2011 January » Tax Research UK

UK Tax Gap to widen

Jan 202011

AccountingWEB (behind firewall) has reported:

The Association of Revenue and Customs (ARC) – the union representing senior managers in HMRC – has told theTreasury sub-committee that proposed budget reductions could undermine HMRC’s ability to identify, prioritise and prosecute those guilty of tax avoidance.

Graham Black, ARC president, said: “It is no coincidence that total revenues are falling at a time when HMRC has suffered significant staffing reductions.

“HMRC is made up of world-class tax professionals and the government must realise that we need to invest in HMRC and our staff, to claw back the money that should be helping to beat the deficit.”

HMRC has already suffered staffing reductions, from 99,179 staff in 2004-05 to 68,037 in June 2010. The spending review announcement of a further 15% cut in expenditure will further erode staff capacity, and their ability to close the tax gap.

The government has pledged to invest £900 million in extra tax-gathering resources for HMRC. However, this is not additional money, but made up from savings made elsewhere in HMRC.

Terry Cook, former ARC president, also told the committee: “HMRC generates income for the government, and must be treated differently to other government spending departments. Cutting tax-gathering budgets will not save money; it will cost money. Tax avoidance will increase; revenues will diminish.”

The latest estimate of the gross tax gap for 2008-09 shows that it has increased by £4 billion compared with the previous year, and stands at £42 billion. ARC believes that if £2bn of the estimated tax gap were to be recovered, it would provide valuable extra resources.

The ARC is affiliated to the Tax Justice Network.

I agree with their comments.

Worstall really doesn’t understand tax – unless he’s hiding it well

Corporation Tax 26 Responses »

Jan 202011

I note that Tim Worstall has written an article about UK Uncut, calling them blithering idiots for deciding to target Boots for alleged tax avoidance.

As I have made clear, I am not a spokesperson for UK Uncut, and have not been on any tax protest, but the idea that Worstall might suggest people are blithering idiots when he is so clearly wrong does seem worthy of comment, for a change.

The issue of Boots’ tax seems to have come to public attention as a result of the work of the Guardian. Felicity Lawrence of that newspaper wrote on this issue on 11 December 2010.

In June 2008, after more than a century and a half in the UK, Boots moved out of the country to Switzerland. The British household name had been acquired, along with its parent company, Alliance Boots, in Europe’s largest private equity deal in 2007, thanks to £9.3bn of borrowing from banks and other investors. The deal squeaked in with this enormous burden of debt just before the credit crunch brought such lending to a jolting halt. Private equity’s gain turned out to be the UK revenue’s loss.

Interest payments on the Alliance Boots debt in 2008 were so large they wiped out profit in the UK – and the tax that used to go with it. HMRC rules allowed the company to set interest payments on its debt against profits for tax purposes, a benefit to investors that has helped drive private equity deals.

Ten years ago the Boots group generally paid about one-third of its profits in UK tax. The Revenue could expect to see a tax charge around the £120-£150m mark each year, with over £100m of that coming from Boots the Chemist.

Then came the move to the low-tax Swiss canton of Zug. Alliance Boots GmbH is now registered at Zug’s 94 Baarerstrasse, an address that is home to a post office. After huge interest payments, its worldwide profits last year were £475m. It is hard to see which parts of the company are now making what, but the cashflow statement for the year to March 2010 shows that just £14m was recorded as the tax charge on those profits – that is, just 3% of profits. John Ralfe, the former head of corporate finance at Boots, told us he calculated that, “the UK has lost about £100m a year in tax as a result”.

Worstall says in contrast:

It isn’t the move to Switzerland which has reduced Boots’ corporation tax bill. Not, at least, in anything more than a very minor manner.

It’s the interest bill it’s paying which has reduced corporation tax paid.

The company was bought by loading it up with debt. The interest on that debt is therefore an operating cost of the company and so reduces taxable profits.

Well this is the first important point. Boots was bought by a non-UK private equity company. The debt incurred has been loaded onto Boots. But let’s be clear: the basic principle of tax relief is that costs incurred in the course of a trade are tax deductible against the profit of the trade. Those incurred to put you in a position to trade are not.

