2010 December » Tax Research UK

Committed to the wrong economic policy

Dec 222010

There are tales all over the press about Lib Dem ministers having little confidence in ConDem policies.

It looks right to me for Douglas Alexander to say for Labour:

Government ministers are only saying in private what we have been saying in public – their changes to child benefit are ill thought-out and unfair ‚Ä¶ It’s increasingly obvious just how little influence the Lib Dems have on this Tory-led government.

But there’s a little more to it than that. Sure there are concerns about student fees, and cuts in child and housing benefit. And yet that’s the detail. There’s no indication of concern about the direction of policy it seems, just its implementation.

And that’s what remains worrying about the ConDems – that they are committed to the wrong economic policy. What we need are measures to tackle unemployment. Then the government deficit would resolve itself. But there’s no hint we might get that.

The next banking crisis

Banking, Economics 6 Responses »

Dec 212010

I blogged this in July:

I have to say I normally pay remarkably little attention to the Sovereign Society in the USA. They are, if I put it nicely, good friends of tax havens. That’s why I read their newsletters. You have to know who’s writing about you – and these guys do seem to have it in for me and my friends, quite often. But we’re pretty thick skinned – and since almost without exception people think people of this ilk come from beyond the fringes, who cares?

Well, on this occasion they seem to have spotted something, so I’ll take note for once. Of course, someone may point out what is wrong with their logic – and it will be good if they did. But their beef (spread over thousands and thousands and thousands of words) is that they’ve spotted a massive short selling opportunity because they think 48 of the 50 US states are about to go bust.

The two exceptions are, I think, Montana and North Dakota. The rest, they claim, have no prospect of balancing their budgets by yesterday – when they were, apparently legally obliged to do so, because US states can’t run deficits, although they can borrow for capital spending. And they do borrow: the “municipal bonds” they issue are massively popular because they’re tax free in the US. Apparently there are some $2.81 trillion of those bonds in issue (and you thought UK debt was big?) and the Sovereign Society thinks they’re going to default, which has happened in the case of these bonds before now.

Well, I bet they don’t: the US can underwrite that debt and I’m quite sure it will. But what this shows are a number of things.

First is the madness of trying to enforce balanced budgets when the situation just does not allow it. People have to come first.

Second, if this is true, is that risk is created by the folly of policy based on poor economics, not by the underlying economic reality.

Third, that the far right just see this as another opportunity to benefit from other people’s suffering – because the whole tone of the Sovereign Society’s message is that no one should miss out on the chance to speculate on this crisis. Which is pretty sick – and precisely why short selling is a mechanism to be eliminated.

And finally – that quite where the next crisis comes from can’t be predicted, but as some banks like RBS in the UK have been saying, we’d better be prepared for it, because it will be hitting us soon.

I note the world is now catching up.

In the US this is the next big banking crisis.

I think it’s all over

Politics 11 Responses »

Dec 212010

It looks like Vince Cable has launched the nuclear option under himself at cost to us all.

He has apparently announced, undercover:

I have declared war on Mr Murdoch and I think we are going to win.

I have blocked it using the powers that I have got ‚Ä¶ His whole empire is now under attack ‚Ä¶ There are things like that that you can do in government.

That was plain daft, and a lack of judgement.

If this means Murdoch gets Sky he has also done a massive disservice to democracy in this country.

What was that about Stalin to Mr Bean?

The problem of telling the truth

Politics 6 Responses »

Dec 212010

So Vince Cable told the truth – working with the Tories is like being at war.

And he’s forced to apologise. Telling the truth is often unpopular. And maybe because I have little doubt it’s also hell for him working with Nick Clegg and Danny Alexander.

It may be time for Cable to go. His role is in opposition. And there’s much to oppose. If he did it properly he could bring the government down, and that would be a good thing.

Happy Christmas Vince whilst you ponder that one.

The Big 4 – time for the resumption of the exercise of judgement

Accountancy, Auditing 8 Responses »

Dec 212010

The FT has noted:

New York state prosecutors could file civil fraud charges against Ernst & Young for allegedly helping Lehman Brothers hide debt, according to a person familiar with the matter.

The office of Andrew Cuomo, the New York attorney general who will be sworn in as the state’s governor next month, could file a lawsuit as early as this week, this person said.

If a lawsuit is filed, it would be the first allegations involving Lehman since the bank filed for bankruptcy in 2008, and the first charges against an accounting firm in connection with the financial crisis.

No doubt the issue relate to repo deals undertaken in the UK to get round US accounting requirements and it is important to note E & Y said they had no comment but had required with accounting regulations. To some degree I’m going to accept that they might have done – having carefully noted the difference between complying with the spirit and letter of the regulation in question – which seems a vexed question in gernal on this site at present – and will move on to the more systemic issue of concern which also comes from an FT article, shared in the public interest:

Fresh details have emerged of secret talks between bank auditors and the government during the financial crisis, as regulators prepare changes to the auditor’s role to lessen the risk of similar chaos.

Letters disclosed to the House of Lords economic affairs committee by KPMG shed light on why auditors did not in general express doubts about the viability of UK banks and building societies during the crisis.

