Tax Research UK

Dennis Howlett was on the ball whilst I was away in Brussels that last couple of days.

First about the Revenue’s data loss. As he rightly said, this is an IT issue, not a tax one. Second, he was spot on to say that the ICAEW is wrong to say

that the causes are likely to be deep-rooted and point to the need for a much wider reform of HMRC’s management and operational practices.

This was a systems failure. Solve that first, then worry about the strategy. It will cost a lost less that way, and be a lot more effective.

Then Dennis picked up the FT on climate change:

Fighting Climate Change: Human Solidarity in a Divided World, released ahead of the opening of the UN conference on climate change in Bali next week, estimated that by 2015, a minimum of $40bn would be needed for poverty alleviation in the face of climate change, while several billion more will be needed for infrastructure, and for disaster mitigation caused by global warming.

As he noted, that’s a great deal less than we at the Tax Justice Network know tax evasion costs a year. In fact Jersey, Guernsey and the Isle of Man cost $20 billion in tax evasion a year before them. Add in Cayman and maybe the BVI then and we have climate change licked.

Funnily enough I was discussing just this point with some NGOs with concern about climate change in Brussels. Which should be enough to have all the tax haven supporting, climate change denying readers of this blog (and they seem to go hand-in-hand, by the way) foaming on the comment button.

Richard Murphy Accounting, Dennis Howlett, Ethics, Europe, Guernsey, Isle of Man, Jersey, Tax Justice Network, Tax management

Prem Sikka is using his Guardian blog to great effect. His latests is called ‘Their hands in our pockets’ and shows just how often big business abuses the market system for its own benefit.

As Dennis Howlett said in his review of this blog:

Prem Sikka’s indictment of Tesco, Asda, Morrisons, Safeway and Sainsbury’s as a cartel operating to fix prices of basic foodstuffs is the sharpest critique I’ve seen of the UK’s enterprise culture.

He particularly referred to this comment:

Increasing profits through tax avoidance, pension mis-selling, dilution of workers’ pension rights or through cartels has become part of an “enterprise” culture that persuades many to believe that bending the rules for personal gain is a sign of business acumen. Stealing a march on a competitor, at almost any price, to gain financial advantage is considered to be an entrepreneurial skill, especially where competitive pressures link promotion, status, profits, market shares and niches with meeting business targets…

The vicious enterprise culture is rarely constrained by any notion of ethics and morality.

All I can say is read it. But then ask this question. Why isn’t Prem Sikka the man in most demand to be a non-executive director in the UK today? He’s the best track record in the UK of asking awkward questions of business on which it has transpired that he has been right. But as As Ruth Sutherland says in the Observer today (and I paraphrase a bit):

Non-executives have been likened to bidets: they add a touch of class but no-one knows what they are for. They are well-rewarded by most standards, earning in the region of £30,000-£60,000 for attending board meetings 12 or so days a year. Most have demanding full-time jobs, families, charity interests and often a portfolio of other roles, so there are limits to the detailed scrutiny they will provide.

What they should do, though, is ask the right questions. No one, however, seems to have made the simple inquiry as to why a modest mortgage bank in Newcastle upon Tyne was playing at the casino end of the capital markets.

Being a non-executive director is not the sinecure it once was. But despite genuine improvements deep-seated problems remain.

One is the sheer shortage of top talent; astute non-executives are in huge demand and may sit at a number of mahogany tables. The pool of people from which non-executives are drawn is relatively small; more effort needs to be made to recruit robust candidates from outside the cosy City club, or its Geordie branch.

That’s just not true. Such people do exist. Prem is one of them. But the fact is that the executive directors don’t wan the awkward squad questioning them. When will investors realise that it is in their best interests that they do? Soon I hope.

Richard Murphy Accounting, Dennis Howlett, Economics, Ethics

The NJ Biz reported yesterday that:

Growing concern over a federal agency’s four-year-old decision to grant patents on tax strategies has some CPAs in New Jersey and elsewhere worried about counseling clients on tax planning.

