Tax Research UK

From this morning’s Independent:

Murphy believes that the number of tax havens could dwindle from 40 to about 10 over the next decade if Automatic Information Exchange were to be implemented.

“This should be pretty popular,” he says. “We are talking about 1 per cent of the population who are involved in tax havens. But the tax loss as a result is extraordinary.”

On the other side of the fence, the big accountancy firms, which often advise big business, and the mainstream accountancy profession, are not in favour of AIE.

While both the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales (ICAEW) say they back moves to greater openness and transparency, neither wants AIE. “There is a serious issue about privacy and confidentiality,” says Ian Young, technical manager of the ICAEW.

Why oh why is my own professional body always on the wrong side when it comes to tax compliance?

Is it that hard to do the right thing and say ‘yes please – let’s collect the tax that is due and cut the tax evaders out of the system?’ Apparently so – because the ICEAW’s excuses do, as ever, actually say the exact opposite.

Remember the European Union Savings Tax Directive, which is based on automatic information exchange, was promoted for one reason and one reason only: to stop tax evasion. And still the ICAEW cannot support the process.

Shame on them!

Richard Murphy Accounting, Tax evasion

KPMG has reported:

HMRC will require UK companies to submit both CT returns and company accounts online in an XBRL electronic format for accounting periods ending after 31 March 2010.

The majority of companies are completely unaware of this ‘ticking time-bomb’. The problem isn’t the filing of CT Returns (tax software vendors are already working hard to ensure that tax numbers can be filed in an XBRL format) but the filing of company accounts. Almost all large and medium sized companies manually produce their accounts using MS Word, Excel or similar applications. To comply with this deadline, companies will need to reengineer their in-house accounting processes and implement systems capable of producing company accounts in XBRL format.

HMRC have stated that if organisations are unable to file both CT returns and company accounts in the prescribed format then HMRC will simply reject the submission.

I am sure KPMG are right but what staggers me is that most small firms of accountants have not used Word in particular to produce accounts for many years.

The change is actually welcome – and overdue. The ability to use corporate accounts filed on line as something other than static data is welcome, and so obviously useful it is amazing it has not been required before now.

And as ever this shows the power of the state to stimulate change and necessary investment without which there would, I suggest, be vastly less innovation in the private sector.

Richard Murphy Accounting, HMRC

The Economic Times of India has reported:

The questioning of Ramesh Rajan, chairman and CEO of PricewaterhouseCoopers, India (PwC) by CBI last week, has revealed that the Satyam balance sheets were in fact audited by Lovelock & Lewes and not Price Waterhouse (PW).

It is also learnt that the auditing fees, though deposited in the name of Price Waterhouse, Bangalore, was later transferred into the account of Lovelock & Lewes. "It is from here that the partners S Gopalakrishnan and Srinivas Talluri withdrew the money," sources involved in the investigation of the case told TOI.

Apart from Rajan, other senior partners of PW, from Delhi and Kolkata, were also summoned by the CBI last week. The partners denied any association with PW, Bangalore and said that Gopalakrishnan and Talluri were not entitled to sign any balance sheet on behalf of PW.

"So as it turns out, the auditors who are partners with PW, Bangalore, wrongly signed under the name of PW, and also outsourced the work to Lovelock & Lewes," said sources adding that investigations confirm that the entire auditing team at Satyam is from Lovelock & Lewes.

On being questioned by CBI about this "outsourcing" of work , Rajan, who is also a partner with PW, Bangalore said that the firm has no manpower and, hence, as part of an internal arrangement gives out their work to Lovelock and Lewes. "But this is not acceptable, considering that the two firms are completely different entities," said sources.

An India-based auditing firm, Lovelock & Lewes, though is a network firm of the international consulting body PwC, has no authority to audit under PwC’s name. The CBI is now in the process of recording Rajan’s statement and also plans to summon other partners of PW, Bangalore for questioning, later this week.

As Dennis Howlett says on this:

Are you kidding me? So let’s get this straight:

PWC were the auditors of record but didn’t do the work
PWC audit partners signed off
PWC received fees and then paid to an associate firm
but..they didn’t do the work and, by implication are not therefore to blame AND
Lovelock and Lewes are a PWC network consulting firm.

The question surely must be: How deep a hole does PWC want to dig for itself because this now takes on an entirely different flavour?

Satyam is a US listed company. There are strict rules about what entities can audit public companies. Lovelock & Lewes would fail that test. By implication, PWC has failed that test.

Bring on the lawyers.

But still this firm is treated as being a key player within the world financial services system, and a provider of assurance of compliance with regulatory requirement.

When all along it is perfectly obvious that it is ethically bankrupt.

How long can this last before the whole edifice of auditing collapses? And what then for the operation of markets? I seriously hope these questions are being asked, because they need to be if another sort of crash, that right now seems inevitable, is to be avoided.

Richard Murphy Accounting, Big 4, Ethics, PWC

The good news about the government’s new Tax Code of Conduct is that it exists. It would be churlish not to recognise that.

But, that said, it really does not go far enough. In keeping with the government’s lack of willing to tackle the banking industry it tackles the issue and then fails to address it.

The issue is that:

The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.

The failure is a simple one: if the government really meant to tackle this issue it should have backed any Code of Conduct with statutory powers to enforce it. In this case that would require a General Anti-Avoidance Principle (GAntiP), an issue I explore in more depth here. In essence a GAntiP says that if a step is added to a transaction with the sole or principal aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored for tax purposes. This is that the new Code of Conduct also seeks to say: why not back it with law?

