Tax Research UK

I note the TUC’s reaction to the CBI’s tax report. The Guardian reports Brendan Barber as saying:

The chancellor must use his budget to give a firm no to this special pleading and strongly rebuff the business lobbying for a U-turn on the inadequate proposals to levy non-doms.

The CBI’s call for a big reduction in corporation tax would increase opportunities for big businesses and the super-rich to avoid paying their fair share of tax.

It would lead to tax hikes for ordinary people, damaging cuts to public services and abandoning commitments on child poverty.

The CBI might as well hang a giant ‘tax is for the little people’ banner from their office windows.

I’d go with that.

Richard Murphy CBI

This morning the CBI is publishing a report calling for a radical overhaul of the UK’s corporation tax system.

The proposals are extraordinary. They show contempt for all those who work for a living in this country and who pay tax on their earnings at rates of at least 20%, plus national insurance at 11%. The CBI wants companies to pay much, much less. 18% is their proposed corporation tax rate. They offer no compelling reason why this difference that represents an exceptional break with the prevailing situation where companies are, at least nominally, taxed at 30% (soon the be 28%) can be justified economically, socially or politically. They simply say that it is competitive to offer this rate, and, as was implied on the Today programme on Radio 4 this morning, that they’ll leave if they don’t get it.

The proposals show similar contempt for small business: the CBI call for the same rate for large and small business when, as my research has shown, large companies pay an average rate 7.5% less than the nominal rate imposed upon them. My own experience as an accountant and the anecdotal tales of the many accountants I talk to suggests small companies pay tax at effective rates higher than those nominally set for them. Despite this at no point does the CBI suggest why it is appropriate to subsidise large business in this way whilst creating an impediment for small business. Again, this reversal of policy, which has for decades seen the tax advantage being given to small business, is not justified by the CBI. Isn’t it time that their small business membership demanded reasons for its policy of contempt towards them on this, the domicile debate and other issues of concern to them?

As for the claim that the proposal will raise money there are three points to make. The first is that no evidence has ever been found for a Laffer effect, but they assume that it exists. Second, the country with which the CBI seeks to compare the UK is Ireland. they claim that Ireland’s 12.5% tax rate has been a success for them. Well, undoubtedly it has raised revenue, but let’s be clear that’s the result of first mover benefit, and the UK won;t have that, and second it’s the consequence of blatantly stealing other country’s tax revenues - as was the case with Microsoft, for example. The simple fact is, there’s only room for one thief in town. This is also why the CBI’s so called ‘dynamic simulation’ of future revenues will not work. Ireland cannot be replicated, but they assume it can be.

But most of all, and thirdly, the proposals the CBI makes are a simple licence to tax fiddle:

1 A corporation tax rate of 18 per cent means companies will have lower tax rates than any individual: people will be rushing to set up companies to hold their savings and investments to avoid tax. The poorest will lose: they don’t have savings or investments. They pay tax on all their earnings. Without massive anti-avoidance measures built in this proposal is simply designed to make the tax system more regressive, increase the gap between the rich and the poor and to add to the increasing tax punishment meted out to those who work for a living instead of living on their investment earnings.

2 Given that we know that when corporate tax rates are at 30% companies are actually paying 22% it’s reasonable to assume that when tax rates are 18% companies will really pay 10%? How can that be justified? And, of course, this too will lower the effective tax rate on the richest in society, who own these companies.

3 The call for tax to be calculated on the basis of existing company accounts sounds good and would remove much of the deferred tax problem, but you can imagine what will happen. Companies will write off all their equipment costs in a year or two to get maximum tax relief in the shortest time possible, and their tax advising auditors will let them do it. Result: massive tax savings, or a need for regulation of accounting policies on a statutory basis. That’s called capital allowances by any other name. Do they really have no understanding as to why we have the laws we have?

4 They’re actually calling for a ‘no surprises’ legislative and administrative process. What this really means is that they want to write the laws and for Parliament to approve them. No thank you, very much. We once fought a civil war to make sure an elite couldn’t control taxation and parliament could, and a lot of us would like to keep it that way.

5 There call for a non-political, independent tax law commission is as naive. They say this should be based on the Law Commission, which I run by lawyers. Take it as read then that what they actually means is that they want a body run by the CBI and the accounting profession. Since when were they non-political? If we really want a proper process for reviewing tax legislation then we should give an appropriate budget to the Treasury select committee to do a proper job on this issue. They’re the right people to do it. Those who wrote this report are entirely the wrong people to do it.