What the Guardian, and what I presume in consequence UK Uncut are protesting about is the fact that the UK tax system is in this case appearing to be abused. The cost of acquiring Boots is not a cost of Boots undertaking its trade as Worstall suggests; it was the cost of a third party acquiring shares in Boots, which had nothing whatsoever to do with Boots actual trading operations. They were the costs of a capital transaction in another location. So the question being asked is why are they being subsidised by the UK taxpayer? It is completely appropriate in this circumstance to protest that a tax loss is arising at cost to the British taxpayer which seems wholly inappropriate, and is an unnecessary subsidy from the UK to a third party located elsewhere to acquire a British company. I think that there is a very obvious campaigning point that this should not be allowed and that as a result UK companies should be protected from such predatory behaviour. it is not the action of blithering idiots to protest at this abuse of UK Exchequer funds.

Worstall goes on:

Do also note that it’s not actually certain that such a manouvre has reduced total tax collected. Of course, yes, the debt has reduced taxable profits at Boots and thus the amount of tax that Boots pays. But the interest received by whoever does actually receive it is taxed at the level of the recipient. If it’s, just as an example, a higher rate taxpayer who holds one of the Boots bonds, then they will be paying 40% (possibly even 50%) on that interest received: a higher rate than the 28% corporation tax that Boots would have paid without the interest bill.

This is yet more obvious misinformation. I fully admit that I do not know where the interest paid on this loan is received. Nor, I suspect, does Tim Worstall. But the possibility does at least exist, and I’m only suggesting it’s a possibility, that the payment is made to a bank in a location with a lower tax rate than the 28% or 30% that might have been offered by way of tax relief in the UK. If that was the case then a considerable tax avoidance opportunity would arise as a result of the arbitrage of the rates in question. That would, if true, represent a tax subsidy from the UK taxpayer and it is quite right for people to protest at the possibility, at the very least, of such arbitrage occurring. Again, to do so is not the action of a blithering idiot, it is the action of an astute observer noting that the UK Exchequer may well be losing out.

But perhaps the most absurd comment Worstall makes is this:

And whining that all the interest goes to foreigners doesn’t work either: what this means is that there’s some £billions (whatever the number is) of foreign capital being used to provide luvverly shops and pharmacies for Brits to enjoy: us getting the benefits of foreign capital is a good thing.

Again, this is completely and utterly untrue. That foreign capital was not used to invest in Boots. It was used to acquire Boots. That is something fundamentally different of course. Investment requires the creation of new assets generating a tangible rate of return. Buying Boots simply required the assignment of ownership rights. That is something fundamentally different. To put it another way, I suspect all or most of the current Boots shops and pharmacies were in existence before Boots was sold to a private equity operator. I imagine the net new investment from the private equity operator has been low, but I stand to be corrected. However, they’re claiming tax relief on their purchase cost, and not on their new investment, and that is a fundamental breach in my opinion of the tenets of tax allowance for interest in the UK economy that should apply, even if present we let something else happen. So this is a valid campaigning point for a change in the law, again.

And as for that move to Switzerland, did it save tax? Point 1 is, unless it did it would not have happened. No one moves to Zug for any other reason. it is only a tax haven. Point 2 is that Boots is a pharmaceutical company with, no doubt, income arising from intangible assets. Switzerland will almost certainly reduce the overall rate of tax on these compared to the UK. Of course there was a tax motive in that switch in that case, I have no doubt about it at all. I can’t see another reason for it.

I leave it entirely aside whether or not it is appropriate for UK Uncut to protest about this in whatever way they choose: I have made clear that I think civil protest is acceptable so long as it is non-violent and property is not damaged. But to say that someone is blithering idiot for opposing inappropriate tax relief within the UK tax system, which undermines the potential revenues due to the UK Exchequer is, I think quite extraordinary. Such relief is, after all, akin to government expenditure. isn’t it amazing that right-wingers can somehow think that spending is fine if it is on tax relief, but terrible if it is actually spent on something of benefit? That they do so just simply reveals their ideological bankruptcy.

Removing tax relief on Goldman’s bonuses would pay half the cost of EMA

Banking, ConDems, Corporation Tax, Economics, Ethics 11 Responses »

Jan 202011

Goldman Sachs has paid massive bonuses. Bonuses so big that it is quite clear that the management of this investment bank have captured its profits for their own benefit at, at cost to the shareholders.

