Tax Research UK

Tax, not cuts to plug public deficit.

AccountingWEB reports:

HMRC should focus less on spending cuts and more on chasing the £130bn in uncollected, evaded and avoided taxes, says the Public and Commercial Services Union.

The union warned that the main political parties were engaged in a bidding war over who could cut the most, whilst the government was losing billions to tax cheats.

The PCS estimates that £70bn is lost through tax evasion, while £25bn is lost through avoidance. It blamed some 25,000 job cuts at HMRC and plans to close 200 offices by 2011 for the £2.7bn rise in uncollected taxes last year.

“Job cuts in HMRC illustrate the short sightedness of crude cuts where staff chasing tax have been axed, even though they recoup £600,000 each after staff costs. It is no coincidence that as HMRC staff have been cut, the amount of uncollected tax written off as doubtful has nearly doubled,” said Mark Serwotka, general secretary of the PCS.

PCS data on tax lost comes from my work.

Data on uncollected tax is something they specialise in though. And from my discussions with them it appears to me this is one of the big, and unrecognised aspects of the tax gap.

Why won’t HMRC employ enough people to collect tax known to be due? Surely tax justice and being being fair to honest tax payers demands that action be taken?

Richard Murphy HMRC, Tax gap

FT.com / UK / Economy & Trade - Tax system flaws cost UK £40bn a year .

Again, reasoned analysis from the FT this morning, this time on HMRC’s new report on the Tax Gap. The FT says:

Loopholes, evasion and other flaws in the tax system are costing the country about £40bn in revenue a year, according to an official estimate likely to inflame arguments over how to repair Britain’s biggest ever peacetime deficit.

HM Revenue & Customs’ first ever estimate of the overall “tax gap” reveals that 8 per cent of the expected tax due goes uncollected for a variety of reasons ranging from simple errors to criminal attacks.

The reactions are interesting:

Advisers expressed scepticism about the tax gap calculations, however. Francesca Lagerberg of Grant Thornton, a professional services firm, said the Revenue risked chasing after “mythical amounts”. Bill Dodwell of Deloitte, another professional services firm, said: “It really is finger in the air stuff.”

Mythical? Respectfully, these are responses of those in denial about the reality of the scale of tax loss in the UK, loss that their firms help create through tax avoidance - which Deloittes denies forms part of the tax gap, suggesting it is officially endorsed.

Thankfully alternative comment is available:

But Richard Murphy, a campaigner and TUC adviser, accused the Revenue of seriously underestimating the scale of the tax gap, which he believed was likely to total about £100bn. “People should be angry about it,” he said.

The TUC recently called for a fairer tax system that “made it harder for people to avoid or evade paying the proper amount of tax”, which it said was an alternative to making big cuts in services or making ordinary people pay more tax.

Quite so.

It’s a good job some of us care about the tax gap.

Richard Murphy TUC, Tax gap

Any quoted company has to file accounts that include a tax reconciliation statement.

The statement is meant to explain the difference between the tax rate in the accounts and the statutory tax rate.

RBS has admitted tax avoidance of £500 million today.

This is its tax reconciliation statement in its 2008 accounts:

The only line in there where this could hide would be ‘non taxable items’. They’re a credit – the only one there is year in year out.

Is that good enough?

If this is where the tax avoidance is hidden is that a set of accounts really giving a true and fair view?

I’ll say this to Deloitte LLP: this is ‘just rubbish’.

And I now have the satisfaction of knowing I’m right and Deloitte LLP is wrong.

Richard Murphy Accounting, Banking, Deloittes, Tax avoidance, Tax gap

The Guardian have noted that a proposal to charge a turnover tax has been made by at least commentator on its Tax Gap series, with the claim being made that this will reduce avoidance and increase fairness.

Neither is remotely true.

I commented as follows:

There is a fundamental difficulty with this proposal. We do already have attacks of exactly the form that is described. It is called VAT. We already pay it at 15%, and is scheduled to increase to 17.5% (or more) at the end of this year.

