A lot of people have been asking the question 'what's fair' when it comes to tax over the last few days. The Fair Mark has, of course, been the inspiration for that.
My answer to that is paying the rate that the law would seem to suggest is due or else explaining why the law explicitly permitted some other outcome is a very good definition of fairness when it comes to corporate tax.
And I'm not alone in doing so. This concept of 'comply or explain' has been at the heart of UK corporate governance for over 20 years now. As Wikipedia notes:
The purpose of "comply or explain" is to "let the market decide" whether a set of standards is appropriate for individual companies. Since a company may deviate from the standard, this approach rejects the view that "one size fits all", but because of the requirement of disclosure of explanations to market investors, anticipates that if investors do not accept a company's explanations, then investors will sell their shares, hence creating a "market sanction", rather than a legal one. The concept was first introduced after the recommendations of the Cadbury Report of 1992.
So, by definition the tax rate paid has to be assessed.
Then the variances from the expected rate have to be noted.
Then the explanations for the variance have to be appraised for credibility.
And all this has to be set in the context of what the business is and does.
That's what the Fair Tax Mark s seeking to do. It follows in the tradition of UK corporate governance codes by doing so.
What, I wonder, is so difficult about that?
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I think one potential problem is that the criteria don’t seem to have much of an element of testing the actual position against a “fair” one to see if it matches.
The two areas where it does are in the current tax rate what the tax policy says. If a company makes full disclosure of what it’s doing, you can’t deduct more than 6 marks for this. So the most egregious tax avoider one can imagine can still end up getting 14/20 and a Fair Tax Mark. That kind of devalues the “Fair” bit.
On the other side of the coin, you’re only looking at current tax, so a company can potentially lose 2 marks simply because it makes a significant investment in plant over a few years. Agin, this seems a little unfair, though of course a compliant company ought to be able to compensate for it in other areas.
This is especialy true as there are a lot of points available for meeting basic company law disclosures. This means that every company starts off with a lot of points, and wrong-doing (even accidental transgressions such as claiming AIA) only loses you a few of the optional ones, so it looks as though it might be quite hard to fail the tests unless you go out of your way to do so. That then devalues the whole thing: a badge you have to work to get is worth more than one you can simply apply for.
Andrew
All reasonable points barring two things
First most companies do not reconcile as we ask (have you read what we are actually requesting, I wonder?)
And very few have a tax policy
And the vast majority of SMEs will fail the basic disclosure points (the average accounts of the average SME are riddled with such errors)
So most companies fail right now – without doubt
But if it gets too easy we will raise the bar – we have always reserved the right to do so – and your comments are fair warning of the need to be aware of that
Thanks
Richard
I have read through your criteria several times, yes – though I did find the tax rec template a stumbling block at first, as I initially went from what showed on the website without realising that there was more to be had from clinking on it. I did think it looked a bit simple…
I know current standards don’t involve a reconciliation in your format, but a company wishing to gain the mark could easily produce one. I personally would prefer a reconciliation to total tax, plus an analysis of the components of deferred tax – I think it’s clearer and easier to understand, but that’s personal taste of course.
Similarly, producing error-free accounts is relatively simple if you want to do so, especially if you get a decent accountant to help. Adding a tax policy to your website would be quite easy too – very easy marks if you want them.
There is a reconciliation to total tax – in 2 parts
In one bit it is utterly meaningless
So yes the FTM can be had by companies who want it
The question is – will they? I obviously hope so
I sort of see what Andrew means…
It reads that you get more points the closer your tax rate is to the statutory rate. You also get points for explaining why your tax rate differs from the statutory rate. And it looks to be your current tax rate that you have to explain (in line with UK GAAP reporting) rather than a reconciliation to your tax rate including deferred tax.
So if you claim a deduction (whether a valid one or due to tax avoidance) you will lose points because your tax rate is below statutory. If you explain in a tax rec’ why and state clearly what it is then you gain points back. The way it reads on the site the reason for the difference doesn’t have to be ‘valid’, you just have to explain and you get points.
Of course If you have undertaken tax avoidance, then although you gain points back in a clear tax rec’, you will lose some points in particular because your tax policy won’t be able to say all the things in the best practice template.
Where we could end up is:
A – ‘Best’ case Lose 2 points because tax policy can’t say you don’t do tax avoidance — But if you have a policy and say you don’t use tax havens then you only lose 2 points
B – Lose some points because tax rate is low — So 4 at most
C – Lose no points because your tax rec’ has a clear explanation — i.e. it’s open about the effect of the tax avoidance scheme(s)
So you meet ever other criteria then from above max points lost is 6 which gives you a score of 14 and so potentially entitled to the mark, even though you clearly do tax avoidance.
I suspect that’s academic because the above company is unlikely to get every other one of the 14 points available but I think that may be what Andrew means.
For the sake of doubt we will add clarity to the Criteria to cover this issue
Thanks for pointing it out
Verth, that’s exactly what I mean. If you try, you can get 14 out of 20 despite being an egregious tax avoider.