They show how the Big Four audit firms – Deloitte, Ernst & Young, KPMG and PwC – wrote to Alistair Darling, then chancellor, in November 2008 for advice as to whether they could describe UK banks as going concerns. Their letter was written two months after the collapse of Lehman Brothers and tried to gauge the extent to which the government would continue to prop up financial institutions.

The audit firms wrote that the post-Lehman turmoil had left them “having to second guess government actions” when assessing whether a bank could access sufficient funding for at least a year – the minimum for it to be viewed as a going concern.

They argued that a bank could fail if the auditor’s report on its annual financial statements contained an “emphasis of matter” paragraph drawing attention to uncertainty about its going concern status.

Controversially, the auditors added that the government could help ward off such disclosures by reassuring them that it would continue to recapitalise failing banks. The letter led to a meeting between the Big Four’s UK bosses and Lord Myners, then City minister, in mid-December 2008.

Following these talks, Lord Myners wrote to the four firms to reassure them that “the government remains committed to taking whatever action is necessary to maintain financial stability, protect depositors and protect the taxpayer”.

This is more serious. First, so significant was the matter that it seems to me that it would still have required specific reference in the accounts.

Second, it is apparent that limited liability was breached at this juncture.

As Dennis Howlett has said on this:

It’s a very long time since I undertook audit work in any depth but unless things have changed there’s a few things going on here that require explanation.

Have the Big Four attempted to abdicate their responsibilities to the shareholders of the banks by seeking to obtain an understanding of likely government action? The answer appears to be a qualified yes. In my day it was standard practice to take up third party confirmation where it appeared that third party support was needed in order to keep a business afloat. The qualification went something like: ‚ÄòOn the basis of our examination of the assets and liabilities, XYZ may not be a going concern. We have received assurances from [named third parties] who have provided financial undertakings to maintain the capital base of XYZ.’ There are plenty of variations on this broad theme but that’s the essence. We would have been be remiss in our responsibilities to clients if we had NOT sought assurance and crafted some sort of similar wording. In my day, banks and other third parties (like large suppliers) relied on the audit report in order to understand how companies might stay afloat. I’m sure the irony of this situation is not lost on those auditors in similar situations today.

The FT describes the exchanges between the Big 4 as ’secret talks.’ Why? The Big 4 are said to have been afraid that qualification might lead to collapse. If that’s true then surely they already knew or had grave concerns about their ability to sign off a clean report and the viability of the banks they were auditing. It doesn’t matter which way you slice and dice this argument you come up with the same answer: ass covering.

Did the Big 4 discuss the issue in terms of a veiled threat? In other words did they turn to government and say something like: ‚ÄòWe think the banks are in trouble to the extent we need assurance from YOU that government will bail them out. If not then [name your bank here] could go out of business.’ That’s not stated though commentators seem appalled that the Big 4 might operate this way. As they should. But then given the UK government’s proclivity for spending tax payers money to shore up pretty much any bank, it doesn’t take a genius to work out what government’s response was likely to be.

I buy all that.

And Dennis’ further comment:

What the hell is going on with our profession? How many more desperate measures will we see the Big 4 take before either litigation or firm government action is taken to sort out what is rapidly becoming an anachronism that feather beds a few to the detriment of the many.

I am sure the defence will be “we played by the rules”.

As with tax avoidance, no doubt.

But what is becoming increasingly clear is that a society where playing by the rules is the aim is not sustainable. Auditors and tax accountants are meant to exercise their professional judgement. And candidly I don’t think they are. And that is dragging down the whole basis of the corporate edifice with risk to the entire market system, at cost to us all.

Those with a neoliberal bent who argue otherwise threaten us all. The time for a revival of the exercise of sound judgement is now.

Want a job? There’s one going in Guernsey

Guernsey 18 Responses »

Dec 202010

The following should suit all UK Uncut and Tax Justice Network supporters who look ideally qualified:

And if anyone is applying it should help your application no end to say you saw it advertised here! Please give me a mention. You’re bound to get it then.

Tax avoidance, tax compliance – and tax cheats

Tax avoidance, Tax evasion, Tax justice, UK Uncut 27 Responses »

Dec 202010

Questions have been raised about how I define the difference between tax avoidance and tax compliance.

Following my blog on the ethics of tax avoidance it was, for example, said:

I am a little puzzled by something you have written and wonder if you explain a little further.

You say:

“‚Ä¶and the law does provide alternative choices in the way in which transactions can be constructed, with the deliberate intent that the tax payer take advantage of those choices and these an and do have tax consequences. So long as they are clearly complying with the law the tax payer can exercise those choices, legitimately. This is not seeking to tax avoid, it is seeking to comply with the law.”

My understanding was that what you have written above is a concise description of tax avoidance that would be understood as such by many, including, academics, HMRC and tax advisors.

In addition, if a choice is made between the alternatives envisaged by the law as being possible (and summarised by you in the extract above) then assuming disclosure by the corporation of what has been selected and the consequences of that selection (non disclosure would possibly be a case of tax evasion), “the right amount of tax” would be payable “and no more”. Therefore the corporation would be tax compliant (if I understand you definition of tax compliance correctly).

