Tax planning » Tax Research UK

It’s true- small business really does pay tax at higher rates than big business in the UK.

ConDems, Conservatives, Corporation Tax, Tax avoidance, Tax gap, Tax Havens, Tax planning 6 Responses »

Mar 022011

I am a regular critic of the Oxford Centre for Business Taxation, and I think with very good reason, but I also give credit where credit is due, and this Centre has published a new report which is welcome because it supports an argument that I have put forward some time, which is that large business in the UK pays tax at a lower rate than small companies in this country.

This argument has, of course, been made in my work for the TUC, including the Missing Billions and an update on the tax gap in the UK published last October. In both of those reports I argued that the effective tax rate of large companies in the UK had fallen to a point where they were likely to be below the small companies rate of UK corporation tax. Many in the business community, and, it has to be said some academics at the Oxford Centre, dismissed this work. So too have ministers in thecurrent government, but it has now been proven to be correct. As the new Oxford report says when looking at the corporate tax system as a whole:

We begin by presenting stylised facts, based on aggregate data.
‚Ä¢ In 2010 the UK had the 7th lowest corporation tax rate in the G20, and the lowest in the G7.
‚Ä¢ For over 25 years the UK’s corporation tax rate has been well below the G7 average.
‚Ä¢ Despite this, as a proportion of GDP, UK corporation tax revenue has generally been above the G7 average. Revenue peaked in 2007/08 at around £46 billion, before falling back to less than£36 billion in 2009/10.
‚Ä¢ UK corporation tax revenues have been volatile: more volatile than both GDP and personal income tax revenues. Revenues from the financial sector have been particularly volatile.

It then goes on to look at details:

‚Ä¢ One reason for the growth in corporation tax revenue up to 2007/08 was a substantial increase in the number of companies with positive taxable income. This more than doubled from 450,000 in 1998/99 to over 920,000 in 2007/08 before falling back slightly.
‚Ä¢ The growth in the number of companies was associated particularly with the reduction to zero of the starting rate of corporation tax between 2002/03 and 2005/06.
‚Ä¢ Despite the growth in the number of companies, corporation tax payments are highly concentrated. The top 1 percent of all companies pays 81 percent of UK corporation tax.
‚Ä¢ Independent companies pay just over 10 percent of UK corporation tax. By far the largest share of corporation tax is paid by companies that are part of multinational groups, with a similar proportion from UK-owned and foreign-owned groups.
‚Ä¢ A significant proportion of companies that have a positive accounting profit do not show a positive corporation tax charge in their accounts; this proportion is similar across the different groups, and ranges from 13 percent to 15 percent.
‚Ä¢ Independent companies tend to have a higher proportion of zero tax liabilities. Companies that are part of groups have a higher incidence of negative tax liabilities, possibly because they are able to surrender losses to other companies through group relief.

And dealing with tax return data (which was made available to them for their research):

‚Ä¢ Tax return data indicate that a significant proportion of companies do not have a positive tax liability.
‚Ä¢ Amongst the smallest companies, this proportion is around 60 percent; as size increases, the proportion drops to 40 percent and then increases slightly to about 50 percent for the largest companies.
‚Ä¢ Within each sector there is evidence that, as a proportion of trading profit, the tax liabilities of the largest 100 companies are generally lower than for other companies.

I added the emphasis – but the case is proven.

That said, what is significant about the report is what it does not say – which is why so many companies are not paying tax. As the FT notes:

Michael Devereux, of the Oxford University Centre for Business Taxation, said there were a number of possible explanations for the finding that the largest companies paid lower rates of tax as a proportion of earnings before interest and tax than smaller companies except in publishing and the sector covering textiles, wood and paper.

These included big groups’ greater use of capital allowances and ability to offset losses against profits. He warned against drawing firm conclusions. “We do not have enough information.”

In other words – there is compelling evidence of systematic tax avoidance, because large companies should be paying tax at 28% and are actually paying it at less than the 21% due by small companies but we must not, Oxford says (returning to its normal apologist style) draw any conclusions from this – a point on which I fundamentally disagree with Mike Devereux, as ever.

It is, however, interesting to note that they did at least have the courage to analyse the difference between the last Labour tax reforms in 2008 and the Conservatives reforms of 2010, of which they say:

‚Ä¢ Although the 2008 corporation tax reform reduced tax revenues overall, around 71 percent of companies had a higher tax liability because of the rise in the small profits rate, while only 1 percent of companies had a lower tax liability.
‚Ä¢ By contrast, the 2010 corporation tax reform resulted in around 64 percent of companies having a lower tax liability

The message that the Tories are indeed ensuring we’re not all in this together and that they are, as many suggest, favouring large companies and their wealthy owners is right.

It’s good to have Oxford support all I’ve been saying about this for some time.