Assuming the UK pay is pro rata world pay total remuneration in the UK will be about £1.6 billion. But, as Robert Peston suggested yesterday, this is not split equally of course. It goes about 80 / 20 – i.e. 20% of staff get 80% of pay. So, that’s average pay for 1,200 people of about £1.07 million – a total of £1.28 billion in all.

Now let’s suppose that the UK took a simple and straightforward step – entirely in line with the ConDem’s policy on pay, which is to say that maximum pay need not be more than 20 times minimum pay in the UK. The minimum wage works out to be around £12,000pa at present – so let’s say for ease maximum pay should be £250,000pa. Anything above that is, I think, a profit distribution. Bob Diamond could not justify why pay of this amount was needed. Nor can I. In that case it is not incurred for the trade, I suggest. And in that case tax releif is not due on it.

Apply this rule to Goldman’s in the UK and of the tootle pay of £1.28 billion to its senior staff and just £300 million of that pay would be subject to tax relief. That would mean that £980 million would not get tax releif, which at 28% tax would raise £274 million in corporation tax.

That’s half the cost of the Education maintenance Allowance paid to well over 300,000 16 to 19 year olds whilst in education.

To put this another way – the tax relief on the excessive part of Goldman’s bonuses to 1,200 people would be enough to pay for well over 150,000 young people to stay in education.

Isn’t it obvious which is the better deal for the UK?

Extend the scheme to other banks and the whole EMA can be paid for.

So let’s not pretend for a moment that the cash is not available. It is. The government is simply making the wrong choices. And it should be held accountable for them.

2.5 million unemployed – and rising

ConDems, Economics 2 Responses »

Jan 202011

Last year I predicted unemplyment would rise to 4 million before this recession was over.

Unemployment rose to 2.5 million last month.

1 in 5 of our young people is unemployed – destroying hopes, skills and prospects, as evidence shows in many cases for life.

I stand by my forecast – thousands more job losses in local authorities were announced yesterday, and all of them will have knock on effects.

No one – not one serious commentator – believes the private sector is picking up the slack. VAT increases, inflation (even if we can’t and should not do anything about it), pay freezes, cuts, and fear – coupled with the absolute reluctance of the private sector to invest – guarantees that.

This government has been and is pursuing an economic policy that is guaranteed to fail.

The only question is how long will we be forced to endure it – and how radical will the steps to corect it need to be?

Does inflation matter?

Economics 13 Responses »

Jan 192011

I’ve written about inflation before, and I’ll do so again, without doubt. As long term friends of mine (some who have suffered discussion of this issue for thirty years) know, inflation has always been relatively low on my list of economic concerns. I stress, not absent from my worries, but an issue that has to be placed in context, which very few neoliberals and even fewer politicians influenced by that way of thinking do. Given that the issue is now, undoubtedly on the agenda, that needs more explanation.

Inflation is, of course, a monetary phenomenon. Money (and I grossly simplify, but do so for important reason that no one else seems to be bothering to even think about the issue) has two functions. One is as a flow. This is the money that circulates in the economy to facilitate the ongoing cycle of transactions. The second use is money as a stock: the store of value and, to some degree, the measure of value. It is, almost instantly obvious that inflation is of potentially lower impact on the former than it is on the latter – subject to one massively important caveat and that is that those who are undertaking transactions can, within reason, keep their own cash supply growing so that whilst the absolute amount of cash they spend grows in real terms the value expended is, near enough, neutral. That means wages need to rise in line with inflation, especially for those on low pay – which means minimum wage adjustments are essential – and it means pensions and all benefits must be increased to ensure the least well off in our society do not suffer for inflation.

This identifies the first and most important risk from the current inflation. The government has changed the basis for indexing pensions and other benefits to make sure that although this government has deliberately increased inflation – by completely unnecessarily increasing VAT – they have ensured the poorest will suffer as a consequence. For these people inflation will matter, a great deal. So I am not indifferent to the issue – far from it. There is a matter of social justice to consider here.

There’s another issue of social justice too. Increasing interest rates now will, without doubt, remove cash from the UK economy. That will result in reduced demand for goods and services and that in turn will mean a loss of jobs in the UK. We’re already going to lose 1.3 million jobs over the next few years – people who do not deserve to lose their jobs. The VAT rise will increase those job losses. And so too will the impact of the inflation we’re going to suffer – inflation that, as I note below, is largely being imported into the UK, but to consciously increase these job losses by increasing interest rates to reduce demand will increase those job losses again. And that would be another issue of social justice – because those people do not deserve to lose their jobs for this reason.

