I gather the profoundly right wing Institute for Economic Affairs is to publish an article written by the former press office of UKIP, Tim Worstall, criticizing UK Uncut.
I also gather he claims that UK Uncut misrepresent the facts and completely misunderstand the way that tax law operates — both within the UK and abroad. On their four main targets he says:
Vodafone has been attacked over a supposedly unpaid tax bill of £6bn, based on profits of its German subsidiaries. However, it is not — and never can be — a principle of tax law that a company should pay both UK tax and German tax on the activities of the German parts of the business. The amount under discussion is therefore much less than the £6bn suggested, and HMRC and Vodafone have come to a compromise owing to the discrepancies that exist between UK and EU law.
That’s why the UK Revenue were winning all the way through the courts was it? Because they were. And that’s also why Vodafone provided for a bill about twice what they paid, was it? Because they did? No, this is Worstall making the misrepresentations here. It’s undeniable that no one knows the full facts of this case - except that as Private Eye have repeatedly alleged, that Dave Hartnett, boss of HMRC, took his winning team off it and with the help of Deloitte negotiated a cut down deal announced a few days before George Osborne was promoting the company in India. The allegation is not about tax in that case at all — it’s about the deal that was done. Worstall completely ignores the real issue — or maybe seeks to misrepresent it.
Wortsall continues:
Boots has also been attacked without justification. A Swiss company, it pays UK tax on its UK profits. However, the company financed its operations through borrowing, and, as a cost of doing business, the interest paid was perfectly legally written off against profits before tax. It should also be noted that those who lent money will have paid tax on the interest they received.
Sure the deal was legal — no one said otherwise. But there’s widespread feeling that the UK is being taken for a ride on this issue of giving extraordinarily generous relief for borrowing: borrowing in this case expended to buy Boots and not incurred in the course of its trade. That does stand contrary to a principle of general tax law — that relief is not given as a matter of course when it is incurred to put yourself in a position to do a trade rather than n in the course of actually undertaking it. But legality is not disputed. It’s the way the law is being abused in the opinion of many that is being highlighted. Again, Worstall misrepresents the truth.
Back to Worstall
Philip Green and the Arcadia Group are possibly the most high-profile targets, Philip Green standing accused of avoiding tax by paying a dividend from a company he controls to his wife who, in turn, does not pay UK tax.This allegation is wrong in three respects. His wife owns Arcadia through a holding company that she also owns and her husband manages the company. Secondly, Arcadia pays corporation tax but any dividends must be paid to the owner — Tina Green. It is only further, higher rate, tax that is not being paid on the dividends. Thirdly, the UK tax system now taxes husbands and wives separately. The implications of UK Uncut’s suggestion that Philip Green’s tax status should determine the tax that Tina Green pays would be to send our tax system back to the dark ages.
All true, of course. And all utterly misleading. First, the UK has sought to challenge settlements from husbands on wives. Worstall ignores this. They have not in this case, but the law to do so exists. Second, Worstall ignores the fact that the protest highlights the offshore arrangements used — which are considered to be abusive in themselves by those protesting, and without which it is certain more tax would have been paid somewhere. So again Wortsall utterly misrepresents the basis for the protest.
So, let Worstall have his fourth try:
Barclays, the final target, has also applied a completely reasonable principle of tax law. Barclays reduced its corporation tax bill in the last tax year by offsetting losses made in previous years. If companies were not allowed to do this, those companies involved in risky businesses where profits fluctuate would pay much more tax than companies with stable profit streams — even if they made the same amount of cumulative profits. This would be a particular problem for “start-up” firms where losses are often accrued in the early days.
Wortsall is on a fourth loser here. The protest is fourfold. Firstly Barclays has form on tax avoidance. Second, Barclays hasn’t made losses. http://www.barclaysannualreport.com/ar2009/index.asp?pageid=137. In that case, why has it got them available in the UK for tax purposes? Could this be because the UK has such generous relief for losses it decided to record those it had here? This is in itself a basis for protest. Third, the lack of transparency is an issue — we don’t know why Barclays paid so little tax. Country-by-country reporting of bank profits would resolve this. Fourth, Barclays enjoyed and still enjoys state subsidies. For example it has its depositors funds guaranteed. In that case to allow relief of losses already supported by the state is unreasonable and the law should be changed. Worstall misses all these points, I presume deliberately.