It’s a shame that Oxford will continue to fail to draw the obvious conclusions from the exercise – that tax avoidance needs to be clamped down on, tax haven activity needs to be stopped and allowances and reliefs must be targeted where they result in real economic benefit, and not at banks. But that may be asking too much. The Oxford Centre is, after all, funded by the FTSE 100 Group of Finance Directors.

Profits everywhere – except near the tax man

Country-by-country, Economics, Tax Havens, Tax planning, Transfer Pricing 1 Response »

May 142010

There’s a second article from Jesse Drucker in Bloomberg today. It reports:

Over the past three years, Pfizer Inc. was an earner without profit in its own country.

The maker of the cholesterol medication Lipitor, the world’s top-selling prescription drug, reported almost half its revenues in the U.S. for 2007 through 2009, while booking domestic pretax losses totaling $5.2 billion.

Abroad, it was another story. A Dutch subsidiary more than made up for New York-based Pfizer’s American losses. It reported pretax profits totaling $20.4 billion in 2007 and 2008 — with a tax expense of 5 percent, a seventh of the top U.S. rate. Overseas tax savings increased the drugmaker’s net income by $1 billion last year, according to Robert Willens, a tax consultant in New York.

Pfizer is one of thousands of American companies that bolster their profits by attributing income to subsidiaries in countries with lower income tax rates, legally cutting their tax bills. Eli Lilly & Co. and Oracle Corp. were among other big companies that helped drive a 70 percent increase in accumulated earnings abroad that weren’t taxed in the U.S. from 2006 to 2009, according to data compiled by Bloomberg.

“An inordinate concentration of profits in a low-tax country, way out of proportion to actual economic activity, is a sure sign of aggressive tax planning,” said Martin Sullivan, a tax economist who formerly worked for the U.S. Treasury and Arthur Andersen LLP.

Martin is a great guy.

He’s never wrong on these issues.

This is the economic reality of globalisation.

We could shatter it with country-by-country reporting.

That would shift some of the burden of the tax increases we’re going to have back onto capital.

What are we waiting for?

Transfer pricing

Tax planning, Transfer Pricing, Transparency Comments Off

Nov 092009

I have been asked to do a video on transfer pricing.

Actually, I did, a couple of years or so ago (I can tell from the glasses). So rather than repeat the operation, here it is, with apologies to the several thousand who seem to have watched it in the meantime:

Is there any room for tax planning in my world?

Tax compliance, Tax planning 3 Responses »

May 182009

I’ve been asked:

In your view, is there any room for legitimate “tax planning”? In a “perfect” world what would the role of the tax profession be?

Sorry if this has been previously dealt with, as I said in the other post, I am quite new to your blog.

My answer is an emphatic ‚Äòyes’.

Tax planning must, I think, be tax compliant. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

To put tax compliance another way – it means you can place all your cards face up on the table in front of your tax authority and know thee is nothing there they would want to challenge. Everything you have done is legal, above board and in compliance with the spirit of the law.

All of which allows enormous scope for tax planning because the law in most states, and most certainly in the UK, allows many options and choices that match those available in the commercial world. So, and taking a simple example, a new piece of equipment may be bought or purchased by a business. The law provides tax relief in differing ways for different businesses when these choices are made. It is quite appropriate to ask what those choices are and to decide between them and to claim the relief in any case is justified if the transaction has actually been undertaken in the form for which relief is claimed. The law intends that this should happen.

What is wholly unacceptable is deciding to create structures abusing those same laws so that the deal is treated as leased in some places and acquired in others with more than one tax advantage secured along the way across an international divide. That does not accord with the economic reality of the transaction: the location of the deals may also be artificial.

There are two stages required to undertake this planning. One is good knowledge of the law. The other is a moral compass. Some lack the former; many seem to lack the latter. A general anti-avoidance principle is needed for those who lack the second. Either a moral compass or a general anti-avoidance principle should ensure we get tax compliance, but that does not mean the end of tax planning. It just imposes upon it the ethical process we all expect of or MPs and professional tax advisers alike.

Budget 2009: £3bn raid on top earners’ pensions

Economics, Ethics, Tax planning Comments Off

Apr 252009

Budget 2009: £3bn raid on top earners’ pensions buried in small print – Telegraph.

If those 1% or so on the highest level of earnings, who benefited most from the economic boom that prceded the credit crunch and recession are not going to pay most for it, who is?

There’s an incredible poverty of thinking here

And the argument that thyey’re worth so much that they’ll leave is ridiculous. As I saw it described in one London evening free paper last night – this won’t be a brain drain – it will be a vain drain.

They’ll come back when they realise just how low the quality of life is away from home if they only leave for money.