And they do not need to do so, because the reality is that this inflation is being imported. Russian wheat shortages, imported gas and oil (and we are now a net importer), imported food and increases in the price of raw materials are what are causing this inflation, in addition to the impact of VAT rises. The VAT increase apart none of these will be resolved by any action the Bank of England or the government can take – unless they are willing to regulate speculation in raw material and food prices by hedge funds and others which are no doubt fuelling this crisis. So any action to reduce demand can only make this crisis worse for the working people of this country.

What then about savers? This is the constituency who will yell and shout about inflation. But I’d remind them – this is modest inflation. It is inflation of 3.7%. I accept that this means that many will be earning no real return on their savings. And of course that is going to be hard for some. But let’s also be clear: those with capital in the bank have been the winners from this economic crisis. Not one of them lost a penny despite the failure of the banks in which they held their money. In other words – to save the bank deposits of all who have savings in this country we accepted the most extraordinary cost of saving the banks. And the price for that has been enormous. You can add it up any way you like: but on the ground it is 2.5 million people unemployed, students paying fees they never expected, the destruction of our NHS, the loss of services to the most vulnerable in our society, poorer education, the loss of the education maintenance allowance, the increase in tax and falls in real earnings for those in work – which are inevitable. To date savers have lost nothing from this crisis: others have paid an enormous price to ensure that is the case. And remember, whilst many of this who read this might be savers most people aren’t. Significant savings are in fact the preserve of a tiny minority in society – and beating inflation is really about preserving their wealth, and not much else.

I’d in fact argue that most savers would be wise to stand back for the time being and accept a bit of inflation – even at cost to their capital. Most of those with modest saving are pensioners – and of course I am concerned for them. That is why I argue that they should have properly index linked increases in their state pensions and other benefits. But pensioners would be wise to remember too that they are dependent on others to look after them in just about every way. People in work make all they consume. People in work supply the health care, social services and other facilities that many pensioners are reliant upon. Those services need to be maintained. They won’t be if there is a recession. And those services need people who can work for them on wages that let them meet their own responsibilities – whether to pay their mortgage or feed their children. And those are pensioners grandchildren, lest they forget.

Yes there is a problem with inflation reducing the stock of value in saver’s accounts.

But let us also note inflation – and what we face is very modest inflation – has a benefit too. It reduces the value of people’s debt. The saver’s loss is the borrowers gain. And the reason why we have an economic crisis is because banks over lent, on property, for consumption, for speculation. The banks made this money- banks make almost the money that exists in the UK. And it was money that fuelled the savings of a few and the debts of many – the many who will be crippled if mortgage rates rise. That many are being crippled by debt – and the young face this more than almost anyone. And in my experience as someone in middle age, with many friends with children in their twenties, this is a cause of massive concern to many who will be pensioners soon. They no longer work to save. They’re working to pay off their children’s debt. It’s an extraordinary situation, and inflation will help these young people. If property prices fall but debt is written off by inflation then there’s a chance young people might be able to do something many of their parents took for granted – they might be able to buy a house with the prospect of paying for it before they retire. And that too is pretty vital for most pensioners – because for many of them more of their savings are locked up in housing than anything else – and without buyers for those houses their prospect of realising the value of those properties is low. Inflation might, curiously, help them do that – and at the same time let them know their children might do as well as they have – which is a situation so many parents aspire too.

So who are those who might really lose? Banks will. They borrow short and lend long. That results in real losses to them. And the rich – those with considerable wealth may also lose – but candidly only if they hold their assets in cash, and most in this group do not.

And business? Will it lose? No. Not at all. Business needs inflation. It needs it to be able to give pay rises, which keep people happy, without having to bear the full cost themselves. They need inflation to encourage them to invest now because it will cost more later. And managers need inflation because it is always, always easier to manage a business when numbers are increasing – even when some is from inflation. Of course that breaks down when inflation gets out of control – which may be the case when it hits double digits, but we’re far, far away from that with no prospect of it happening because there is no prospect of wage inflation in this country at this time with unemployment at its current rate.