Historically VAT has been heavily evaded. The Public Accounts Committee of the House of Commons has published regular reports on this issue over a number of years and the rates of evasion vary between about 14% and 17% of the time. I make this point for one simple reason: such attacks will not close the tax gap. Furthermore, if this tax was to collect the £45 billion a year that is currently collected by corporation tax and VAT rate would have to increase to at least 28%, way outside the limits are allowed by the European Union, and providing massive further incentive for the black economy.

In addition, the social impact will be enormous. VAT is quite clearly a tax upon consumers. Any tax on turnover is paid by consumers. Whatever we argue about incidence, in this case I think that is clear. Those who consume the most as a proportion of their income are, of course, those on the lowest levels of earnings. They have no savings. Those who consume the least as a proportion of their earnings are those with the greatest wealth. By definition they save.

Let us be quite clear therefore that any tax of the type that you propose is deeply regressive. It will increase the wealth and earnings gaps in the UK and it will not tax capital as a proper corporation tax without loopholes should. Your proposal will without doubt make the poor poorer, to spell this out in the bluntest of terms.

Maybe that is your reason for proposing this tax. I hope it is not, although it is quite clear that this is why it is so popular with many of the right wing think tanks, and I am quite sure that it is also the reason why it will be proposed by the forthcoming Mirrlees commission from the Institute for Fiscal Studies, which seems to have the same overall orientation. I have noted this issue with regard to their work here. If you search Mirrlees on my blog you will find plenty more on a similar theme, including costings and the evidence that they could not even do basic arithmetic.

I regret to say that for right-wing politicians apart, the superficial attraction of your proposal disguises a deeply unattractive proposal for the well-being of most people in the United Kingdom and that is why it is wholly unacceptable.

Richard Murphy Tax gap, VAT

The Guardian has published a thoughtful blog by ex tax inspector Richard Brookes this morning criticising the Revenue’s tax risk weighting system for large companies.

I posted the following reply:

We should not criticise everything that HM Revenue and Customs does. The idea of ranking large companies as having high, medium or low risk is, in principle, a good one.

It is also important to understand what they mean by these categories. They are not saying that a low risk company does not tax avoid. They are saying that a low risk company is completely open with them about their tax avoidance whereas a high-risk company is both tax avoiding and not being as transparent or open with them as they would wish. At least, this is my understanding from discussion with HM Revenue & Customs. In consequence they are allocating resources to enquiries on those companies who are likely to have something to hide. That is appropriate.

There is, however, a good question about whether this is a sufficient approach. I do doubt that. There are several good reasons.

First of all, in an era when we know that the audit reports on our major companies are meaningless, as Prem Sikka has shown, then the risk assessments undertaken by HM Revenue and Customs could, for many of us, be the best guide to the quality of corporate governance with in these companies that we have available. I would certainly be influenced in my investment decision making if they were to be published, and for that reason believe that HM Revenue and Customs do have a duty to make this information available in the public domain, or that listing agreements do require that they be published in the corporate accounts of the entities who have received such ratings.

There are, however, alternatives. HM Revenue and Customs are aware of these. For example, the Tax Justice Network and Association for Accountancy and Business Affairs jointly published a code of conduct for taxation in 2007. The code is just two pages long; the support notes just a little longer.

For a discussion see here.

We do believe that there is substantial benefit in bringing tax compliance (paying the right amount of tax at the right time in the right place where right means that the economic form of the transaction coincides) out of the closet, and for rewarding it - both by awarding a kite mark and financially. Of course, penalties for then breaching the Code should be high.

This is proactive tax management: precisely what we need.

Richard Murphy Tax Justice Network, Tax avoidance, Tax gap, Tax management

From the Guardian:

Brown presided over the tax system for 10 years, ushering in much anti-avoidance legislation but also several business-friendly reviews and “light touch” regulation from HM Revenue & Customs. He also rejected a general anti-avoidance rule as too onerous.

So when he was questioned on the subject on the floor of the House, shouldn’t the greatest chancellor for decades have been capable of a more coherent reply?

The reason? He completely fluffed answers to Nick Clegg arising from the Guardian’s Tax Gap series.