The result is the claims made by Worstall are not just groundless, they reveal either a profound misunderstanding of the issues or a deliberate willingness to misrepresent them.
Maybe it’s the latter. Worstall goes on in his piece to argue that:
Corporation tax is a very damaging tax. In a world of mobile capital, high rates of corporation tax reduce the amount of capital employed in a country and therefore reduce the productivity and wages of labour. Research suggests that the cost to workers of this effect in the UK is greater than the total corporation tax take.
That research is seriously flawed. It only tested tax increases. It never tested tax decreases. There was good reason no doubt: the benefit of corporation tax decreases never goes to workers. The research was as such political and inherently biased. Or wrong, if you like.
Then Worstall adds:
Further, corporation tax is not paid by the company but by the owners of the company. Such owners are, in general, prospective pensioners, beneficiaries of savings policies and so on and have had their returns severely curtailed by other economic events and government policies.
That’s also wrong. Only 15% of the UK stock market is UK pension fund owned. The reality is that ownership of much is hidden behind trusts and offshore companies, Remove corporation tax and no tax would be paid at all by these owners. No doubt that's Worstall's aim. As he reveals when he says:
Were UK Uncut’s recommendations to be implemented, they would cause huge injustices and would see a huge flight of capital from the UK — ultimately leading to a lower tax yield for the UK government, the very opposite to what UK Uncut want to see.
This is nonsense. Companies may leave the UK now when they like. In fact if you note the issues raised they're all about ones that have left the UK, at least in part. It can't get much worse. But it would if Worstall had his way:
Members of UK Uncut would do better to direct their energies towards campaigning for an abolition of corporation tax. Such a move would increase productivity and investment in the UK, see more jobs created and see far better growth in the UK economy.
Rubbish. Corporation tax pays for the infrastructure business needs to be profitable. Without it we’d have lower trained workers, poorer infrastructure, worse regulation, greater credit risk and much more, all of which would make the UK a much worse place to do business.
Worstall is wrong. He has just one aim — to allow tax abuse that let’s the rich get richer at the expense of all the rest of us. He can’t even be honest about his motive. And his logic fails at every stage.His article is a farce.
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It occurs to me that the bulk of your responses, in essence, are ‘yes.. but..’ responses. That is to say, Worstall isn’t necessarily wrong (albeit he is selective, but this is politics!) but the fact that the companies are acting legally doesn’t mean that UKuncut don’t have a point.
You obviously have a decent grasp of the real issue.. which is that the law is the real problem, either because it allows inappropriate avoidance, or because it doesn’t require proper disclosure.
My issue with UKuncut is that this is not the message they give out. They are over-critical of the companies themselves, they quote the most sensational numbers available (you say yourself that the Vodafone issue is about the deal that was done, and not about £6bn.. so why do they quote the £6bn at all?), they disproportionately attribute the blame to ‘rich corporations and individuals’ when we all know that evasion and avoidance span the full spectrum of taxable people. Finally, they seem to imply that it’s all down to the current government… even though most of the things they’re angry about happened before May 2010. Let’s not pretend that ‘we’re all in this together’ wouldn’t have been utter bollocks if Brown or Blair had said it.
UKuncut is an exciting movement, and it’s very modern and young and is effectively spreading a message using social media and the likes. The downside of that is that most of the exposure that UKuncut gets is stemming from people who don’t understand the real issues and why they have arisen, and are just repeating the headlines. With such complex issues, that can be unhelpful… and I see nothing from the ‘top’ of the movement (by that, I mean the peole I’m seeing on the television or who are writing the official website) to correct any misconceptions or distortions. This means that the is a lot of misinformation which undermines credibility and provides fuel to those who just want to dismiss any notion that there is a problem.
You, Richard, have written this long critique where you get to accuse Worstall of being biased and of missing the point.. but not of being necessarily wrong. If the message was foremost that the rules are wrong, and the companies targeted merely illustrations of why, then UKuncut would not be so easily argued against with a bit of basic tax knowledge. However, I think that UKuncut are quite happy that the message is garbled, because acting like big companies are doing something dodgy and the Tories are all to blame suits the agenda, and spin is always an easier sell than knowledge.
Yes, well done for calling Tim Worstall out.
The cleverest and simultaneously the most stupid pedant on the internet.
A massive intellect that once successfully grasped a single idea, and then, fooled by its superficial elegance, subsequently closed his mind to all evidence that reality was a tad more complicated.