So overall, what’s the problem with inflation? Right now there is just one of consequence – which is that the poorest in the UK might suffer most from it and need protection. Thereafter do we have a problem that should be addressed? My answer is no, we don’t. But more than that, addressing this issue will make the problem much, much worse, all to protect those who have enormously benefitted from the spending to save our banks. They’ve already had their social justice. Now it is time for others to get it. And let’s face it, inflation at 3.7% is neither here or there for most people. Once we protect the poorest in our community our priority is to keep everyone else who can be in work. And any action we now take to address inflation will put many more people out of work – and that would be a disaster – including for most of those with savings.

And remember – unless the ConDems raise VAT again next year quite a bit of this inflation falls out of account.

So let’s keep calm and carry on.

NB I discussed thse issues on Radio 2’s Jeremy Vine show today

Robert Peston on banks

Banking, Economics 10 Responses »

Jan 192011

Robert Peston did a first rate programme for BBC 2 on banks last night.

I, like many, find Peston’s style a little irritating. But this could be entirely forgotten in this programme which delivered one key and consistent message: that these banks created toxic assets (one commentator called them fraudulent), accounted for them for them incorrectly to artificially inflate profits through the creation of artificial structures, were then systemically bailed out (i.e. all banks failed, and all were saved), and despite this they’re carrying on doing exactly the same thing now, and this will, inevitably, result in another failure soon. There’s not an if or a but about that, it’s just a when?

Despite this politicians have failed to take action.

And bankers still threaten to leave the UK unless we acquiesce to their demands – demand that we let them keep their profit and that we bear their reckless losses.

Peston clearly thinks this is wrong. Good for him. He’s right.

And the villain of the piece? Undoubtedly Sir Philip Hampton, the unreformed banker who chairs RBS who had the gall to say the UK had to be made attractive to keep banks here when he chairs an organisation owned by the state he was seeking to demand favours from on behalf of the elite of which he is a member.

I am increasingly aware that people are now asking whether we can do without the investment banks – which are the toxic element of the banking industry. And increasingly I think the answer is an unambiguous yes. The cash they create can be more effectively created with lower risks in other ways. And they don’t finance our tax revenues – they leach from them. I admit I haven’t formulated the whole logic of the bank free alternative, yet. But it is something we need to do.

Jersey claims this is tax information exchange

Information exchange, Jersey, OECD, Uncategorized 7 Responses »

Jan 182011

The following answer to a written question has been published by the States of Jersey today:

WRITTEN QUESTION TO THE CHIEF MINISTER

BY THE DEPUTY OF ST. MARY

ANSWER TO BE TABLED ON TUESDAY 18th JANUARY 2011

Question

Can the Chief Minister inform members how many Tax Information Exchange Agreements were in force at the beginning of 2005, 2006, 2007, 2008, 2009 and 2010?

Can he further tell members, for each of those years, how many requests for information have been received, from how many countries they were received, and in how many cases was the information requested found and sent to the requesting authorities, and how many staff (FTE’s) were employed in this work?

Answer

The number of Tax Information Exchange Agreements in force at the beginning of each of the following years on a cumulative basis is –

2005 – nil

2006 – nil

2007 – 1

2008 – 1

2009 – 2

2010 – 12

2011 – 15

In addition there was one Double Taxation Agreement with equivalent tax information exchange provisions in force at the beginning of 2011.

I am unable to provide members for each of the years the number of requests for information received and from how many countries they were received. Jersey has been requested by some of our treaty partners not to publish the number of requests received. Quoting figures for the earlier years would identify the number of requests received from the USA, which is one of the countries concerned. What I can say is that for the period from 1 January 2007 until the 31 December 2009 there were 12 requests and for the year 2010 there were 27 requests. Over the period as whole requests have been received from Australia, Denmark, Germany, Iceland, the Netherlands, Norway, Sweden and the USA.

Of the total of 39 requests received by the end of 2010, two were subsequently withdrawn by the requesting authority and three have given rise to issues relating to the distinction drawn in the agreements between criminal and other tax matters, and the definition of what is a criminal tax matter, which issues we are currently seeking to resolve in discussion with the countries concerned. Otherwise all requests have been responded to within the forty days set by the Jersey competent authority (the Comptroller of Income Tax). This is significantly faster than is required by the OECD Model Agreement.