But “if drugs can be patented, why not tax strategies?” asks E. Martin Davidoff, a Dayton CPA and tax attorney, referring to a decision by the U.S. Patent and Trademark Office to extend patent protection to tax strategies.

I have to say I linked this story to an excellent piece by Dennis Howlett yesterday on the professions and self interest, which I recommend. The reason is simple: this is the profession putting its interests above those of the society it serves and which grants its right to charge super-normal levels of fee.

And if you want an answer as to why not, just consider this. Suppose the government wants to outlaw a patented tax strategy. Does that mean they will have to pay compensation to the patent holder for loss of royalty income? In a society like the US that is on obvious risk. And in that case the right to legislate on tax has been privatised. That’s why not, Mr Davidoff.

Tax is a public good. The problem our profession has is that it sees it as a public bad. And that is undermining not just our profession, but the stability of our society as a whole. That’s the inevitable result of putting individuals above communities. And that’s what our obsession with private property is doing.

Richard Murphy Accounting, Dennis Howlett, Ethics, Tax management

Dennis Howlett has written a long and considered response on his blog to a claim made elsewhere that claimed:

If the cult of the amateur is growing, it’s a direct response to the failures of said professions. As budgets are repeatedly slashed (we can’t afford to actually audit those accounts!) authority dissolves and ethics collapse. The grassroots pro-am revolution didn’t create these problems, its filling a vacuum.

The writer of that paragraph had previously maligned lawyers, accountants, teachers, doctors, journalists and others. Dennis’ point (if I can paraphrase) is that it’s a pretty sad day for the professions if these things can be said to be true, but in fact they’re not true.

His defence is based on the premise that it’s not technical knowledge that defines a professional - it’s how we use it that matters. And I agree with that. I think being a professional requires technical mastery of a subject as a prerequisite, but not as a characteristic of the status. It is the application of that knowledge that counts. When it comes to application the requirement is to profess, that is to state an opinion that is honestly formed based upon the available evidence that answers the question that is posed. Most importantly though, that answer must be objective in the sense that it does not just answer the question in the way that the enquirer might wish to hear. It must do so in the way that the professional thinks is right.

This is what professional ethics are about. They require the exercise of independent judgement in the pursuit of what is seen to be in the interest of broader society. That’s why I’ve said before now that an accountant has a duty to others before their duty to the client standing in front of them. It’s the fact that this has been forgotten that has given the ‘amateurs’ the chance to eclipse the professionals. The person who claims to be professional but who does in fact merely seek to serve the interest of the piper who calls their tune is not a professional at all. They’re propagandists. And unsurprisingly no one takes heed of them. Nor should they.

It’s getting over this issue that will challenge the profession. So, and for example, when we see the tax professions making measured contribution to tax debate rather then delivering the standard knee-jerk reactions that all tax and everything HMRC does is a bad thing that remains almost universal on their part we’ll have some idea that they can be trusted to be using their judgement as their status requires. Until then they remain destined for the margins because people will not trust their judgments. And rightly so.

Richard Murphy Dennis Howlett, Ethics

Dennis Howlett has commented on the same Sunday Times price that I referred to yesterday (which I suspect he found here). He’s much more robust than me. He does not accept that blame for offshore tax evasion can be deflected to banks. He blames accountants , as I do too: in the scale of suppliers of corruption services accountants are at number 1. As a result he says:

Yes Dave [Hartnett] - and what are you going to do about the professionals who were complicit in these arrangements? Again from experience, firms that do naughties usually find themselves under the spotlight. Having opened the door on one lot, surely you’re not going to let other culprits get away free and clear. Are you? Or am I stealing your next headline?

I think Dennis is on the nail with this.

Richard Murphy Accounting, Corruption, Dennis Howlett

Dennis Howlett and I have an interesting relationship. We are both natural bloggers. Sometimes we agree: sometimes we don’t!