A very sad boy. In the battle of ideas, the very definition of a loser.
If the IEA are putting Tim Worstall into the frontline then their cupboard really is pretty bare. I’m not surprised: I saw Mark Littlewood defending the drinks companies on 10 o’clock Live and he was taken to pieces by David Mitchell. The IEA is weak even by the standards of right wing think tanks.
@Howard
Absolutely!
I think Strategist is right – Worstall’s great ability is to be negative
And you have to conclude as a result with regard to all that he says “so what?” When did a cynic ever achieve a result? Or increase the sum of human well being?
He certainly never will
@Lee T
I am sorry to see that you are repeating Worstall’s mistakes.
This is, as you note, politics. There would be nothing to be gained by protesting outside the Treasury. No one would notice. So although it is quite true to say that the rules are at fault, and that the companies who are abusing them are all, without doubt, acting within the law, first of all to protest to the tax authorities would make very poor politics in itself. The impact would be minimal, albeit that in some cases it is very clear that the very senior echelons of our tax authority do have some responsibility to bear.
And you are quite wrong to say the companies bear no responsibility, and are simply complying with the law. This is completely untrue. First of all, they have a choice available to them. No one obliges them to abuse the law. There is no requirement in UK law that a company seek to minimise its tax expense at all costs. There is no requirement in company law that companies maximise their profits. They are in fact required to act in the best interests of their shareholders. Taking taxation risk can very often be quite the contrary of that. In addition, whilst it might have short-term impact and give rise to significant payment of bonuses to executives who can manipulate results as a consequence, it may well have long-term implications that are severely detrimental to the well-being of the shareholders, and this point is usually overlooked. A poor relationship with HM Revenue and Customs does, for example impose significant costs, and many of the structures used to undertake tax avoidance are both expensive to maintain, reduce governance, and distort the allocation of investment within the corporation, thereby reducing the overall rate of return on capital. It is, as a consequence, quite appropriate to draw attention to those companies that are undertaking activities that may well be detrimental to their shareholders interests.
It is also quite wrong to think that companies are somehow totally independent of government when it comes to the creation of taxation law. Vast amounts of money are spent by corporations in lobbying for taxation rules that suits their purposes, and the same is true with regard to the expenditure of effort by the tax profession, acting on behalf of their clients. The change in the rules with regard to corporation tax, has, for example, been driven in no small part by that profession acting through its professional bodies. So to presume that the companies are innocent parties in this is completely erroneous. They are active participants in the process of establishing taxation law, as is evidenced by their presence on all the significant committees that undertook the reviews that have resulted in the opportunities for abuse that have arisen. Ordinary people were excluded from representation on those organisations, as were all civil society organisations.
In that case it is completely appropriate for protest to be levied at these companies, and for them to bear their responsibility for creating a situation where the taxation burden in this country is shifted from the owners of capital onto those who supply their labour to generate an income which is static in real terms, compared to the significant growth in the earnings of senior management, who exploit capital, and of capital itself.
So yes this is politics. But it is entirely appropriate politics, and UK uncut have absolutely accurately read both the mood of the country, the way in which to manipulate that mood to achieve their goal, and the mood of the press on this issue, which is I think accurately reflecting sentiment within Parliament, the broader public, and even the small business community. In that case, your analysis is, I’m afraid, wrong.
No, they weren’t “winning all the way through”. See paras 1 to 5 of this judgement for the background: Vodafone won before the HMRC Special Commissioners, won again at the High Court. HMRC won the right to appeal the High Court ruling.
Interesting counterarguments. I can’t say that I’m an expert in this. But I do remember learning about the Laffer curve back in A level economics.
The big part of the discussion which seems to be missing is “what is the optimum rate for corporation tax, where tax revenue to the treasury will be maximised?”
I presume – but dont knnow for sure – that UK Uncut think it should be higher, and that the IEA think it should be lower.
What is absolutely clear is that there needs to be more transparency about tax and a simpler system – with, I suspect, a competitive corporation tax rate – that encourages companies to remain in the UK and reduces the incentive to use tax avoidance loopholes.
You may argue about the general desirability of relief on interest expenses, but in the concrete case of Boots, it did NOT produce a bad deal for the UK treasury.
KKR and Stefano Pessina’s paid a take-out price for Boots that was 35% higher than the closing price immediately before the consortium’s approach, and it all happened a few months before the FTSE crashed. They paid about £11 billion for the company’s outstanding equity, a premium of over £3 billion compared to the market value before the takeover process began.