6 The call for proactive UK government action on all cross border tax issues is actually a request that when a company sets up a head office in a filing cabinet in a tax haven the government should give up the right to tax it. Do they think we’re stupid?

7 The call for the adoption if an exemption system for non-UK source profits is as naïve. This means that when a subsidiary s set up in a tax haven with no tax paid nothing will ever be due when that money comes back to the UK. Right now Dave Hartnett of HMRC has expressed his concern about UK companies shifting their profits offshore by artificial abuse of intellectual property that they claim is based there. What the CBI is saying is that they want open licence to do this. It’s a massive licence to shift money offshore and pay no tax that they want. Their call for reduced burdens on proving transfer prices falls into the same category. It’s very hard to take nay of this seriously.

8 Just in case this does not go far enough they are calling for tax reliefs for investment to be given even when there are no taxable profits against which to offset them - so now we have the CBI calling for negative tax rates for companies.

In combination this is the most massive abuse of the UK tax system proposed for a long time. The logic within it is apparent. It is obvious that the CBI has adopted Leona Helmsley’s maxim that ‘only little people pay tax’. In doing so it shows blatant contempt for all those who work for companies in the UK and who will pay tax at rates much higher than the large companies on whose behalf the CBI is arguing. It’s also showing massive contempt for small business in this country, who would if the CBI’s proposals were adopted find itself paying tax at much higher rate than big business.

There’s no doubt what would happen if this proposal were adopted. It is likely that the effective tax rate of many large UK companies would fall from 22% to about 10%. Since these companies pay most of the £45 billion or so corporation tax paid in the UK each year what the CBI is asking for is a cut in the tax bill of the biggest companies in the UK of at least £15 billion a year. There is no reason to think otherwise; as I note above the case of Ireland cannot be replicated.

There’s one thing the Treasury need to do with this report, and that’s bin it. I suspect they will.

Richard Murphy CBI, Ethics

PWC’s weekly tax newsletter includes the headline:

PwC’s family business survey notes hunger for simpler UK tax rules and lower rates

If you can work your way through the password minefield the story is here.

And the story is wrong: entirely wrong. It’s political misinformation, yet again.

The evidence is simple to find. The Chancellor delivered simpler tax rules and lower tax rates for many on Capital Gains Tax in the Pre-Budget Report and the result was, as Accountancy Age reported from the CBI conference:

CBI warns Darling of tax ‘rage’ over CGT

You can’t reconcile these two positions.

I believe the evidence on the ground. People don’t want tax simplification, and they probably don’t want real tax cuts either.

Richard Murphy CBI, Capital Gains Tax, Ethics, PWC

I’ve been musing some more on the CBI’s ministrations on tax. I have a database on UK company performance. I prepared it when researching ‘Mind the Tax Gap’. Between 2000 and 2004 the average UK FTSE 100 company turned over £13,782 million a year. It’s average tax payment (I stress, payment to avoid deferred tax issues) was £487 million of which about 26% was in the UK after double tax relief.

This means that for the average FTSE company, whose finance directors are dedicating their vastly expensive resources to this activity, UK tax represents less than 1% of turnover. Now lets suppose that the tax rate is cut to 25% (and I think in their wildest dreams the CBI could not imagine more) then the fall in the rate will be 10.7% from that now announced. That means the benefit to UK FTSE companies would be about .09% of turnover, or about £13 million a year each over the period surveyed. However, I accept that corporation tax yields have grown in the last couple of years as profits have risen substantially. Updating this based on growth in tax yields would suggests a current saving of almost £20 million each. That’s consistent with the fact that these companies pay about a quarter of all UK corporation tax.

The cost to the UK might be a total of about £4.5 billion based on current corporation tax yields.

To put this in context, £4.5 billion is about 40% of university spending in the UK, most of which benefits big business either by linked research work or by supplying them with trained staff at no cost to them. This is one thing that could go if they got a cut in corporation tax. But it makes no sense at all.

All of which implies that what the CBI is doing is two things. First it is fixating on an immaterial issue outside its control when it should be worrying about issues it can control. Second, its not asking itself what role it does want to play in society. That’s because it thinks that business is what society is about. That’s wrong. Business is a small part of society. But it can’t see that bigger agenda. Until it can it’s voice deserves to be unheard.