Dennis has commented on ‘Closing the Floodgates’ at his place. One comment I found curious. He said:

There are some weaknesses in the argument. It depends on a definition of ‘corruption’ that embraces commercial activities that while logical is far from universally accepted as appropriate.

The definition we use is logical. It’s not accepted because it’s new. But that’s the case with all new ideas. The fact is, that if they’re logical they often are accepted. We think this one will be.

No, it’s more than that. We’re sure this one will be. To read more, go here.

Richard Murphy Dennis Howlett, Tax Justice Network

There have been interesting reactions to yesterday’s press release from the TJN (which was reproduced here) on the research spearheaded by Richard Lupson-Darnell into the causes for UK tax legislation.

Accountancy Age covered it. Thanks chaps. Another accountancy journal confirmed that they would do so within 3 minutes of getting the mail from me with the press release attached. I have to admit even I was surprised.

Some, such as TaxationWeb, which I would have expected to do so, did not. But it looks likely that the national press will be covering it soon, so I thought Dennis Howlett’s comments were of interest. Let’s put it on record straight away that Dennis is not opposed to what I’m trying to do. He blogged to that effect the same day. That may be his polite way of getting my attention, but since his analysis is ore critical than that of some others I thought it worth looking at. His argument seems to be:

1) I didn’t define anti-avoidance in the published comments and press release;
2) The argument is not fully developed;
3) The research could be developed further, but wasn’t.

Each is an interesting point. I’m going to come back to the definition of tax avoidance when I have time. But the Tax Justice Network has published one, often. It is:

The term given to the practice of seeking to minimise a tax bill without deliberate deception (which would be tax evasion or fraud).

The term is sometimes used to describe the practice of claiming allowances and reliefs clearly provided for in national tax law. It is, however, now generally agreed that this is not tax avoidance. If the law provides that no tax is due on a transaction then no tax can have been avoided by undertaking it. This practice is now generally seen as being tax compliance. So what the term tax avoidance now usually refers to is the practice of seeking to not pay tax contrary to the spirit of the law. This is also called aggressive tax avoidance.

Aggressive tax avoidance is the practice of seeking to minimise a tax bill by attempting to comply with the letter of the law whilst avoiding its purpose or spirit. (etc…)

That’s readily available from ‘tax us if you can’, published by the Tax Justice Network and so sets a framework for this issue. I did not think I had to define it again, at least in a press release. Not least because the term is in common usage and even if indefinable (which I happen to think is true) can, like an elephant with which it shares this characteristic, be readily identified by a seasoned observer. One was engaged on this research.

Second, Dennis is suggesting that we jumped to a conclusion. Did we? I don’t think so. Anti-avoidance legislation is aimed at taxpayers. We suggested that it was the actions of taxpayers that gave cause for this legislation to be enacted. I accept one can argue where this circle starts, and it’s clear we started at a particular point, which was explicit. But is that an undeveloped argument or an unreasonable conclusion given the starting point? I doubt it. No one else but Dennis seems to have this problem. And like most pressure group analysis, we weren’t pretending this was PhD stuff. It was simple analysis involving some judgement, and as it so happens incorporated considerable caution in our case to ensure that we did not overstate the case.

How cautious? Well, enough that we could have claimed almost 60% of legislation was focused on anti-avoidance. We chose not to. We went to the bottom end of the scale we could calculate and used 41%. Let’s use the range 40% to 60% to cover possibilities and anyone who wants to count something differently from us will have to contend with the fact that our methodology (which weighted all sections and schedules as being of equal length in the legislation when those relating to anti-avoidance are, as our testing showed, much longer on average than those introducing new initiatives) under scored the page allocation made to this category of sections and schedules.

Unless someone is in denial about the existence of either tax avoidance, or anti-avoidance legislation our research is a good marker in the sand. We’ll stand by it. But if anyone would like to fund us to develop it further, just call me. We could undertake a lot more research on the issue if we had the cash to do so.