Worrying. You’d have thought this was one thing he did know.

Richard Murphy Tax avoidance, Tax gap

From the Guardian blog by Vince Cable:

In the case of the UK-based global banks, we have also painfully discovered in recent weeks that the UK taxpayer has vast exposure as a result of the government’s role as lender (and, now, investor) of last resort. To see these catastrophically mismanaged institutions going cap in hand to the government while simultaneously organising tax avoidance schemes at the expense of the UK taxpayers beggars belief. One of the important supplementary arguments for the government assuming direct control of the banks it has rescued is to bring such practices to an end.

And:

[T]here is a strong case for a more aggressive approach to tax avoidance. The systematic and widespread avoidance of stamp duty land tax by corporate vehicles can be stopped quickly. More broadly the idea of a General Anti-Avoidance Rule is that tax is applied wherever there is an intention to avoid it, even if the loophole hasn’t specifically been identified in advance by the Inland Revenue.

There is only so much governments can do in isolation. Tax arbitrage involves playing off one state against another. Governments can limit that game by co-operating. The British government’s dogmatic opposition to any EU tax harmonisation has inhibited sensible, practical initiatives like agreement on a common EU tax base (not harmonisation of rates but agreement to treat depreciation and other accounting conventions in a similar way). Britain has formed a bizarre alliance with Ireland and the Baltic states to block co-operation.

And:

Tax havens are the big challenge for the UK, which has spawned a substantial number in its dependant territories. There has been limited progress in stopping the grosser abuses, such as money-laundering, but non-criminal tax-dodging continues apace. There is now a mood in the Obama administration and the EU to crack down on havens through such measures as withholding taxes to prevent leakage outside the main jurisdictions. The UK has traditionally dragged its feet on measures to curb tax havens, on the basis that these helped the City of London to attract business. It is to be hoped that straitened fiscal circumstances and a less credulous approach to the City will now persuade the government to turn its guns on the tax havens and tax-avoidance industry.

You can see why this man is thought to have the best economic brain in British politics.

Richard Murphy Accounting, Banking, Corporation Tax, Economics, Tax Havens, Tax gap

I note that Tim Worstall is persisting in his claims that my methodology used in the TUC report, The Missing Billions, is flawed.

I have already dismissed his arguments on tax incidence. They are substantiated only by the false assumptions he makes about the reality of transparency in the corporate world. Let me now deal with this second, false, allegation.

Worstall’s argument appears entirely dependent upon rhetoric. If ever there was a man to split hairs it is him. I am reasonably confident if there was no person left on earth to argue with Worstall would take issue with a lamp post, and it has to be said that argument with Worstall is totally pointless because it continues ad nauseum without any benefit arising. As a result, candidly, I will not bother. Far too many people of sound mind had been convinced by my argument to need to engage with him in that way.

I do instead issue a straightforward challenge. As my research has shown, using the data published by the 50 largest companies in the UK in the period from 2000 to 2006 and considering just the current tax charge and profits with goodwill added back, because the goodwill charge in a set of accounts is almost never allowed for tax, an extraordinary trend is apparent. In 2000 the ratio of current tax declared to pre-goodwill profit was 26.1%. By 2006 it was 22.5%. On a trend basis the decline was just over 3.5% during the seven year the period even though the UK corporate tax rate throughout this period was flat at 30%.

Throughout this period the current tax rate was almost exactly 5% less every year than the declared tax rate placed upon the proper loss account of the companies in question: in other words, always and persistently the companies paid at least 5% less in tax than they declared on their profit and loss accounts. The resulting graph looked like this:

In addition in 2000 there was under £9 billion of deferred tax liability on their balance sheets. In 2006 it was almost £47 billion, an increase in unpaid tax of £38 billion in seven years from just 50 companies.

I’m well aware that Deloittes tried to brand this finding ‘just rubbish’ but unfortunately for them they audited a significant amount of the data I used to reach this finding. All they managed to do as a consequence was questioned the credibility of their own audit procedures, for these are facts. Whilst the tax rate in the UK was not falling, and whilst the weighted average tax rate around the world taking population as the basis of weighting hardly fell at all, the overall declared corporate tax rates of these companies fell dramatically.