Accountants do not have to tell their clients about tax planning schemes

Accounting, Ethics, Tax avoidance, Tax compliance, Tax planning Comments Off

May 302008

AccountingWeb has an article in which it is claimed that 95% of accountants may be negligent with regard to tax planning because they do not tell all their clients of all the tax planning schemes that might be available to them.

I think that an absurd suggestion and have said so on that site, saying:

This debate has been around for a long time. Let’s deal with the tax avoidance thing first. Most people are risk averse, especially when they know the facts. Kite G has outlined some of them. Most accountants are risk averse, especially when they know that the cost of a tax investigation on a scheme they sold to a client will probably fall to their account (and don’t always rely on insurance). In that case, and given the ethics of tax avoidance (or rather, the absence of ethics in tax avoidance which means that in my opinion a professional person has a duty not to partake in that activity) then the accountants position can be made abundantly clear to a client at the outset of the relationship – and can be summarised in the engagement letter. It can be stated that arrangements that the accountant thinks to be tax avoidance will not be offered to the client for consideration on the basis that the risk inherent in them is always considered unacceptable for either accountant or client to consider. Use David Ulph’s definition of tax avoidance if it helps:

Using artificial or contrived methods of adjusting taxpayers’ social, economic or organisational affairs to reduce their tax liability in accordance with the law while not affecting the economic substance of the transactions.

That gets one contentious issue out of the way. Completely.

Let’s now get back to the point. Does an accountant have a duty to advise a client on every tax compliant planning opportunity available? No, of course they don’t. To say they do is complete cop-out of professional duty. Client’s engage accountants to take stress of their shoulders in an area they do not understand: in our case accounting and tax. They do not choose to have an accountant to be the recipient of endless unrequested advice on complex issues they do not comprehend and on which they are not qualified to form an opinion. They paid an accountant to do that.

So, it’s an accountants duty to use their professional judgement to suggest opportunities to clients that might be suitable for them. But that has to take into account the broad range of knowledge an accountant has.

Let’s take an example. It remains true that limited companies can, theoretically, save tax for a lot of self employed people, most of whom have no regard for the corporate veil, the need to account for tax whenever funds are withdrawn from a company, and who believe that any account with money in it is theirs to raid. It is completely negligent of an accountant to recommend the use of a limited company to a person who does not have the discipline to operate it within the constraints of the law and so expose that client to all sorts of risk. So why do it, to then follow up with a comment which basically says ‘You could do this apart from the fact that I think you far to negligent to manage the arrangement?’ Is that good client relationship management? I don’t think so.

In other words, the accountant has a duty to exercise their own judgement. That is what being a professional person means: exercising judgement. The solution recommended here is a technical solution designed to alienate clients. I’d suggest giving it a very wide berth.

But as for the glaringly obvious advice everyone should supply, why aren’t you doing that by email, web site, in routine letters, even (hard to imagine they’re relevant anymore, but someone must do them) newsletters? If the client refuses to take the service, so be it. Make sure it’s been offered. Then liability risk is removed.

That is being proactive.

I get very annoyed by accountants who claim they have no choice in what they do. They have. They’re not technicians who deal in certainty. They’re professionals who deal in uncertainty. That means choice is an essential part of their work. To deny that is seriously misleading, at best. It is as often irresponsible because it creates an entirely false impression of what a practicing accountant can and should do.

And what they should do is form judgements. This article appears to deny that essential truth. As such it is very poor advice indeed.

Britain’s big companies aren’t paying tax

Accounting, Tax avoidance, Tax management, Tax planning 5 Responses »

May 202008

The Times has reported this morning that:

Some of Britain’s biggest listed companies, including several that have threatened to redomicile abroad, paid little or no corporation tax in Britain in 2007.

Research by The Times shows that FTSE-100 companies – Cadbury, Standard Chartered and British American Tobacco, which have a combined market capitalisation of £75 billion, employed almost 11,000 UK staff and generated more than £6 billion in global profits, – paid zero corporation tax in Britain last year.

As the report goes on to note:

Richard Murphy, an accountant with Tax Research UK, who contributed to the research, believes that the system is in urgent need of reform. He said: “Why does the UK have a tax structure where you can have significant operations in the UK but pay all your tax overseas? We have an extremely generous corporate regime, which needs to be reexamined if this is the case.”

And:

Mr Murphy cited Rolls-Royce, the jet-engine maker, which employs 22,900 of its 38,600-strong global workforce in the UK but paid only £13 million in British taxes last year because the majority of its £733 million pretax profit was earned from overseas sales. Rolls-Royce, which says that it has no plans to relocate overseas, pointed out that its UK manufacturing and research operation was costly.

However, Mr Murphy said: “This cost structure is inevitable, but international rules for pricing within a group of companies allow for this and should usually result in tax being paid where the profit is generated. I’d usually expect that to be where most of its people are, especially in an R&D-based company.”

This analysis was all undertaken by the Times using data in the companies’ own accounts.