Richard Murphy Accounting, CBI, Tax avoidance, Tax management

The CBI has set up a tax ‘task force’. The mere use of the term is a bad sign. The membership also gives the game away. It includes finance directors from Pfizer, Rolls Royce, BP, Cadbury Schweppes and Barclays. Several are not names to inspire confidence in objectivity in this area.

Even worse are its terms of reference which are apparently to evaluate:

whether the current UK corporate taxation regime is fit for purpose over the long term, and drawing up proposals for how it should adapt to ensure the continued competitiveness of UK-based companies

If the CBI reckons the only way to make the UK economy competitive is by cutting tax then enterprise really has died in this country. They may not have noticed, but business competitiveness is based on supplying the right product at the right price at the right time to a customer who wants it. Tax does not feature in that equation. As defined here the CBI do instead think its linked to the degree of state subsidy they can enjoy. How far has their faith in the market fallen?

I really do despair when business leaders seem to know so little about the subject. This group is doomed to failure from the outset.

Richard Murphy CBI, Tax management

It’s OK to quote Polly Toynbee now. David Cameron does. I’m on side, apparently. So take this from her column in the Guardian today:

Yesterday, promoting their latest survey of 87 top executives, the CBI said two-thirds complain about tax. Only two-thirds? Who are the one-third who are happy with their taxes? The CBI claims the UK’s “burdensome and expensive” tax system is a major factor for the 20% of firms that shifted some operations abroad and the 30% considering it. Again, what’s surprising is that they could drum up only a third of executives willing even to “consider” moving bits of their business abroad. It easy to see why: the World Bank finds UK firms have the lowest tax rate in the G7. Last year Britain had the highest foreign investment of any country in the world.

You can see why Cameron has to agree, can’t you?

As for the survey itself, I have a feeling it looked like this:

Please tick all of the following you’d like:

• A tax cut
• A cut in red tape
• A free all expenses paid holiday in Barbados, care of the NHS (you know you’re worth it)

Come on now, you can have all three! Don’t be shy.

And still they couldn’t get some to sign. That’s because some, I am sure, in the CBI know that the claims embodied in the CBI survey are not just unattainable, but actually undesirable. Which is why I don’t buy the arguments of those who say I am out of step with the reality of life. I back Toynbee on this one. It’s some in business, and their advisers, who are acting in pursuit of profit, who are out of line. And there are some in business who seem to agree.

In society as a whole that agreement is bigger. Dave Hartnett, Director General of HM Revenue & Customs, suggested in June 2006 that research undertaken in Canada showed that 50% of taxpayers would be compliant irrespective of the circumstances, and 10% would be non-compliant. The remaining 40% were capable of being influenced into compliance. I think I’m addressing the 40% with the arguments I present. The 10% aren’t ever going to agree. That may include many accountants. If they don’t then the law will eventually bring them into line. And please let’s have no argument about this not working. 10% did not agree with the abolition of child chimney sweeps, or giving holidays with pay, or maternity rights or the minimum wage. The environment is still available for abuse according to some. I accept that some people think that way. But the world did not and does not agree with them. And it’s embraced all these issues, and the world is a better place as a result.

The world will be a better place when business sees it is utterly dependent upon government for its success, and vice versa. Then we might have a constructive partnership based on compliance, on both sides. This is possible because I think most people already believe that to be true. If accountants don’t, that will be their problem at the end of the day.

Richard Murphy Accounting, CBI, Tax avoidance, Tax management

The Liberal Democrats have offered two things business want according to a report in the Telegraph. The first is a small cut in the corporation tax rate. The second is a massive reduction in tax regulation as a result of the adoption of a general anti avoidance rule.

These two issues are the favourite demands of business, large and small. So what does the CBI say? As the Telegraph notes the reaction is “cautious”. They say:

“At face value, simplification of the tax system is very appealing to businesses, but it could create losers as well as winners and risk harming parts of the economy. Such a proposal would have much more appeal if combined with a reduction in the overall tax burden on firms.”

Which comment clearly sets out their real agenda. The CBI wants government to supply it with a well trained workforce, a health system that keeps them at the grindstone, social security which means they don’t have to bear the cost of their own failings, infrastructure and legal systems that provide them with the environment in which they can operate, and more – but they want someone else to pay for it.

A touch of reality would help a lot of the discourse on tax – especially from people who should know better. I would like to put the CBI in the latter camp. On this evidence I can’t.

Richard Murphy CBI