I say that was because of a significant and deliberate increase in the abuse of the world’s tax systems by these companies through the undertaking of tax avoidance. Worstall disagrees.

My challenge to Worstall is simple. Produce the data that can show any other explanation for this trend, but I warn you in advance: do not use KPMG’s survey of corporate tax rates because that is a simple statistical analysis which takes no account of the population size of the countries in question, or of the size of their GDP and therefore of their relative economic significance. As I noted above, when these factors are taken into account this cannot explain this trend, as I proved in earlier research.

Tim Worstall can nitpick, but I have produced answers and he has not. That is the difference between us and right now I can find no alternative explanation of the evidence I created and which others can now reproduce.

That’s why I stick by my work, its methodology and its findings and the obvious inferences that can be drawn from it.

The numbers tell this story loud and clear. That’s enough to justify action.

Richard Murphy Corporation Tax, Tax gap

The Guardian has begun its Tax Gap series.

And those who spend their whole lives seeking to be negative are already pointing out that in its 2008 accounts the Guardian Media Group actually reported a tiny tax refund on its profit and loss account on profits exceeding £300 million.

As a result I have looked at the issues, and have prepared a report on the Guardian’s own tax gap, here.

My conclusion with regard to its tax gap:

The Guardian Media Group was on average during this period the persistent highest payer of tax in its sector, declaring a rate over the period that was almost exactly that expected of it in the UK, and settling a liability only a little less than that.

It does have a tax gap, but it is not significant, its prior year adjustments to its declared tax are lower than average, and it does therefore appear to indicate a high rate of tax compliance within its accounts when compared to the sector and other companies I have researched, for example in the report ‘The Missing Billions’ for the TUC which showed average tax rates of the largest UK based corporations in this period were significantly below the rates declared and paid by the Guardian Media Group plc.

As for the 2008 exceptional result:

The tax credit on the exceptional part sale of the Auto Trader group was almost entirely deferred tax, and as such is ignored in the comparative analysis noted above. As stated there: such deferred tax liabilities are rarely paid, and they were not in this case, giving rise to their credit to the profit and loss account. Any criticism needs to be of accounting rules that so significantly distort the proper reporting of real taxation liabilities.

No complicated planning was needed to produce the low tax charge on the sale of this interest: the government has since 2002 provided that Substantial Shareholdings Relief is due when an asset of this sort is sold and no tax is due. The Guardian was, therefore, being tax compliant: the company is doing what the government wants, and for which it provides a relief. It would appropriate to criticise the government for introducing a tax relief of this sort: the Guardian cannot be criticised for using it when the law required that it be applied.

Disclosure: Tax Research LLP has advised the Guardian Newspaper on taxation issues. It has not advised the Guardian Media Group plc.

Richard Murphy Tax gap

The Guardian has launched its Tax Gap series. As it notes:

Last October the public accounts committee criticised the Treasury for its inability to measure the missing billions. It said: “The department does not have a robust measure of the corporation tax gap. It should develop such a measure and publish the results.”

I have, of course, already worked on this issue, and the research I did for the TUC is extensively referred to.

These are difficult to relate to real life. But if the TUC is correct, it means that 2.4m households - a tenth of all those in Britain - are paying over their entire annual income tax just to plug the gap left by the legal manoeuvres of big corporations.

I am, of course, happy with the research I did. I do, in fact, think that as with all my estimates it is cautious and bound to underestimate the problem as a result.

But look at that statistic: it takes 2.4 million households to make up the gap caused by legal tax avoidance. See it this way and it is obvious what is happening: the rich are making themselves richer at the expense of ordinary people in the UK.

No wonder those ordinary people are fed up with the taxes they pay.

No wonder they are annoyed at the stealth taxes they have been charged with.

No wonder they are fed up with politicians who will not stand up to these corporations.

The Guardian is right to draw attention to this issue: it is the cause of one of the fundamental social grievances in our society right now and it has to be addressed.

Richard Murphy Tax avoidance, Tax gap