The £3 billion represent an immediate capital gain for existing shareholders, taxable at somewhere between 10% and 18%, and resulting in revenues of at least £400 million for the UK treasury. In fact, most shareholders had acquired their shares at a much lower price than prevailed immediately before the approach, and so their capital gains (and resulting tax obligations) were much higher.
KKR determined the level of its offer on the basis of its projections about the company’s future cash flows, which obviously included assumptions about future tax expenses. In its models, KKR assumed that the interest expenses on acquisition debt would be tax deductible. If the interest on that debt had not been deductible, KKR’s offer would have been lower, and so would have been the revenues for the UK treasury from the capital gains tax on the Boots shares’ take-out.
So the UK treasury received immediately over £400 million, as opposed to future payments of corporation tax, which carry the significant risk of the company underperforming (common with UK high street retailers) and should be discounted to reflect the time value of money. In addition, the company now pays interest on its ca. £7 billion of high yield debt, on which the creditors are liable for tax. Assuming a blended interest rate of about 6%, and an average tax rate of 40%, the UK treasury might be earning about £170 million just from the taxes payable by the holders of Boots’ acquisition debt.
Unless UKUncut or someone else can demonstrate the opposite, I don’t think that this is a bad deal for the UK treasury.
@Richard Murphy
I think that your response to Lee T is a bit harsh and possibly a bit simplistic. Whilst you have a valid point that part of the solution is directing criticism at companies and boycotting their products, this is not the whole solution. For example, I don’t buy stuff at Boots, but where would I shop if all other retailers set up similar offshore ownership structures?
I think that the point that Lee T is making is that we need to look at regulation through the tax system as well.
Clearly there will be other elements (such as bolstering resources at HMRC) and transparency through accounting regulation.
@Richard Murphy
I understand your points, and I agree with many of them. I’m certainly not one of those who thinks UKuncut should be protesting outside the treasury instead of Barclays branches – such an approach will raise awareness of nothing. However, that doesn’t mean that the companies should be presented as the only ones with anything to answer for.
Further, I recognise that companies are not required to minimise tax costs without considering the wider and long term implications of their actions. I’ve got first-hand experience of a lengthy and expensive anti-avoidance process that arose following a foolish and aggressive tax ‘efficiency’ idea (not mine, I should add). Having said that, in most of the cases at hand the policies adopted have been fairly uncontroversial, and you surely could not argue that Barclays directors’ (for example) would not have been in breach of their obligations had they failed to take relief for losses, for the BGC capital gain, and overseas activities.
Of course, you’re spot on about capturing the mood.. it’s given everyone someone else to blame so it’s an easy sell. Criticising bankers, big companies and rich people is always going to go down well. And they deserve it. But the demonisation of certain of the culprits comes at a cost to the collective understanding of everyone, because it is a wholesale passing of the buck preventing individuals looking at their own behavior (the politicians and policies they vote for, the companies they do business with, the mortgage they took on, the money they spent before it was earned etc) and what role that may have played. We’re the voters, the workers and the consumers.. and all this happened on our watch. I don’t blame people for that.. but the opportunity to educate people about the deep flaws in the system, and what they can do about them, is being lost in the calls for lynching.
If you boil all the issues down to a few easy-win hate-targets, you get headlines and you get support – but you don’t make anyone smarter. This is an opportunity missed.
“Sure the deal was legal — no one said otherwise. ”
Is theme of all of your responses to Tim Worstall.
The problem with UK Uncut is that it’s targeting the companies, not the legislators. The companies are programmed to do whatever it takes to maximize profit, provided it’s legal.
Legal and ethical are different things. My ethics change when I read about tax avoidance, then when I open my pension plan report and question why my investments didn’t do better? Companies are programmed to maximize profit, even if it’s unethical, so long as it’s legal.
Why is UK Uncut wasting it’s time trying to change the way companies do business? It’s futile and amateurish!
The only way to change the way companies do business, is to FORCE THEM to change with legislation and new rules. Capital only listens when you speak it’s language, not when you hold up a pocket full of posies and demand peace and love.
Worstall is giving cheezy annoying answers, but technically, he’s right. And that should be the target of your efforts – to change the technicalities so that he becomes technically wrong, not to preach to him about ethics.
Case in point – you argue that banks that benefit from deposit insurance to bolster the confidence in their operations shouldn’t be able to do tax avoidance.