Richard Murphy Dennis Howlett, Tax Justice Network, Tax avoidance

Dennis Howlett has written some very confused articles on tax evasion over the last few days: so confused that I am not sure where Dennis thinks he’s heading.

His latest is worth reading. Because it’s the most recent it might suggest that he’s been working out his own confusion, because the earlier ones are much harder to fathom, making confusing claims (and quite unusually for Dennis) what appear to be errors of logic.

Take the first. In this he takes issue with me on numerous fronts. Too numerous to worry about. But one of his key contentions is that I should not have said:

Everyone knows that large numbers (but I accept not all) of these [micro] businesses do suppress receipts to pay less tax.

I did this here. Simon Sweetman also questioned my claim, saying this was no longer Revenue thinking. I apologise to Dennis, but not Simon. Dennis rightly picked me up for not referencing my claim. So I’ll correct that now. The latest research literature on this is, as far as I know to be found here. The authors, Per Engström and Bertil Holmlund of Uppsala University in Sweden wrote a paper in 2006 called ‘Tax Evasion and Self-Employment in a High-Tax Country:Evidence from Sweden’. It’s a good paper and adds to the literature in this area. As they note in their abstract:

Self-employed individuals have arguably greater opportunities than wage earners to under-report their incomes. The incentives for underreporting should be especially strong in an economy with generally high taxes. This paper uses recent income and expenditure data to examine the extent of underreporting of income among self-employed individuals in Sweden. A key hypothesis is that underreporting of incomes among the self-employed would be visible in the data as “excess food consumption”, for a given level of observed income. Our results confirm the underreporting hypothesis. In particular, we estimate that households with at least one self-employed member under-report their total incomes by around 30 percent. Underreporting appears to be twice as prevalent among self-employed people with unincorporated businesses as among those with incorporated businesses.

That’s pretty clear evidence of systematic abuse of the sort I suggest to be a matter of public knowledge. It’s also why I hope Simon is wrong about the Revenue not presuming the self employed understate income systematically. All the evidence is that they do. As Lyssiotou, P, P Pashardes and T Stengos noted in ‘Estimates of the Black Economy Based on Consumer Demand Approaches’ in the Economic Journal 114 reported, in the UK the true income for blue collar self-employed people is more than 100 percent greater than reported income, whereas true income for white-collar self-employed people exceeds reported income by 64 percent.

I’m satisfied that every informed person could have known this, and I note that following his blog in which he made the accusation against me Dennis delved into the academic literature of tax for the first time that I recall, so maybe he realised how I’d respond.

I do, by the way, instinctively believe that Lyssiotou et al overstate the case. But, I also have no problem believing the findings of Engström and Holmlund. Sorry Simon, this is the reality.

PS I’ve struggled to determine what else Dennis was trying to say in the rest of his post or that which follows on tax evasion. I’ve asked him directly and have only received cryptic answers. So I’m afraid I’ve given up the struggle and am presuming that his third article shows where he got to. If so, he seems to agree that the profession is a key supplier of services that at least assist taxation abuse and that greed is the motivator for this. But it’s darned difficult to work out his thought pattern on the way.

If you elucidate Dennis I’ll engage. If not, I’ll stay on the sidelines.

Richard Murphy Corruption, Dennis Howlett, Tax avoidance, Tax management

Dennis Hewlett at AccManPro has been seeking to engage me on the issue of government spending. I have been reluctant to respond as he would wish. The reason is simple. He seems willing to promote websites that have a view of government that is, in my opinion, critical and unhelpful.

I do not share that approach, even if Dennis has sought to call my own ‘lop-sided’. Since I start from the premise that the market has an essential role within the economy, and that there are great many activities for which it is the obvious or only economic supply mechanism I clearly do not have the biased view of those sites he has sought to reference which appear to only be capable of abusing government and all engaged in its service. The fact that I also believe that government alone is the best, or on occasion the sole able supplier of some other services suggests, I think, that mine is not a lop-sided starting point, but one that is balanced. I hope so. I genuinely feel that the mixed economy works best.