The omission from the Code is the obligation it should have put on the government to make it easier to determine what the ‘spirit of the law’ and the ‘intention of parliament’ is. Again, I have written extensively on both issues, most accessibly here. The government has a duty to publish purposive legislation, and it must empower courts to interpret the law of tax purposively. If not we will always end up with the courts undermining any Code – a fate that an attempt at a general anti-avoidance rule (note, rule not principle – they are not the same) has suffered in Canada.

And then there are three oversights: the first is that this Code does not extend to the advisers and auditors of banks. That seems a serious error: these parties should be covered with the obligation to ensure their clients comply or to decline to act. Second, it’s not clear if the Code extends outride the UK, when clearly it must if tax haven activity is to be included. Third, there is no requirement on the government to ensure its own activities are also compliant. That would mean it would be banned from using artificial structures such as orphan entities, too commonplace in PFI for example, or from artificially promoting tax competition. Reciprocity is  key to the acceptance of voluntary obligations, and I am not seeing it here.

All of which leaves me grateful that this will be reviewed in twelve months, and worried that it will be the Tories who review it, which gives more than enough reason for going the extra mile now.

Richard Murphy Accounting, Banking, Code of Conduct, Tax avoidance

A nation of accountants | Prem Sikka | Comment is free | guardian.co.uk .

The UK has about 50,000 family doctors, but nearly 280,000 professionally qualified accountants (pdf), often earning exorbitant salaries. That is almost the highest number per capita in the world and more than the rest of the European Union put together. Unsurprisingly,nearly 165,000 students are registered with the UK accountancy trade associations to become professional accountants. In addition, probably more than 100,000 are studying for accounting and business degrees at UK universities and colleges, dwarfing the numbers studying engineering, mathematics and sciences. A record number of graduates are making a career in accounting.

This huge social investment in accountants and accounting technologies has not resulted in the publication of sensible company accounts, orworthwhile company audits (pdf), as evidenced by the banking crisis and other scandals.

Why?:

Accountants have colonised the state to carve out niches. There are no state-guaranteed markets for mathematicians, scientists, designers, information technology experts and other wealth generators, but accountants belonging to a select few trade associations enjoy the state-guaranteed monopoly of insolvency (they share this with law practitioners) and external audits.

The result is most accountants are about as far from an entrepreneur a it is possible to be. Which is why they pomote a model that is so obviously false (neo-liberalism) with such enthusiasm.

As Prem concludes:

The huge social investment in accounting is stunting the development of other sectors of the economy and alternative forms of governance, and that cannot be good for the future of any society.

Richard Murphy Accountancy, Accounting

The Observer astutely observed the moves in the City to claim it’s “business as usual” this weekend.

In its editorial it said:

It is astonishing and alarming in equal measure how quickly the memory of last October has faded in the City. The whole banking system came within hours of collapse. State intervention saved the day and any subsequent recovery is underpinned by government authority. Finance was put on a democratic leash. At least, it should have been. But already the political will to reshape the economy has flagged.

There is a danger now that the impetus for radical reform will be lost and that, with a few cosmetic changes, Britain’s economy will come out of this recession looking much as it did before, only smaller and with far more people alienated, unemployed and angry.

This is true. The Observer also highlighted the latest report by the Financial Reporting Council (FRC), covered here last week:

The FRC is asking the financial industry whether subsidiaries should be required to file audited accounts with full disclosures. "Is a more simplified reporting regime more appropriate? Would it be desirable to eliminate the UK requirement to prepare, have audited, and file wholly-owned subsidiary accounts in the case of a parent company guarantee?" it asks.

Critics point out that it was a subsidiary of Northern Rock, Granite, that contained the liabilities that led to the collapse of the bank: Granite owned £49bn of mortgages that were sold by Northern Rock and moved offshore to the tax haven of Jersey. Likewise, a series of banks crashed last year because their subsidiaries loaded up on asset-backed securities that plummeted in value.

Richard Murphy, an influential forensic accountant, said: "We have seen how subsidiaries have led parent companies into liquidation. HMRC and the public should have a right to get high quality audited information on every company. If this goes through, it will mean complex financial transactions will become harder to detect, so tax avoidance will increase."

The pieces are of course, connected. The Big 4 firms of accountants, and their agents at the FRC, UK Accounting Standards Board, the International Accounting Standards Board and elsewhere are very clearly driven by the agenda of making as little information be available as possible and at the same time ensuring maximum reallocation of wealth from the poorest in the communities of the world to the wealthiest – who are their clients.

As such we should see them for exactly what they are: political players. When they argue, as they do, that politics should be kept out of accounting standards what they’re actually asking for is that their politics have free reign.

When they say that organisations such as the EU should not supervise them what they mean is that they want licence to ensure that data is not available to ensure tax is paid.

Think about it for one minute: not auditing the subsidiaries of multinational corporations would be a dream for them: every opportunity they want for transfer pricing abuse and no need to sign off a single internal transaction within a group giving rise to that group as being true and fair.

That is what the Big 4 want.

It will cost lives. I know they know this. And they will do it anyway.

It is necessary to expose this.

As I said at Compass on Saturday: we need a new agenda for tax. Demanding reform of accounting is part of this agenda. we have to know where the tax base is, and right now the Big 4 and their friends want to deny us this information.

There is a moral judgement to be made about their actions: they are wrong. And wrong in that sense which makes clear that this wrong is a harm; a harm to society, a harm to real people, a harm to the economic system which they seek to undermine in pursuit of the greed of a few, a harm to the world at large.

That is why we need to keep the City on the hook.

Richard Murphy Accounting, Big 4, Economics, Ethics