in these cases, be deemed to settle their UK tax bill. As a result it is those who flee the UK to live in tax havens that this measure would target. We think more than £1 billion of extra tax would be raised as a result, and untold abuse and time wasted by HM Revenue & Customs brought to an end.

We also propose new rules for those coming to the UK from abroad. We welcome the contribution these people bring to the UK. We also recognise many only come for short periods, so for up to four years we suggest anyone taking up residency in the UK should only pay tax on their UK income and that other income they bring to the UK from overseas. But once this period of grace is over we argue that all who come to the UK to live should be subject to exactly the same tax rules as those who have always lived here. So, after four years of temporary residence in the UK we argue that anyone choosing to stay for longer should pay full UK tax on their worldwide income, gains and wealth.

Our rules ensure that is the case, and also ensure that those who stay in the UK for relatively short periods but have extensive connections with it none the less – such as keeping a home and their family here – should also be tax resident in this country.

These changes, matched with the ending of the domicile rule, would , we suggest raise up to £3 billion of tax a year and, as importantly, deliver the fairness and certainty the UK needs if it is to play a full part in a world economy where people are mobile.

The rules proposed are as straightforward as can be suggested in a complex situation. Of course there are winners, and losers. The winners are those going abroad to work in places with acceptable tax systems. Those going to tax havens, on the other hand, will find they are still paying UK tax – and rightly so. They have the right to return to the UK at any moment and claim all the services that we as a state have to offer. That is precisely why they must contribute here if they do not anywhere else.

This is a proposal will deliver significant tax simplicity, fairness between those born and not born in the UK (which is very important), enhanced tax revenue at the time that we needed, and certainty where the law has not provided it to date. If the tax profession objects one has to wonder what their objectives are.

The TUC calls for country-by-country reporting as the FTSE backs off from geographic reporting

Accounting, Country-by-country, TUC Comments Off

Oct 182010

My report for the TUC on corporate taxation in the UK, published today, highlights an issue not picked up by the press, but for me of some considerable significance. That is the decline of corporate reporting for activities in the UK – less than 20% of the largest companies in the UK now reporting in this way compared to 50% a decade ago.

As I note in that report:

In 2000, half the sample of companies surveyed published information in their published accounts on their results arising in the UK. Usually this separate geographical information related to turnover, staff numbers, profit, tax and also to gross and net assets employed, although there was some variation from company to company. Then in 2005 companies ceased to publish accounts in accordance with UK Generally Accepted Accounting Principles and instead published them in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board with the backing of the European Union. Under IFRS rules, data on what are called ‚Äòbusiness segments’ could be reported on the basis of the major business activities of the reporting company rather than on the basis of geographical location. The result is that many of the surveyed companies ceased providing any data on their UK based activities at all, so that by the end of the survey period just eleven were doing so. Wolseley plc was the only one to take up such reporting over the period surveyed. Some very notable companies, such as Barclays, Lloyds TSB (now Lloyds Banking Group), BP, BT, Glaxo Smith Kline, Centrica and Legal and General were amongst those giving up the practice. Just none companies reported in this way in 2009.

The fact that major corporations are not now reporting their activities (whether it is their sales, number of staff employed, profits or tax paid) in the UK is a cause for considerable concern. It seems that the major companies quoted in the UK no longer think they have any geographical association with this country, or indeed, any other. They do instead report as if they float above the reality of the geographical space in which the rest of us exist as if they belong to some other global space of which only they are a part and which leaves them without attachment to anywhere.

This however, is a denial of corporate responsibility, which we believe to be based on the duty of the company to the state which first grants its limited liability charter and secondly (if different) in which its activities are hosted. This responsibility to that place or those places (for there can be more than one, and in a complex multinational corporation we are aware there may be up to 150, or more)is, we think, at least in part fulfilled by paying the tax that each state asks of the company with regard to its activities in that place. This is part of the culture of tax compliance which we believe is indicative of true corporate responsibility. Tax compliance is seeking to pay 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 transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

A company may, of course, suggest it is tax compliant, but the right to limited liability also carries with it a responsibility to report how that privilege (for that is what it is) is used, and in that case we view this decline in the reporting of the national activities of multinational corporations as a serious retrograde step in their accountability. The difficulty it gives in estimating the UK tax gap is simply indicative of the problems this causes, and is in turn representative of the lack of accountability that has been created for multinational corporations during the period when the creation of regulation covering such issues has largely been under the control of the accounting profession.