The worrying thing then would be if Richard refused to give his approval on the grounds that the company was a tax avoider, despite the company meeting the published criteria and being able to publically demonstrate that it could. Departing from the published criteria could undermine the credibility of the whole project.
Your points will be in the criteria soon
They will change and develop – but if a company meets them we have to give the award – assuming they pay
I don’t get the point on AIA – Why would making a valid AIA claim be ‘wrong doing’?
That is an allowance wholly envisaged and endorsed by government, so what’s ‘wrong’ with that? No different than investing in an ISA to my mind.
You may not agree with the government policy of giving AIA, but I think if you were a company director and didn’t claim reliefs available then you’d potentially be negligent so even if you didn’t agree philosophically you’d still be bound to make the claim.
I have no objection to anyone claiming a relief to which they are properly entitled
It’s not really wrongdoing, but for purposes of the tax rate section of the Fair Tax mark it is indistinguishable from it.
You are marked on your current tax rate, and the AIA reduces your current taxes by deferring profits to later years. So it has exactly the same effect on those marks as say entering into a marketed avoidance scheme (though of course the latter might have other adverse effects on your marks). The fact that you have a deferred tax liability due to AIA doesn’t mitigate the situation.
That’s an absurd claim
It’s just wrong
It has to be explained – that’s the whole point
I really do not think you have read this
I’m starting to suspect you haven’t read it!
Take for the sake of argument a moderately profitable company that, in each of the lst four years, has been investing its profits in plant and machinery, such that the AIA almost (but not quite) entirely cancels out the taxable profits. So PBT of £20,000, PCTCT of £1,000, current tax of £200 (and a deferred tax charge of probably £3,800 or so).
The current tax rate is therefore 1%, which is more than 7% below the expected rate of 20% and so the company gets no points out of the four available for current tax charge. It then explains in detail in the current tax reconciliation why the AIA has this effect, and so gets two points back. It is however two points down precisely because of the AIA.
Then compare another company, which rather than investing in production plant and machinery has been using a marketed scheme to get PCTCT down from £20k to £1k. It also loses the same four marks, but because it also explains exactly what it has done it still gets the two marks back.
The two situations get exactly the same points in this area.
Now the former company is likely to score better on tax policy and so on: it will be able to say it doesn’t use artificial structures, for example – So as I said it can probably compensate for losing them. But it is still penalised because of the AIA.
If the AIA took it down to nil taxable profit, or a loss, then it would get the full four points because you’ve said that in this case the headline rate would be deemed to be 0%.
But so far as I can tell there is nothing in your “Average tax rate” criterion that allows you score points if your rate is low for a good reason; and in the reconciliation sections there is nothing requiring you to have a *good* reason for the difference from expected rate if you want to score points: all you need is a *detailed* reason.
In practice this sort of situation is unlikely to come up, but the fact that your criteria don’t distinguish between good and bad reasons for low tax rates does make it hard for me to see them as identifying “fairness”.
We wouldn’t give a mark if it is using a marketed scheme
Ah, that makes sense, although it doesn’t seem to be in the published criteria.
You agree that the company claiming AIA would still be marked down, even though the AIA is clearly not tax avoidance?
It loses at maximum 2 points
So, it can have a Fair Tax Mark
What is your problem?
We don’t publish scores
My point is simply that a company is marked down because it invests in plant and machinery, as Parliament would like companies to do (hence the AIA).
I fully agree that such a company can probably still get your approval, if it makes the points up in other areas, but it still seems a little unfair. Especially if as you say a lot of SMEs are non-compliant with their accounts disclosures, this could be enough to make the difference between being awarded the mark and not.
We never intended to be giving out awards to all comers
What would be the point in that?
Oh, absolutely, there must be discrimination between comapnies or there’s no point.
But denying the mark because a company has claimed AIA would seem to be the wrong sort of discrimination.
I don’t think you appreciate the difficult position the fair tax mark campaign will put you in……to be frank you have always refused to toe any company line and demand the right to say what you think (hence not labour member etc).
If a company with a reputation for tax avoidance rearranges their affairs to meet the criteria for an award of the fair tax mark then you will be in an impossible position….
They will undoubtedly crow to the media that you now approve their tax affairs and that they are the cleanest of the clean………if you stay silent then the tax avoidance crusade comes to a halt and they continue to “get away with it”……….if on the other hand you continue to attack them then everyone will argue what is the point of getting the award!
The same point applies to changing the criteria, the only reason a company would go to the trouble of the award is to be left alone and not criticized, if that will continue anyway then what is the point!
If and when that happens I’ll deal with it
Right now the chance is remote
A small clarification would be helpful: Suppose a company has an average tax rate of 30% – something that is perfectly possible with the vagaries of both accounting standards and tax law – does it lose out under criteria 7 because its average tax rate is not within 7% of the expected headline rate even though it is actually paying more tax than expected?
That gets full marks