Can I recommend this article by Tess Riley of UK Uncut and one of the found not guilty of causing criminal damage in Brighton at the close of her trial last week?
She offers an erudite explanation of why those who protested acted as they did, concluding
Acquitted or otherwise, we know that we are not the criminals in this situation. Acknowledging alternatives to devastating spending cuts is a basic human right. The failure to do so is the real crime taking place around here.
I agree with her.
I wrote the following at the request of the Brighton Evening Argus for publication after the close of the UK Uncut trial in that city, in which I appeared as an expert witness to explain the links between tax avoidance and the cuts agenda of this government.
I regret that the judge, sitting as a magistrate, did not accept that the link was close enough to justify the actions taken during peaceful protest by UK Uncut supporters: equally I am pleased he appeared to accept the link existed but was simply not sufficiently immediate in his view on this occasion (which does of course beg the question when it might be, but let’s leave that aside) and as such five of the nine charged were found guilty of criminal damage. That he gave them conditional discharges for six months does also suggest how trifling he thought the absurd case brought against them to be.
But, back to the Argus article:
Nine people from UK Uncut have been on trial in the last fortnight in Brighton for allegedly causing criminal damage during a protest in Brighton’s Top Shop last December. The damage they’re alleged to have caused was trivial and they admit they stuck themselves to the window of the store. The much more interesting issue is why they did it.
As a chartered accountant I appeared in court when asked to do so by their defence lawyer to explain just what the issues they were protesting about were. These are both complex in detail and relatively simple at the same time to explain.
Everyone knows that the UK is facing cuts at present and we are told they are inevitable. So benefits and pensions are being cut, school funding is down, hospitals are having budgets frozen, the arts and leisure are seeing cuts all over the place and the armed forces are having their numbers slashed. What I argue and what UK Uncut argue is that this is not as inevitable as it seems. There is, in fact, an alternative and it is one that the government is refusing to pursue.
That alternative is called ‘closing the tax gap’. The tax gap is the difference between the amount of tax which the law suggests should be paid in the UK and the amount actually paid. There are three parts to the tax gap. The first is the tax that tax payers have admitted they owe but which they then do not settle on time or at all. This amounts, according to H M Revenue & Customs to about £25 billion at present. If we got this money in the country would not have to borrow so much so it’s a big deal.
The second part of the tax gap is tax that’s evaded. Tax evasion is a criminal activity. It’s what happens when people don’t declare their income to H M Revenue & Customs or when they claim expenses to offset against their income to which they are not entitled. Of the two the first is the most important. Estimates of the total sum evaded each year vary. H M Revenue & Customs estimate the sum to be approximately £35 billion a year but there’s good reason to think that’s a serious underestimate. I think it’s £70 billion a year.
The third component of the tax gap is tax avoidance. This is the element that most people find hardest to understand. Tax avoidance is not the act of claiming the allowances that you are entitled to in law. So, for example, claiming your personal allowances is not tax avoidance. Nor is paying money into a pension fund, or saving in an ISA. Tax avoidance is instead seeking to get around the law so that less tax is paid than Parliament intended on the economic activity that a person undertakes.
This “getting round” the law can be done in a number of ways but the most common is to find loopholes in UK law or between UK law and the law of other countries. These can be complicated; a lot of it involves offshore tax havens, and because it’s expensive to set up it’s largely done by the wealthy and multinational corporations. I estimate it costs the UK £25bn a year, split between individuals and companies.
So the tax gap is, I estimate, up to £120 billion. In fairness I should note H M Revenue & Customs do not agree, but because of my work they have published their own estimates, which come to £60 billion at present – exactly half of what I suggest. It’s curious to note in this context that ‘benefit fraud’ is just over £1 billion a year – but is the issue to which all attention is given.
Either way, and whoever’s figure for the tax gap is closer, it’s an enormous amount of money. My figure would pay for most of the NHS. The point is collecting even some of this money – again whoever’s estimate is closer – would eliminate the need for a lot of cuts – hence the name of UK Uncut. They are saying, and I have said for a long time that if only we collected the money due from tax cheats and crooks then we would either need many fewer cuts or we would not need tax increases. And what I have shown, sometimes working with politicians like Caroline Lucas, is that the measures needed to collect some of this tax are relatively simple, are quick to enact and would work.
