Dennis Howlett » Tax Research UK

41% – right or wrong?

Dennis Howlett, Tax avoidance, Tax Justice Network 6 Responses »

Dec 082006

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‚Ä¶)

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.

Do small businesses evade tax?

Corruption, Dennis Howlett, Tax avoidance, Tax management 5 Responses »

Nov 272006

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 Engstr??m 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 Engstr??m 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.

What to tackle – government revenue or spending?

Dennis Howlett, Tax avoidance, Tax management 10 Responses »

Nov 212006

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?

Congratulations to Dennis Howlett

Accounting, Dennis Howlett 2 Responses »

Nov 162006

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.

The Big 4 – where is the audit market going?

Accounting, Dennis Howlett, Practice management Comments Off

Sep 222006

Dennis Howlett has been musing on developments in the market for the Big 4 as pressure is brought to bear upon them.

What he says is worth reading. So I won’t repeat it.

Unreasonable men

Dennis Howlett, Uncategorized 3 Responses »

Sep 132006

My friend Dennis Howlett has been giving this blog some plugs, and has even been saying some kind things about me. He does so in this article which is worth reading for far more reasons than that.

What he says, in a nutshell, is that a couple of curmudgeons are a good thing for a company. They provoke change. I think he’s saying I’m such a character.

George Bernard Shaw put it another way, which I like. He said:

The reasonable man adapts himself to the world: The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.

My wife first introduced me to this quote. She thinks I’m an unreasonable man. I think she was using GBS’s definition.

Ethical practice

Dennis Howlett, Ethics Comments Off

Jul 312006

There’s a good discussion at AccManPro on ethical consulting practice, so I won’t reproduce it here.

Suffice to say, this gives a flavour:

Which leaves me with a question for professional accountants. If you’re not taught the fundamentals of integrity and ethics as a practical discipline based on solid theoretical grounds, then what value is there in your benchmarked advice?

And this comment by me (and do read the comments) adds some tone:

If we project our assumptions onto the client we fail. We have an ethical duty to listen. When we have we can advise. Until then we’re best keeping our mouths shut.

It’s so refreshing to find that there are a few who do actually care about this sort of thing.

KPMG think there’s room for improvement in tax reporting

Dennis Howlett, KPMG, Tax management Comments Off

Jul 262006

Accountingweb in the USA reports that KPMG have done a survey on the effectiveness of audit committees. Since the survey was of the members of such committees perhaps it wasn’t surprising to find that most thought they were doing good job.

Even so, many thought there was still room for improvement. In particular the following needed attention:

Oversight of internal controls (36 percent)
Financial reporting implications of taxes (59 percent)
Fraud risk (61 percent) and
Information security (78 percent)

I am sure they are right. I’ve read more sets of accounts of more quoted companies than most people in the last year or so as a result of the work I did on Mind the Tax Gap.

And if you want an example of how bad tax reporting gets have a look at the hash Reuters have made of it under IFRS in 2005. In 2004 I reckoned their figures were amongst the better ones available. Under IFRS they’re nonsense.

Which means I reckon the workload of UK audit committees just increased somewhat more.

Thanks to Dennis Howlett for the hat tip.

Feedblitz emails

Dennis Howlett Comments Off

Jul 252006

I realised yesterday that the Feedblitz email system on this blog was not working. So I offer my apologies to all those who have signed up and for whom. I hope, this is one of the first messages they get. Blogging, when you try to do it seriously, is a bit techy. I hope I’m getting through the learning curve.

And, as usual, my thanks to Dennis Howlett for helping sort this. And to Phil Hollows of Feedblitz as well. Both gave invaluable support. The blogging community is a remarkable case of a situation where people seem to realise there is value to be had in helping each other…..