I have the following post on the UK Uncut blog this morning. They used the title “If ever there was a campaign the Tories should support‚Ķ”:
“Those who oppose the UK Uncut tax protests argue — as the new head of the CBI did in the Observer today - that a company has a duty to be “tax efficient”. In saying this Carr argued:
"What are the rights, duties and responsibilities of any company? To ensure shareholders are correctly rewarded and to act in the right way for the organisation. Part of that is to be tax efficient. That's reasonable and appropriate."
He’s wrong. As the Tax Justice Network has argued:
Companies and rich people can locate wherever they are "tax efficient". Ordinary people lose out from the process. There is a term for this: its called the Bono Defence. Named after the Irish rock musician whose band shifted its tax base from now bankrupt Ireland to the Netherlands in the name of "tax efficiency", the Bono Defence provides stark warning that tax dodging doesn't promote better economics; it promotes failed states.
That’s a big claim, but one that is justified. Those like Bono and the CBI, and others from business and the right wing who argue tax efficiency is simply tax avoidance and tax avoidance is legal and so acceptable have entirely missed (or deliberately ignored) some enormous ethical issues when making their claims. For a description of what tax avoidance (and some of the other language used here about tax) means I refer you to my blog but the big issues can easily be explained.
First, just because something is legal does not mean it is ethical. Think apartheid in South Africa or even slavery in 18th century England and move on from there.
Second, remember that when you avoid something you go round it. That’s what tax avoiders do. They go round the law. How on earth can anyone, anywhere claim that getting round the law is ethical?
But perhaps most important is the fact that a limited liability company gives its shareholders in whose interest Roger Carr says it must be run the most phenomenal economic privilege: they cannot be sued for the debts the company incurs if all goes wrong even though they get all the benefit if things go right. That’s an astonishing privilege. It is not a right. I stress, it is a privilege — and one that is granted by parliament on behalf of the people of the UK.
The privilege carries with it at least two implicit responsibilities. The first is to account for how the privilege is used — which means putting full and proper accounts on public record so we can know exactly what our companies are up to. The second obligation is to pay for the privilege — and that means complying fully and willingly with the tax (and other) laws passed by the UK parliament that creates them using exactly the same authority that they use to grant the privilege of limited legal liability. Of course these two obligations are also related — the accounts must properly explain how much tax is paid.
In combination these observations puts paid completely and utterly to Roger Carr’s argument that the company has a duty to its shareholders to be “tax efficient”. That’s not true. It has a duty to society to be tax compliant in exchange for the benefit of limited liability granted to its shareholders.
That then requires that companies be tax compliant. Tax compliance means 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.
Tax compliance is a million miles form tax avoidance. Tax avoidance is about reducing a tax bill come what may without breaking the law, and not caring who else has to pick up the bill. Tax compliance is about trying to pay the right amount of tax, but no more. The last bit is important: no one has to voluntarily pay tax. But no one has to use a tax haven or a loophole either when the result is that the tax not paid by the company and its shareholders as a result will be shifted onto ordinary working people instead (and for the pedants who say this assumes tax is a zero sum game, my answer is it certainly looks like it is from all the evidence over recent years of tax burdens shifting from capital to labour).
So, in that case what is UK Uncut doing? In summary it seems to me it is doing three things. First it is trying to uphold parliament and the ethics of democracy — including voluntary compliance with the rule of law. Second it’s asking that people, and especially large companies, comply with the law — and not avoid it. And thirdly it’s saying that there’s a contract between the people of the UK and the people who own companies which is implicit in the granting of limited liability and that some who use companies are acting in breach of that contract. That is unacceptable and all UK Uncut are saying is that it’s time corporate UK honoured the obligations it has to fulfil in exchange for the privilege it has been granted.
Seen in this way it’s extraordinary that anyone can object to such a campaign. If ever there was a campaign that Tories should be turning out in force to support it’s this one, largely run by young people, that demands that people comply with the law and respect parliamentary democracy.
So the real question is, if they aren’t doing that, then why not? Could it be that they’re on the side of those who are in breach of their contract with society? “
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How can one stay within the law and yet go around it? Your argument is flawed, it is not the law that is being avoided. Tax avoidance’s definition is based on the fact that it’s about avoiding tax yet staying within the law. If it was avoiding tax without staying within the law it would be tax evasion and there would be no need to make the distinction between avoidance/evasion.
If the tax system can be exploited then the constructive thing to do would be to come up with ideas of how to simplify the system.
Insofar as this being a contract then it fails most pre-requisites. Society does not have capacity to contract, the form of the contract is not legal, both parties have not intended to create a legal relationship nor have they consented.