All the requests to-date have been dealt with by the Comptroller of Taxes personally as a normal part of his duties, and there are no staff specifically employed in this work.

So now we know several things:

a) Until 2010 Jersey did almost no information exchange – which confirms what we always suspected;

b) The UK has not made a request for information exchange (which is extraordinary);

c) The amount of information exchanged is so pitifully small the requesting countries do noit want their tax payers to know that the system really does not work, and therefore has no compliance effect;

d) As I’ve always said, this proves how hopelessly ineffective the Organisation for Economic Cooperation and Development tax information exchange agreements are, and how badly they failed the G20 when suggetsing this programme in 2009;

e) As a result there is still no effective mechanism for information exchange in existence because the obstacles to making a request are so enormous it is almost impossible to make one. In effect a tax authority has to know all the information it is requesting before a request can be made.

The campaign for effective information exchange goes on.

My suggestion is here. And it would really work, at very low cost.

Jersey, next week

Jersey 2 Responses »

Jan 182011

Inflation – the reality hits home

Economics, Uncategorized 4 Responses »

Jan 182011

The December inflation figures are out, and are bad. At 3.7% the number is bigger than expected.

But then stand back a minute. As the Guardian notes (above link) if you exclude increases in indirect taxation the figure is just 2%. and if you excluded the impact of the 2.5% VAT increase that has just been introduced for the rest of the coming year, as will be necessary, the figure will probably remain within the target level set for inflation.

So what we are facing is a situation where inflation has been increased as a result of government policy – yes, both Labour and Conservative – and now we are seeing the City bringing pressure to bear upon the Bank of England to push down inflation, even though they also wanted the VAT increase to rebalance the government’s budget.

At the same time, their chosen policy instrument, an increase in bank base rates, will have no impact whatsoever on this inflation. When inflation is caused by a combination of government policy domestically and international raw material price rises ( fuelled by City-based speculation) downward pressure on consumption is irrelevant. That downward pressure already exists because in the current environment of substantial involuntary unemployment, which can only rise, there is already real downward pressure on net household income that will already achieve this consumption orientated goal without further pressure being brought to bear by increasing interest rates.

The simple truth is that the knee-jerk reaction of neoliberal economists in the face of inflation to demand that interest rates be increased is on this occasion wholly inappropriate, as has so often been the case with neo-liberal prescriptions. What we are actually facing is a situation where, like it or not, real incomes in the UK may be under pressure because of a fundamental rebalancing of the overall economic equation within the world economy, where income shifts to the far east and the Indian subcontinent and away from Europe. In overall global economic terms this may be welcome, but if there is a reaction within the UK which sees ordinary consumers penalised for something that is entirely beyond their means to rectify through altering their pattern of consumption the consequence is that we will, inevitably, see an exacerbation of the fall in household income, and the creation of the environment for a double dip recession, which will inevitably follow.

The right reaction to this situation is to ask what we can do to restore our income, and not what we can do to restore the value of our currency, which is a matter of secondary importance.

We can of course enhance our income. We can get people back to work, in the short term by government spending, which will pay for itself through increased tax revenues, and in the long term from the stimulus that this will supply to the private sector which would otherwise not grow. We can also ensure that funds invested in pension funds are put to real economic use by demanding that at least 25% of all contributions be used to create investment in new income generating opportunities in the UK economy as a condition of the grant of tax relief on those contributions. That will put £20 billion a year into the UK economy. And we can use green quantitative easing to start a programme of investment in the Green New Deal – in itself capable of generating hundreds of thousands of new jobs in the United Kingdom and paying for itself through the creation of long-term energy sustainability which supports the value of our currency by reducing our dependence upon imports.

But all this requires a government with foresight and a willingness to commit our economy to a long-term vision of prosperity based upon the work people in this country can do for themselves. Instead we have a government that worries about the value of rate of return on short-term cash savings. It is that impoverishment of thought that cripples us.

I was in discussion with a shadow minister this morning. As he said to me, whether or not Labour gets back into office is not dependent on detailed plans for micromanagement of particular issues. It is dependent upon it having a meta-narrative that explains why a different economy is possible. That is the policy goal. And he is right on this occassion.

But will the Bank of England listen?