It is for this reason that the TUC called in ‚ÄòThe Missing Billions’ for greater accountability for multinational corporations including a requirement that they account for where they are located and where they pay their tax. This demand is incorporated in the call now made by many in civil society for what is popularly called ‚Äòcountry-by-country reporting’ by multinational corporations.

Country by country reporting would require disclosure of the following information by each multinational corporation in its annual financial statements:
1. The name of each country in which it operates;
2. The names of all its companies trading in each country in which it operates;
3. What its financial performance is in every country in which it operates, without exception, including:
   a. It sales, both third party and with other group companies;
   b. Purchases, split between third parties and intra-group transactions;
   c. Labour costs and employee numbers;
   d. Financing costs split between those paid to third parties and to other group members;
   e. Its pre-tax profit;
4. The tax charge included in its accounts for the country in question ;
5. Details of the cost and net book value of its physical fixed assets located in each country;
6. Details of its gross and net assets in total for each country in which operates.

If this information had been available for each of the companies in the FTSE surveyed as part of this review calculation of the UK tax gap would have been an easy undertaking. It is for this reason, amongst others, that the
accountability that country-by-country reporting cerates is important. Unless companies can be held to account for the tax they pay, an essential component of their accountability is lost, and reform to ensure this is possible, is vital if we are to guarantee that all companies make their fair contribution to the UK economy over the years to come.

Luxembourg and tax evasion? Surely the two could never mix?

Tax evasion 6 Responses »

Oct 182010

The First Post Daily notes:

Fashion designers Dolce and Gabbana have been accused of a massive tax evasion scam. Italian prosecutor Laura Pedio said the pair had committed “a tax dodge that defrauded the state” after conducting a three-year investigation into the dealings of their company GaDo.

Domenico Dolce and Stefano Gabbana, along with five other people, are accused of channelling profits through Luxembourg, paying just three per cent tax on sales royalties instead of much higher Italian taxes. As a result, the Italian treasury has allegedly been defrauded of an estimated €420m.

A tax haven being used for tax evasion? Surely not?

Remember it’s the secrecy that does it (but see the comments below for elaboration)

Why should we have a regressive corporate tax system in the UK?

Corporation Tax, Tax avoidance, Tax gap, Tax justice, TUC 2 Responses »

Oct 182010

My report on corporate tax, published by the TUC this morning, highlights the continuing fall in the average rate of corporation tax paid by the UK’s largest companies. The trend is clear:

By 2010 the trend suggests the average rate of corporation tax was 21% (and given that for technical reasons the recorded figure for the year was almost certainly inflated by small profits, which tend to result in overstatement of effective corporation tax rates) may well have been lower.

As I say in the report:

Over a decade the trend has been for effective corporation tax rates of major corporations to fall by almost half a per cent a year with the trend rate in 2009 being just 21% – a figure 7% below the headline rate for that year.

It is, of course, always risky to extrapolate trends, and in the case of this data there is some evidence based on the above graph to suggest that current rates may be flattening – although this issue is returned to below. But even if this is true the trend shown reveals an alarming probability. This arises because of trends in UK corporation tax rates over recent years and those to come, which have been and are predicted to be as follows:

The differential between the large and small company tax rates is closing rapidly. But whereas it is the commonplace experience small companies in the UK (and their accountants) that those smaller companies pay tax at rates in proportion to profit that are often higher than the nominal rate noted on the graph, above, as chart 1 shows large companies are seeing their effective rates of corporation tax fall steadily so that in 2009 on a trend basis they were some 7% less than the headline rate, a situation that replicated the 2006 finding.