That being the case, I have refused to engage in debate with those who seek to abuse government for one simple reason. I think it extraordinarily unhelpful. It is my experience that quite extraordinary people work for both government and business. And each have their fair share of both dullards and laggards. Inspiration is common to both. And so are mistakes. In fact, it’s quite easy to find matching pairs. In the case of the NHS IT system debacle just look at Sainsbury’s distribution IT fiasco, which left one of the largest supermarket chains in the UK with massive gaps on its shelves whilst product rotted in warehouses and you’ll see the similarities.

As I have explained here before, I find this easy to explain. Large organisations operate almost independently of their ownership structures. As a consequence what is noticeable about the state and large companies private sectors is what they have in common and not what divides them. That is the premise from which I might start any consideration of state spending.

After which I would seek to objectively determine how big the problem being addressed might be. Recent reviews have put varying values on the degree of inefficiency in the UK state sector. The Gershon Review estimated this to be £21 billion. The Conservatives James Review estimated waste to be £35 billion. Some, such as the Taxpayer’s Alliance suggest the sum might be £80 billion, but their methodology is so flawed that their work could not be taken seriously by anyone. Including all spending by Quangos as being, by definition wasteful (as they do) really does not result in credible conclusions.

A serious estimate of waste might therefore be in the range £21 - £35 billion. Let’s call it £28 billion. In 2006/07 total government spending is estimated to be £552 billion (source: March 2006 Budget Report). That means 5% of government revenue might be saved by judicious reviews of spending by government.

Now let’s put this in context. First of all, as almost any procurement specialist will tell you, there’s almost no person or company in the UK (or elsewhere) who could not save 5% of their current budget by more judicious management. I’ve certainly never arrived in a company as a consultant where I have not found that to be possible. So I’d actually suggest government, whilst not being as efficient as it could be (which is, of course, always going to be a statement of fact) is doing pretty well overall on this basis. 95% right is a good score.

Secondly, if I have a choice as to where I think my activity could be focused I can either look at the income or spending sides. With the resources I and my colleagues have available I doubt we can seriously cover both right now. And the losses on the revenue side from the combination of avoidance and evasion are clearly much larger. The VAT gap was, for example, hoped to be no more than 12% in 2005-06. Given the rise in carousel fraud it was probably more. But let’s stick with 12%. That means in relation to spending the gap is about £75 billion (£552 billion x 100 / 88 - £552 billion). There are plenty of estimates that put it higher than this.

So which is more important? £28 billion of savings or £75 billion of extra income? Well both are, but if a choice has to be made it’s obvious which to go for if you are interested in spreading the burden of taxation fairly and in cutting it for everyone. I’ll be sticking to the Revenue side and in the meantime might ask the obvious question, which is why are those on the right emphasising the less important one? What is their agenda in doing so?

Richard Murphy Dennis Howlett, Tax avoidance, Tax management

As readers of this blog might realise, I have been assisted technically in getting it going by Dennis Howlett of AccmanPro, assistance for which I was very grateful as I get to know this medium and the technology it uses. I’m also an admirer of Dennis’ blog, and we share views on some issues.

So it was good to finally meet Dennis at the Accountancy Age Awards last night. By coincidence, at an event 1.200 people attended we arrived at the door at the same moment. And, it was good to see Goodman Jones, who Dennis has been advising on a professional basis on these issues win an award for their use of the internet. It’s time more firms jumped in on the act.

Thanks too to my hosts for the night, ICC. We’re looking at interesting projects for the future.

The down side of the evening? William Hague’s insincerity abut the achievements of the accountancy profession. And Dave Hartnett of the Revenue not receiving personality of the year award. Who has heard of the senior partner of BDO who got it? Did they put out a three line whip to ensure he won? I read a lot of accounting press material, and still can’t recall his name. It’s a funny world.

Richard Murphy Accounting, Dennis Howlett