The analysis of Rolls Royce simply applies a unitary overview to what then seems an odd result.

But the strangest comment was by BAT, which paid no tax in the UK in 2007:

A spokeswoman for BAT, the twelfth-biggest company in the UK by market value and the owner of the cigarette brands Lucky Strike and Pall Mall, said that its head office operated at a loss and that 99 per cent of its profits were earned overseas.

There is only one commercial response to this. If a head office loses money it cannot add value. In that case the group is not worthwhile mainatining and should be broken up on commercial grounds. Shareholder value must be increased in this case if it were.

I await BAT’s response.

Free markets require fair taxation

Code of Conduct, Dennis Howlett, Tax management, Tax planning, VAT 3 Responses »

Dec 312007

It’s a fact that we cannot do without taxes. That’s because we cannot do without government. And we cannot do without markets either, at least in the world as we know it. The relationship is symbiotic: governments provide the structure in which markets can work: markets need government as their insurer of last resort: populations need governments to protect them from the excesses and failings of the market. Those who argue for one as opposed to the other will always be on a losing ticket: they ignore the obvious fact that as we have structured our society this is an indivisible relationship, not a matter of choice.

But relationship carries obligations. One is that each plays an appropriate part. The other is that outsiders are held at bay and not allowed to interfere to the point that they harm the process which ensures a continuation of the productive benefit that flows from reasonable harmony.

What’s the relevance of this? Simply that unfair taxation harms the relationship between a government and markets. Take the example of Setanta’s relocation of its subscription TV service from Ireland to Luxembourg. It has saved £17 million in VAT as a result as Luxembourg has a 3% VAT rate on such supplies, apparently. Ireland charges more. But what is absurd is that this is happening within the single market of the European Union where such anomalies are meant to be eliminated and the free movement of capital is not meant to be either encouraged or hindered by taxation.

It’s clear that Luxembourg’s VAT abuse needs to be tackled.

But there’s more to it than that. Setanta is a substantially Irish company. Half of its staff are there. That’s likely to make it the core of its activities. They’re not in Luxembourg. So this is an artificial move. As such it contravenes section 1b of the TJN / AABA Code of Conduct for Taxation which says:

1b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

Luxembourg is not honouring its international obligations to other states.

Setanta is also in breach of sections 3b and 3c of the Code:

3b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

3c. No steps are put into a transaction solely or mainly to secure a tax advantage.

I also think they’re in breach of 4c and 5b:

4c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

There’s a great deal of unacceptable conduct taking place here. Relationships rarely survive such behaviour. That’s why we’re worried when this sort of abuse takes place. It’s bad for the economies that suffer, it’s long term unsustainable for the compnaies involved, eventually consumers usually lose as a result, but worst of all, it’s bad for the whole effectiveness of the market which is best sustained when each party accepts their duties and obligations to each other and to those they relate to outside the immediate relationship.

This isn’t pie in the sky stuff: this is about creating well-being. And that, at its core, is what economics is meant to be about.

It’s accountants who think economics is about market abuse.

NB: Hat tip to Dennis Howlett.

Is Google evading taxes?

Accounting, IFRS 8, Tax avoidance, Tax management, Tax planning, Transfer Pricing 1 Response »

Nov 122007

Not my suggestion, I got this one from the TaxProf Blog in the USA:

Google Norway does its best to avoid paying Norwegian taxes, but is this illegal?

The Norwegian newspaper Dagens N?¶ringsliv reports today that Google does its best to avoid paying taxes to the Norwegian government.

Google Norway had an official turnover of NOK 33.6 million last year (US$ 6.2 mill). However, as Dagens N?¶ringsliv points out, that is only a fraction of the unit’s real revenue. Unnamed media companies estimate that Google sold pay per click text ads in Norway for NOK 200 million last year (approximately US$ 37 mill), and is expected to generate twice as much this year. Still, last year Google Norway paid only NOK 1.5 mill in taxes.

How does Google do this? According to Dagens N?¶ringsliv the income is turned over to Google Ireland. It is Google Ireland that bills the Norwegian AdWords customers. …

When signing up for an AdWords account anywhere in the world you may ask for your ads to appear in any territory, region, country or language. Hence you may select to have your ads presented at Google sites in Norway and Denmark and not – let’s say – in the US or the UK.

Does this mean that Google in this case should be taxed by both Danish and Norwegian authorities? That would make this kind of trade extremely complicated.

If you on the other hand was selling cars in Norway and Denmark, you would definitely have to pay local taxes.

We are neither lawyers nor tax experts and are glad to leave this conundrum to the professionals.

Of course, if Google were subject to unitary taxation and had to report on a country-by-country basis much of this abuse would be a) apparent and b) prevented.

The blog is worth looking at by the way – it also deals with allegations about Google in China.