Even if large companies’ effective tax rates, using current tax rules were to stabilise at about 21% as Chart 1 suggests possible, which is a figure 7% less than the headline rate, the effective tax rate of those companies will still fall over the next four years as the headline rate of corporation tax for large companies (alone) is cut in the UK, from 28% to 24%14. On this basis the prospect exists that by 2014 large companies will be paying corporation tax at no more than 17% on average whilst small companies will be paying corporation tax at 20%, or more. This means that for the first time in UK corporation tax history small companies will be asked to pay tax on a regular
basis at effective tax rates that are not just higher, but are significantly higher than those paid by large companies. What is more, those large companies will also be paying tax at effective rates lower than the marginal rate applied to the income of a majority of UK households. We will, in other words have a regressive UK corporation tax system.

This is important: small business in the UK plays a vital job in creating new employment, often at relatively low cost, and often as the precursor to economic recovery. And of course, most small businesses are run by self employed people paying income tax at the basic rate. We are not necessarily arguing that small business should have its tax rate cut: there are good reasons relating to tax avoidance why the rate of small company corporation tax in the UK should be pitched at least at the same level as the basic rate of income tax (or maybe higher) but we are pointing out that a fundamental inequality is being created in the UK economy which makes no sense at all. The tax system will be favouring large companies over small companies, and large companies over the self employed. It is hard to see how a more unequal and unfair playing field on which small business and its employees have to compete could have been created.

The £19 billion tax subsidy for banks

Banking, ConDems, Corporation Tax, Tax avoidance 2 Responses »

Oct 182010

The report I have written for the TUC on the corporate tax gap, published today, highlights three key issues.

The first, and the headline maker for all the papers, is the tax subsidy that the UKs High Street banks – Barclays, HSBC, Lloyds and RBS, are to receive from the taxpayer over the next few years.

As I note in the report:

The most notable feature of the bank’s reporting over the period surveyed from 2000 to 2009 is, however, the movement in their deferred tax reserves. In aggregate for all the banks in question (HBOS again being the exception in 2000 and 2009) these balances were as follows:

From dominating the overall deferred tax balances of the whole sample in 2000 these banks saw remarkably little increase in their deferred tax liabilities in subsequent years (in itself a matter for further investigation, and not considered here) before their situation suddenly changed in 2008 to being in a position of having substantial deferred tax assets. In total, £14.9 billion of the £19.1 billion increase in the total aggregate decline in deferred tax liability balances of the top 50 companies in the FTSE between 2007 and 2008 was caused by these banks alone. Their deferred tax assets increased again in 2009, the total movement between 2007 and 2009 by then having reached the sum of £18.9 billion. The overall decline in deferred tax balances of the whole sample over this period was £18.3 billion.

The causes for deferred taxation balances are numerous, and not all deferred tax assets relate to tax losses (some can, for example, relate to pension payment provisions for which tax relief has yet to be given).
However, the exceptional move in these banks’ deferred tax balances between 2007 and 2009 cannot have been caused, overall, by anything but the expected future benefit they believed might arise from the accounting losses they had suffered, and which had yet to be recognised for tax purposes although they had been included in their accounts.

If some £19 billion in tax might not be paid as a result at some time in the future, there is an extraordinary double subsidy going on for these banks. Not only were their losses underwritten by the state in 2008 (and in most cases they still are receiving some form of state support, if only by way of asset guarantees), but they will now receive a second round of subsidy when over years to come they will offset those state subsidised losses against the profits they might now make only because they have been saved for the benefit of their shareholders by the UK government.

Of course, not all the tax offset will be in the UK. These are multinational banks and not all their losses will arise in the UK. But there is some evidence that banks have been transferring losses into the UK precisely because of the generous way in which UK tax relief works.

In this case the question must, and should arise, about the alternative tax contribution banks can and should make if their corporation tax payments will be substantially lower than might reasonably be expected in years to come. This is especially true as it seems likely that no other corporate sector enjoys anything like the tax benefit that banks now do as a result of losses that this bailed out sector seems to benefit from.

The options available are that the banks in question might continue to pay bank bonus taxes, or pay a financial transactions tax, or have their right to carry tax losses forward limited so that they expire after a limited period if not utilised by that date, or a combination of all these factors, and maybe others.

What is clear is that the proposed bank levy now being considered will make little difference to the overall contribution these banks will make to the cost of remedying the current crisis, not least if their tax payments in the UK are reduced to anything like the extent their deferred tax assets might suggest likely.

