That was the mildly provocative title of the talk I gave last night to the annual joint meeting of the London branch of the Chartered Institute of Tax and the Association for Revenue & Customs. Other speakers were Chris Davidson, head of the Large Business Service at HMRC and Pete Miller of Powrie Appleby.
Each of us, curiously, suggested it was time for a new paradigm in tax.
I do not have time to note what I said in detail, but the MindMap of my speaking notes are here. No doubt there were changes when I actually said it — but they give a good idea of the argument.
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I was quite taken by your note that ‘avoidance’ means, by definition, getting around something. And when it comes to tax that ‘should’ be paid that’s wrong.
Of course being tax compliant is the only acceptable alternative to tax evasion and abusive tax avoidance. (And I accept that on your definition all avoidance is abusive).
However we must remember that the general public and small business owners want advice on how to keep their tax liabilities to a legal minimum and how to reduce their tax liabilities in a legally acceptable fashion. This goes beyond the conventional meaning of being tax compliant – which, I would suggest, means simply complying with one’s obligations to report income, gains, deductions and reliefs and paying the tax due thereon at the right time.
Headline debates, like last night’s, about tax avoidance tend to focus on big business and on the promoters of abusive avoidance schemes. It’s important that we also keep in mind the demand and indeed the need for day to day real life tax planning and tax mitigation advice.
And, as I said last night, in this regard the public’s attitude to playing by the rules has been impacted by the way that MP’s have sought to justify their expenses.
Mark
The continual problem of language
Avoidance is unacceptable
Compliance is clearly the aim – but has been used by practitioners (and no one else) to mean something else and does not preclude tax minimisation
I think it’s the right term as a result – what’s the alternative? Your input needed!
Thanks
Richard
Actually I think your definition is wrong. Tax avoidance is more properly defined as arranging your affairs in a particular way to achieve a specific tax liability. That is not specifically the same as “getting around” a tax liability.
Take for example the rules regarding pension contributions. It seems clear to me that arranging your affairs such that (say) 10% of your income is paid into a qualifying scheme, and thus resulting in a lower tax liability (now, and possibly in the future depending on marginal rates) is tax avoidance, and is also entirely acceptable. Its not getting around something – in fact you can argue it is compliance.
You could set out other examples – how about arranging your affairs so that you are domiciled but not ordinarily resident.
There are loads of examples which come under the heading of avoidance, but which are simply a question of arranging your affairs in such a way that you are complying with the complicated rules.
I think your definition is missing the dimension of intent, but even so I think it is a slippery slope. Ultimately I think that the concept of avoidance and evasion, and that the arbiter is a court, is the best you are going to get in a complex world. Which is why I think your attempts to villify avoidance is misguided. I also think it often clouds the arguments you might reasonably bring forward that some tax rules are bonkers and/or unfair.
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.
How the heck can it be missing the dimension of intent? It is all about intent
Read again, please
Paying into a pension is tax compliant using my definition
Read again
And please think before you ink next time
And just for once imagine a better world is possible
Or don’t you want one?
Richard
perhaps you might read my response again – the relevant definition was your of avoidance – in Mark Lee’s response.
Although perhaps you should bear in mind a legal definition of compliance – rather than your interpretation.
Alastair
If you want to comment here;
a) read what I said
b) stop creating straw men
c) understand that progress requires change – including in the law – so what it says now is inconsequential
Or please don’t bother
Richard
@alastair harris
Alastair, I wouldn’t bother. Most of us understand your point very well. To use the language of mathematics the set of feasible points for “tax compliance” is a large domain, but the objective function of the tax payer (maximising the present value of net income) is radically different from that of Mr Murphy (maximising TReasury receipts). Mr. Murphy thinks that any body who doesn’t share his objective is [insert your own term of disapprobation here].
Alex
What a sad and wasted life you must have if you use it to maximise the net present value of your future income stream – when you have no idea what that income stream might be and what discount rate to apply
How bankrupt a philosophy is that?
You’ve been banned before – given you just waste time when you appear – why not disappear for a while again?
Richard
[…] Why don’t the profession like that? Because they’re the secrecy providers. And they need to get their acts in order, very, very fast. Because I think the balance of risk in this equation is going to shift much sooner than the profession expects — as I said to the CIOT and ARC the other evening. […]
Actually mathematical optimisation is a well known technique for structuring project finance and leasing transaction, more applicable in the 1980’s and early 1990’s when such transactions were geared towards the requirements of individual private placement investors, and less widely used now that such transactions tend to be structured to fit the needs of the capital markets.
All the participants do know what their desired rate of return is. Banks, investors and borrowers all know exactly what their marginal debt/investment rates and weighted average costs of capital are.