Nothing though would work better than having more people on the job of collecting the tax owed to H M Revenue & Customs and yet extraordinarily at a time when the government needs every penny it can get in tax it is sacking tax staff as fast as it can. There were almost 100,000 HMRC staff in 2005: there will be 50,000 in 2015. Rarely has a policy designed to offer ‘savings’ been so misguided. It’s like a company facing a cash flow problem deciding to sack all its debt collectors. But the important point is this: that the government has not only decided to continue with this plan conceived when the economy as booking and it might have made sense, it is accelerating it.
As a result it is clear that the Coalition is choosing to leave money with the tax crooks and cheats instead of collecting it to pay pensions, educate children, fund the NHS, keep our armed forces armed and so much more. It’s that choice that UK Uncut were highlighting – picking on Top Shop because Sir Philip Green’s family are widely reported to have actively avoided £285 million of tax in one year in the mid noughties. He’s just an example, nothing more. But the example is important: there’s cash out there; this government needs it and UK Uncut and others expect them to collect it, now, for the sake of us all. And by demonstrating UK Uncut have made clear that this option is available, which is why I supported them by giving evidence during their trial.
U2 heads the line up at Glastonbury festival this weekend and the stage is set for Art Uncut’s events targeting their tax dodging.
Away from Glastonbury, at the Bull and Gate in Kentish Town, London,Art Uncut in conjunction with Big Society Entertainments is organising an evening of comedy and debate in support of the Fortnum & Mason 145. The comedians will be supported by a line up including TJNs very own stand-up economist, John Christensen, Lord Maurice “Blue Labour” Glasman, plus speakers from Christian Aid and Art Uncut.
Governments throughout Europe continue to give tax handouts to bankers and big business while cutting back on public services for old people, sick people, children and those in need.
We have clear choices ahead of us: we need to resist the tax handouts without control being taken of the banks. We need to resist the tax haven economy. We need to support our welfare services. Most of all we need to protect democracy from the deep pockets of the banks, hedge funds, and other special interests.
UK Uncut has released a short and fun video calling for activists to take to the streets in support of industrial actions to protect vital public services on 30 June.
They’re right to do so.
Which is why I suggest you watch it here.
Questions have been raised about how I define the difference between tax avoidance and tax compliance.
Following my blog on the ethics of tax avoidance it was, for example, said:
I am a little puzzled by something you have written and wonder if you explain a little further.
You say:
“‚Ķand the law does provide alternative choices in the way in which transactions can be constructed, with the deliberate intent that the tax payer take advantage of those choices and these an and do have tax consequences. So long as they are clearly complying with the law the tax payer can exercise those choices, legitimately. This is not seeking to tax avoid, it is seeking to comply with the law.”
My understanding was that what you have written above is a concise description of tax avoidance that would be understood as such by many, including, academics, HMRC and tax advisors.
In addition, if a choice is made between the alternatives envisaged by the law as being possible (and summarised by you in the extract above) then assuming disclosure by the corporation of what has been selected and the consequences of that selection (non disclosure would possibly be a case of tax evasion), “the right amount of tax” would be payable “and no more”. Therefore the corporation would be tax compliant (if I understand you definition of tax compliance correctly).
If corporations behaved in such a manner what label would you give to such behaviour? Is this for example “tax mitigation” or “tax planning”? And such behaviour is to be distinguished from something you call “tax avoidance”? Reading through previous blogs you associate tax avoidance with what appears to be the metaphor of “going round the law”. Is the substance of this metaphor the key to understanding what you mean by tax avoidance? If so, can you provide me with any guidance on what you mean by “going round the law”.
My suggestion is that if what I have suggested as tax compliant behaviour is understood to be tax avoidance by academics, HMRC and tax advisors then they are using the wrong language. Please don’t get me wrong: this is not a persona;l criticism. It is a statement of fact. If the Inuit need large numbers of words to describe snow then we need more than one word to describe the spectrum of all behaviour deigned to reduce a tax bill when the range extends for claiming a personal allowance to complex regulatory arbitrage through offshore structures.