BTW, I don’t believe the high level of taxation in this country is ethical. Neither do I believe that being forced to pay tax for wars and bail-outs of criminally negligent banks is ethical either.
Richard,how about a plug for Captain Ska’s Liar Liar,if we could get it into the top ten !
http://itunes.apple.com/gb/album/liar-liar-single/id408050972
A very excellent and thoughtful piece. Compliance v Avoidance, a useful distinction. I make sure my clients comply but I don’t advocate they pursue avoidance schemes. And yes, limited liability is granted by public consent. If limited liability companies insist on usurping the will of the people, as expressed by tax legislation, then the public would be justified in withdrawing its consent for those companies.
@Rick
But in that case you’re the sort of person who denies obligations so of course you deny the existence of a social contract in this case
Your position can of course be easily summarised: it is anti-social
How do you presume to know what “tax efficiency” means? Has Carr explained what he means by it? If he has perhaps we can see it.
@Richard Murphy
I think we have differing opinions as to what is more anti-social.
Limited Liability is indeed a privilege, so why not apply a ‘limited liability levy’ on GROSS corporate revenues through the clearing system and get rid of VAT and Corporation Tax altogether.
For services companies you’d also need another levy on gross corporate revenues attributable to the privilege of exclusive rights of use of intellectual property such as trade marks; brands; patents; copyrights and so on.
With this approach we could also sweep away massive deadweight costs of accountancy; tax advisors; tax lawyers and so on and also a couple of public sector departments’.
I’m not holding my breath, because too many people have an interest in conflicts and complexity.
@Chris Cook
This is so naive
Accounting is not just for tax
Not all turnovers indicate capacity to pay
Sorry Chris – but this can’t be taken seriosuly
Richard
Thank you.
Hi Richard, what do you make of this article on the GAAR? http://www.guardian.co.uk/law/2010/dec/09/treasury-plans-tax-avoidance-rule
More fantasy from Murphy land. Your delusions get weirder evry week. Limited liability isn’t a privilege granted in return for the opportunity for the government to tax companies. If that were the case many of them would opt for unlimited liability to avoid taxes. Limited liability was created because shareholders and the companies they own are distinct legal entities and because in many cases shareholders cannot expect to control the companies of which they own a small part.
ANd of course as other commenters have said, tax “efficient” companies aren’t “getting round” the law. They are simply acting within the law and operating as efficiently as they can.
@Alex
I think your distaste for all things moderate is overcoming you and any sense you had
Unlimited liability results in more tax, not less. Please get facts right.
And limited liability was created to make them separate legal entities, when they weren’t. That’s the privilege
Sorry – but you have lost the plot – and your last para shows it
@Richard Murphy
How does unlimited liability result in more tax?
@Richard Murphy
“Unlimited liability results in more tax”. That is an interesting sugestion. Do you have any research or evidence to support it?
“Limited liability was created to make them seperate legal entities”. In fact no. Seperate legal entity and unlimited liability are different things entirely. The point about unlimited liability is risk. It is a device that allows business to manage risk – no more and no less. Society benefits on the back of the wealth that is generated. I guess the muddle arises because seperate legal entity is a device that makes limited liability legally viable, but remember it existed long before the companies acts came into being.
But if the priviledge is given to the shareholder, shouldn’t he be the one encountering greater scrutiny, not the taxpayer?
In any case, I don;t really like the idea of someone or some entity being given a specific right or as you say priviledge being subject to broad public scrutiny. Governmemt scrutiny, yes but not unfetterd public scrutiny.
What next: benefit claimants having to lodge all their financial and medical details and reasons for claiming benefits in the public domain. And then having to comply with all government obligations, fully and with absolutely no derogation from those requirements.
I think you are making good points about Tax Avoidance RH.
However I think your weak point is Tax Compliance which you think you are explaining in a small simple paragraph. I did not know there was such a pure concept. For example there are numerous accounting issues often involving estimates or judgements before one can get to a figure of taxable profit itself.And businesses work on differing time cycles so annual accounts are an arbitrary time period in any event.
@Stephen Griffiths
Sorry – I don’t see the link…..
@Justin
a) The company is easily identifiable – you make damned sure the shareholder is not
b) Being a company is voluntary. Being a benefit claimant is not
Stop being deliberately stupid
Tax compliance is a million miles form tax avoidance. Tax avoidance is about reducing a tax bill come what may without breaking the law, and not caring who else has to pick up the bill. Tax compliance is about trying to pay the right amount of tax, but no more.