So no, it is a very useful technique that has been used to structure the finance of many billions of useful pieces of infrastructure, trasnportation equipment, power generation and industrial sites, creating employment and income for may. So no, I don’t call it sad at all, and certainly not bankrupt at all. Rather it is a proven and useful tool for structuring and pricing business deals.
Alex
Ahhh….so good in the make believe world of certainty that financiers inhabit
Try the messy real world sometime
Then you’ll realise why it is completely useless
And why it’s proponents have prescribed so much waste – like PFI
Richard
Alex
Can you provide the proof for your jubilationary support for such nonsense?
Come on. Show us the results.
Pigs in troughs.
Sure. Go to the website of Warren & Selbert (http://www.warren-selbert.com/), who have been providing financial transaction optimisation services in a timeshare basis to bands, project financiers, lessors since 1971, and are used by all the major banks in the US, Japan and Germany. They are the market leaders, but other firms such as Interet Inc (http://www.interet.com) offer a similar PC based service, but the most advanced is probably offered by Advantage for Analysts, which was spun out of Babcock & Brown who had developed their own in-house systems over 20 years.
You want to see the results? Call James Warren & Jim Selbert and ask them what their turnover has been for the last 38 years. I know what it was 15 years ago and it was an incredible figure, but it is probably less now.
No, just good enough to structure, price and win bids to finance fixed assets, and a technology that is widely used and proven, but obviously outside your field of knowledge.
As far as I am aware this sort of optimisation is not used in PFI. I don’t do PFI, and the main reason is because there is very little risk transfer, so there is no point in tying to develop the sort of structured project financings that the private sector uses. Where the private sector uses multiple levels of risk participation to allocate risk, in PFI everybody pushes risk back onto the government. But since the government now owns stakes in two of the biggest PFI lenders they can sort that out themselves.
Alex
I studied this complete nonsense more than 30 years ago
I know how to do it
You make up a cash flow
And you fix an arbitrary interest rate
And you fiddle the result until you select the projects your ego says you want to do and reject those you don’t like
That is the whole science of this subject, nothing more or less
I rumbled it in 15 minutes
Why has it taken you so long to do so?
Richard
Because where it is used it is nothing to do with picking a discount rate, or a typical corporate finance invest/not invest decision.
It is typically used by borrowers or their financial advisors in selecting between financing proposals, and as a consequence also used by investors and project sponsors in structuring optimal offers to borrowers that are dependent on the requirements of more than one party (e.g. eenior lenders, mezzanine debt providers, asset value guarantors, credit and political risk insurers.
The rates are a given; they aren’t optimised or varied. They are the rates required by lenders and investors or offered by deposit takers or interest rate swap counterparties, subject in each case to that counter parties specific requirements.
What are optimised are the financing cash flows, the amounts drawn on eac htranche, the allocation of cash flows between various parties to a transaction who have all bid to finance various tranches of a project or asset.
What makes people continue to use this technology? I guess it must be the number of times that it has won competitive bids and the fact that it comes up with better answers than anything you could find out by messing around with a spreadsheet, usually squeezing millions in financing cost savings over what you would get by putting arbitrary allocations into a spreadsheet.
But then maybe you think you know more than all the world’s airlines and the leading project finance arrangers and investors companies (and I exclude PFI from that).
Alex
I suggest you go and read what Roger Bootle has to say about the stupidity of rate selection in such cases and the massive harm they have caused to the UK economy
By literally discounting the future using required rates of return that are far too high we have ended up with short termism, an end to real investment and the over-arching destructive force of finance
Great technique isn’t it? We all have a lot to thank it for
Richard
You obviously didn’t read or understand what I wrote. The people using financial optimisation are typically the users of rates that are offered to them by the market for various tranches of a financing. They might be the corporate finance desk of a bank taking rates from their own treasury plus external sources or they might be a borrower matching up the lowest cost blend of offers of junior and senior finance and other sources for a term financing.
This has nothing to do with Bootle’s short termism, but is actually used for financing long term physical assets. And furthermore it is not used much in the UK for various reasons too abstruse to go into here, but in the US it has been used extensively for the last 35 years.
Why do snipe at something you clearly don’t understand or appreciate?
35 years
The ear of destruction of the economy by neo-liberalism
No coincidence, I suggest
And your analysis is wrong: when people know the system they fiddle it to make sure their forecasts fir
Are you really so naive as to believe this works as the textbooks say?
I am not sure what you mean by this, but I don’t think you do either. Financial optimisation is a mathematical process and nothing more, so yes, like most arithmetic processes, I have to say it does work as the textbooks say.