I have explained these differences as follows:
Tax avoidance
Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking
international transactions.The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.
Tax compliance
Tax compliance is different from tax avoidance and tax evasion because it is defined as 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. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).
Tax planning
Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.
So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.
As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.
And for the sake of the record:
Tax evasion
Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.
Let’s put it another way. If there is no tax to pay you can’t avoid it. Putting money in an ISA can’t be tax avoidance: the law says that this option is only available to UK taxpayers (right place) and there is no tax to pay as a result (right amount, right time).
The same with personal allowances. Anyone who says claiming them is tax avoidance is just plain wrong: parliament fully intended that people have such allowances and it is not in the business of promoting tax avoidance, which is the act of getting round the law parliament promotes.
But go to another extreme and a great deal of offshore activity is be definition tax avoidance. That’s because by definition nothing happens offshore – the substance of the transaction is never in the place in which it is recorded when working offshore and therefore cannot be paid in the right place. It’s as simple as night follows day.
The same therefore follows that offshore treasury management functions, Dutch interim holding companies, offshore holding of intellectual property and all that goes with it – plus the distance selling arrangements so beloved of IT companies using Ireland where the deal never goes near the place – are all tax avoidance.
There are other flags. For example, artificial income shifting between family members. And turning income into capital gains. Using companies to avoid national insurance is also tax avoidance. A great many uses of trusts for tax purposes represent tax avoidance.
But the use of trusts to protect children and the disabled does not represent tax avoidance. And nor does the use of limited liability per se mean that someone is doing something wrong. I use an LLP to organise my affairs but pay no less tax than I would if self employed as a result – a fact that influenced my choice, I admit.
That is the key point in all this – it is choice. Ends never justify means but looking at ends to ensure that the means used can be justified is necessary and appropriate in tax. In some cases – like most offshore structures – it is reasonable to presume the end purpose and condemn the means. But there are also grey areas. This is shocking to the libertarian right of the corporate world who demand certainty even when surely they know that this is impossible except in their fantasy world of politics where the assumptions they make eliminate all causes of doubt that might question their abuses. For the rest of us in this middle area we have to look at motive.
It’s OK to use a limited company for commercial purposes.
It’s OK to claim the expenses the law allows if you incurred them and did so for your business.
You can use a trust to protect children or to run a charity.
No one should criticise you. It’s all don to motive – or the ends of your action.
And it’s that which lets us draw a line in the sand. Do you intend to cheat or not? Tax avoiders and tax evaders alike cheat. I stress – both are alike in motive in that they don’t want to pay tax that is due – and they cheat as a result. And it’s tax cheating that I despise, whether its ‚Äòlegal’ or not. Paying the right amount of tax at the right time in the right place (and no more) is fine. But cheats don’t do that. And that’s what annoys me. And a lot of other people. Because more morality is much more important than the law – and the cheats know that too – which is why they find it so hard to justify their actions.
I love this:
Faced by a challenge from young people who believe in something, our political and media mainstream is confounded. It is also scared. And it should be.
It is so true. Read the rest of this thoughtful piece on UK Uncut and its importance for democracy.
Dennis Howlett, a long term blogging friend of mine has a great blog on his site about another blogging friend and commentator here - Stuart Jones, senior partner 3CA, chartered accountants based in Kendal. As Dennis says:
He’s a really nice person who works hard to do the best he can for his clients. He gets rightfully annoyed at the antics of bureaucracies that harm, impede or otherwise behave badly towards the small business. He’s none too impressed by the way some people manipulate the tax system to their advantage. Last weekend he went out to support protesters at the Westmorland shopping centre. He ended up being banned from using the centre for the day.
Stuart followed up with a well timed blog post entitled: Why I think the protests against Topshop are justified. He says:
I have sent this letter to the Financial Times. Hopefully they will publish it.
Sir,
Richard Horton’s suggestion “that more UK tax would be payable if Sir Philip owned the companies himself, but he does not, and he cannot pay tax on something he has not received and to which he has no legal right” would be more believable if HM Revenue and Customs accepted his argument and stopped applying “income splitting” legislation to smaller companies.
Until they do criticism of Sir Philip Green’s tax “savings” is fully justified.