If corporations behaved in such a manner what label would you give to such behaviour? Is this for example “tax mitigation” or “tax planning”? And such behaviour is to be distinguished from something you call “tax avoidance”? Reading through previous blogs you associate tax avoidance with what appears to be the metaphor of “going round the law”. Is the substance of this metaphor the key to understanding what you mean by tax avoidance? If so, can you provide me with any guidance on what you mean by “going round the law”.

My suggestion is that if what I have suggested as tax compliant behaviour is understood to be tax avoidance by academics, HMRC and tax advisors then they are using the wrong language. Please don’t get me wrong: this is not a persona;l criticism. It is a statement of fact. If the Inuit need large numbers of words to describe snow then we need more than one word to describe the spectrum of all behaviour deigned to reduce a tax bill when the range extends for claiming a personal allowance to complex regulatory arbitrage through offshore structures.

I have explained these differences as follows:

Tax avoidance
Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking
international transactions.

The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.

Tax compliance

Tax compliance is different from tax avoidance and tax evasion because it is defined as 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. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).

Tax planning

Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.

So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.

As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.

And for the sake of the record:

Tax evasion

Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.

Let’s put it another way. If there is no tax to pay you can’t avoid it. Putting money in an ISA can’t be tax avoidance: the law says that this option is only available to UK taxpayers (right place) and there is no tax to pay as a result (right amount, right time).

The same with personal allowances. Anyone who says claiming them is tax avoidance is just plain wrong: parliament fully intended that people have such allowances and it is not in the business of promoting tax avoidance, which is the act of getting round the law parliament promotes.

But go to another extreme and a great deal of offshore activity is be definition tax avoidance. That’s because by definition nothing happens offshore – the substance of the transaction is never in the place in which it is recorded when working offshore and therefore cannot be paid in the right place. It’s as simple as night follows day.

The same therefore follows that offshore treasury management functions, Dutch interim holding companies, offshore holding of intellectual property and all that goes with it – plus the distance selling arrangements so beloved of IT companies using Ireland where the deal never goes near the place – are all tax avoidance.

There are other flags. For example, artificial income shifting between family members. And turning income into capital gains. Using companies to avoid national insurance is also tax avoidance. A great many uses of trusts for tax purposes represent tax avoidance.

But the use of trusts to protect children and the disabled does not represent tax avoidance. And nor does the use of limited liability per se mean that someone is doing something wrong. I use an LLP to organise my affairs but pay no less tax than I would if self employed as a result – a fact that influenced my choice, I admit.

That is the key point in all this – it is choice. Ends never justify means but looking at ends to ensure that the means used can be justified is necessary and appropriate in tax. In some cases – like most offshore structures – it is reasonable to presume the end purpose and condemn the means. But there are also grey areas. This is shocking to the libertarian right of the corporate world who demand certainty even when surely they know that this is impossible except in their fantasy world of politics where the assumptions they make eliminate all causes of doubt that might question their abuses. For the rest of us in this middle area we have to look at motive.

It’s OK to use a limited company for commercial purposes.

It’s OK to claim the expenses the law allows if you incurred them and did so for your business.

You can use a trust to protect children or to run a charity.

No one should criticise you. It’s all don to motive – or the ends of your action.

And it’s that which lets us draw a line in the sand. Do you intend to cheat or not? Tax avoiders and tax evaders alike cheat. I stress – both are alike in motive in that they don’t want to pay tax that is due – and they cheat as a result. And it’s tax cheating that I despise, whether its ‚Äòlegal’ or not. Paying the right amount of tax at the right time in the right place (and no more) is fine. But cheats don’t do that. And that’s what annoys me. And a lot of other people. Because more morality is much more important than the law – and the cheats know that too – which is why they find it so hard to justify their actions.

Scared – and it should be

Tax justice, UK Uncut 1 Response »

Dec 202010

I love this:

Faced by a challenge from young people who believe in something, our political and media mainstream is confounded. It is also scared. And it should be.

It is so true. Read the rest of this thoughtful piece on UK Uncut and its importance for democracy.

The Tories – dedicated to making it tax haven UK

Ireland 4 Responses »

Dec 202010

I gather that Associated Press have reported this morning that Northern Ireland political leaders have been handed a government paper on devolving corporation tax powers to the region. The proposals will be considered by parties over the Christmas period before the long haul to have any agreement and legislation put in place.

I have, of course, written extensively on this issue and believe first of all that the EU will object, secondly that the arrangement can’t compete with the Republic and thirdly that Northern Ireland can’t afford the £300 million in lost grants it would suffer to do this – at cost to ordinary people.

And remember the CBI has said it could not guarantee a single new job will be created as a result. That’s because the promoters of the idea tare blatant – that they want to attract profits (hit money avoiding tax) to Northern Ireland but not costs (jobs).

But another Tory minister intent on creating change for changes sake goes with the idea all the same – regardless of the social and political consequences.

No doubt this accords with their theory of government – which is to deliver chaos.

But it’s a disaster for ordinary people.