As a result, action is now needed to ensure that banks contribute through their tax payments to government to the extent most in the UK would expect so that as cuts begin to impact on the UK economy as a whole they are seen to be bearing their fair share of the burden for the consequences of their past profligacy and recklessness. Without such action this will not happen, and that is unacceptable.

Today in the press – RT?â News

Banks: double subsidised when the rest of us must feel the pain

Banking, Tax avoidance, TUC 5 Responses »

Oct 182010

As the TUC and many papers report this morning:

Despite being rescued by taxpayers during the crash, UK banks will avoid paying £19 billion of tax on future profits by offsetting their losses during the financial crisis against their tax bills. This is equivalent to more than £1,100 for every family in the UK, a TUC report says today (Monday).

The TUC report – The Corporate Tax Gap – says that as well as benefitting from an £850 billion bailout from taxpayers and the Bank of England during the recession, banks are able to offset their £19 billion of tax losses between 2007 and 2009 against paying tax on future profits.

The report, authored by tax specialist Richard Murphy, has calculated this double subsidy from the accounts of five UK high street banks – HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS (later Lloyds Banking Group) – and HM Revenue & Customs (HMRC) data.

The Corporate Tax Gap warns that banks could soon be paying a lower rate of tax than small businesses. The corporate tax gap – the difference between the rate of tax set by the Government and the actual rate companies pay – has grown by an average of 0.5 per cent a year over the last decade. Between 2000 and 2009, the effective corporation tax rate fell from 28 per cent to 21 per cent, much deeper than the headline rate cut from 30 per cent to 28 per cent, says the report.

With the Government planning to reduce corporation tax to 24 per cent, the UK’s largest companies, including banks, will soon be paying an effective tax rate of 17 per cent – three per cent lower than small businesses, who are less able to exploit loopholes and therefore pay a headline rate of 20 per cent. As a result, the UK will soon have a regressive corporation tax regime, says the report.

The TUC has calculated that the banks’ £19 billion double subsidy could pay for the following cuts between now and 2015:

switching the indexation of benefits from RPI to CPI (£5.84 billion);

housing benefit (£1.77 billion);

tax credits (£3.22 billion);

child benefit for higher rate taxpayers (£3 billion);

estimated cuts to the science research budget (£3 billion); and,

estimated cuts in HMRC resources to tackle tax avoidance (£2.1 billion).

TUC General Secretary Brendan Barber said: ‘Banks caused the global financial crash and triggered the recession that produced the deficit. Yet not only did they take almost a trillion pounds from taxpayers to bail them out, they are now using the losses caused by their irresponsibility to cut their tax bills for years to come.

‘The Government’s bank levy is small change compared to this huge loss as the business-as-usual bonus levels show.

‘It’s double bubble for the banks, but huge cuts, job losses and VAT increases for ordinary families.

‘Small firms have every right to be angry too. Not only are they finding it hard to get credit from the banks, soon they will be paying more tax on their profits than the banks and other big companies.’

The full report is available here.

Disclosure: I was, of course, paid by the TUC to write this report.

Tories and secrecy jurisdictions – what a surprising mix!

86, Conservatives, Secrecy jurisdictions, Tax Havens 17 Responses »

Oct 172010

The Mail on Sunday reports:

Channel 4 was last night embroiled in an explosive row with the Government over an investigation into the financial affairs of Cabinet Ministers.

The documentary makes allegations about millionaire Ministers including Chancellor George Osborne, Transport Secretary Philip Hammond and International Development Secretary Andrew Mitchell.

Last night, all three men strongly denied any implication that they had acted improperly by deploying tax-avoiding measures, with Mr Hammond warning that his ‚Äòlawyers will be watching’ the programme tomorrow.

And the Foreign Office entered the row after learning that the report would claim that it had granted special financial treatment to the Cayman Islands – an infamous tax haven – thus indirectly benefiting companies run by Tory Party donors.

The programme is on Channel 4 at 8pm on Monday 18 October.

The producer tells me I appear six times. John Christensen also appears several times. But in case Mr Hammond’s lawyer’s are reading – the Mail story was the first occasion that I knew that he was in the programme.

So I look forward to learning more.