As Dennis concludes:
None of this will be news to chartered accountant Richard Murphy who has been campaigning on this broad topic for many years. What is different today is that the ‚Äòman in the street’ is finally seeing the direct impact of abusing the tax system on the ability of the nation to provide essential services. That’s where the rubber hits the road and where people like both Richard and Stuart have their part to play. They are the face of a progressive profession though you’d be hard put to know that when seeing some of the opposition ranged against their related but different stands on this topic.
Thanks to Dennis, but Stuart is a hero. It takes courage as an accountant to go out in the town where you work and protest about tax. Good for him! And it’s great to know there are accountants in the world who do think it’s right to protest.
The Observer noted yesterday that:
Behind the scenes, those companies that have been targeted, such as Topshop, Vodafone and Boots, are angry and frustrated that their staff and customers are being affected by protests.
One senior executive, who would only speak privately and anonymously, says: "This is the most difficult communications issue I have ever faced. Tax is a very complex issue but these protesters – egged on by some parts of the media – are reducing it all to a few black and white slogans using information which in some cases is entirely wrong."
Another executive is more blunt, insisting it is "disgraceful" that some of the UK’s biggest brand names are being targeted for vilification and that so little is being done by politicians and press commentators to defend them.
I note they won’t be identified, poor little dears.
But the truth is that these companies could deal with this issue easily and effectively. They could:
1. Publish their accounts on a country-by-country reporting basis – a profit and loss account for every country (without exception) in which you trade and full details of tax paid by country;
2. Reconcile their tax charge in each country with the profit and the current tax bill – not the deferred tax bill, which tells us nothing;
3. Tell us when they expect their deferred tax to be paid, if ever, and where;
4. Reconcile their accounts to show how opening and closing tax liabilities reconcile so we can sure that everything due is being paid.
That way we’d know and their shareholders would know what you’re up to.
But right now we don’t – and press releases will never change that, even if everything undertaken is done entirely legally.
If these companies are so sure all they’re doing is acceptable do it in the glare of publicity. Then we’ll know. But right now they hide, behind their accounting rules, consolidated accounts and their use of tax havens – where nothing is put on public record. And that will not do.
I note the Telegraph has been making some very strange comments at the weekend. Toby Young wrote:
Has there ever been a more ham-fisted protest movement than UK Uncut? The express purpose of this organisation is to force rich individuals and corporations to pay more tax. ….
What makes the movement so objectionable is that the main victims of this form of protest are the people trying to buy Christmas presents for their loved ones, not the corporations that own these shops. The organisers purport to be sympathetic to the victims of the cuts whom they describe as “the poorest and most vulnerable” – a category I must fall into because my family’s child benefit has been cut to zero – but the ordinary shoppers harmed by the UK Uncut protests will include precisely these people.
Even if this method of protest was successful and Vodafone and Top Shop ended up paying more tax, it wouldn’t be ordinary people that would benefit. On the contrary, the higher taxes would immediately be passed on to consumers in the form of higher prices. How, precisely, is that going to help “the poorest and most vulnerable”?
His suggestion:
If the organisers of the UK Uncut movement really want to help the most needy at this time of year, why don’t they patrol the streets of their home towns giving food and blankets to the homeless? That way, the rest of us can get on with our Christmas shopping without being screamed at by a bunch of red-faced students.
Ah, as ever, the elite’s response is to say:
Don’t ask why the poor are poor, just hand out food parcels
That’s the Tory view of charity for you – and it’s why Thatcher hated Oxfam so much.
But let’s go back to the main comment and note the claim that “the higher taxes would immediately be passed on to consumers in the form of higher prices”.
If that is true then Toby Young has hit on some much more serious issues. the first is that these companies can charge whatever price they like to considers and the consumers have no choice but pay it. Several things follow. First, demand is apparently unaffected by price. I bet that’s news to Vodafone. But just in case it isn’t then that means they’re a monopoly and it’s absolutely right that their prices are regulated (which they are – negating Young’s argument). Third, it says that if the company could increase price at will and doesn’t it’s not acting in its shareholder’s interest now.
Alternatively it says that the protests are actually bang on target, this is the right thing to do, and that Toby Young has not a clue what he’s talking about.
I think both are true.
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