Well it’s pretty easy to counter right? The pub owner who benefits from the security that the local police provide, shouldn’t be able to apply for any tax deductions or relief because he’s robbing from the same source that secures his business.
These types of esoteric debates and arguments don’t help solve the tax avoidance issue. They just distract from the real tangible things that can be done: ie. change the damn legislation!
@ukliberty
HMRC won every case
How’s that losing?
@james
No one has ever found what the optimal rate is – because no one it seems has yet charged the rate that redices tax yield
So for all practical purposes Laffer is undiluted BS
@DaK
Talk about missing the point
The capital gain is wholly unrelated to the subsequent income
You can’t net off – a golden rule in accounting – and tax
@the admiral
Of course we need to change the law – but we need to do so in the social interest – not as now in the interest of the companies
UK Uncut make this point
@Lee T
Oh come on ….. over the year’s we’ve published a mass of data on this issue
Only someone who opposes UK Uncut could call this an opportunity missed
Mass television coverage
Vast amounts of media
International spread
Missed? No – the understanding that massive corporate abuse through regulatory capture is happening is growing
It’s an enormous success – precisely because UK Uncut got the facts right – which is why corproates say they have no idea how to defend themselves
Richard,
In my judgment the CFC legislation, which depends on Section 747 and Section 748 for its effectiveness, must be disapplied so that, pending such amending legislation or executive action, no charge can be imposed on a company such as Vodafone under the CFC legislation. It follows that HMRC’s enquiry into Vodafone’s tax return for the Accounting Period has no legitimate purpose and should be closed. – Vodafone 2 v Revenue and Customs [2008] EWHC 1569 (Ch) (04 July 2008)
How is that a ‘win’ for HMRC?
@fred G
Ah, the apartheid defence
It’s legal so I’ll abuse
that’s what they said in South Africa
they were wrong
And so are you
Not least by ignoring the massive campaigns I’ve been involved in for tax reform, for accounting reform, for tax haven reform over the years – all of which are yielding results
Why do you think Wortsall writes so much about me? precisely because he knows I’m winning
And those for tax justice are winning
@ukliberty
Selective quoiting
And I haven’t bothered to look it up – but I think you’ll find that the relevant requirements were subsequently read into the law
I’m not particularly aligned with many of their aims, but I wholeheartedly support the idea of a grass-routes movement that educates and informs people about the inequities of the system, even moreso if it can do so by cutting through all the political b******t.
I’m open minded, and I’ll keep watching, and I’ll be pleased to be proven wrong. But as it stands it’s far too easy for the likes of Mr Worstall to brush enough arguments aside to materially undermine the credibility of the movement. Furthermore, what should be a battle between us ordinary folk and the privelaged, seems to be descending into left vs right.. and once an argument does that it becomes dominated by the same old people saying the same old things and *nothing* really changes.
Richard, what leads you to believe Vodafone 2 v Revenue and Customs [2008] EWHC 1569 (Ch) (04 July 2008) was a win for HMRC?
@ukliberty
This issue has been extensively discussed elsewhere
I’m not wasting my time repeating doing so here
@Lee T
a) Worstall has not won – he’s pedantically proven they were avoiding tax – something never denied – so has not changed the argument one iota
b) Ordinary folk v privileged is always left v right. What else could it be?
Respectfully, you are the one completely off. The price paid by KKR, and the reulting capital gain for exisiting shareholders, was directly connected to their projections of future income. This is elementary financial economics.
Fallacious to the extreme: Apartheid was only legal on the basis of the decision of a parliament elected by, and for the benefit of a small minority of the population. This was undemocratic. Our UK parliament is universally elected in a broad and representative democratic process. It passes laws, including in the area of taxation, that carry that legitimacy.
@Richard Murphy
a) Quite right.. he hasn’t won.. but he’s successfully given perfectly good reasons why campaigns against the companies themselves are wrong. You have to accept that this is one of the biggest criticisms of UKuncut, and so the reason why this tactic is chosen over, say, protesting outside the treasury, is not getting through. You can make that case here, and I agree with it, but it’s not being made out on the street.
b) If all the ordinary folk votes for left-wing politicians and all the privileged voted for right-wing politicians then I might just buy that. They, quite obviously, don’t, and I, quite obviously, don’t.
Richard,
If one believes HMRC won every case then of course one will be inclined to be very suspicious that HMRC ‘settled’ with Vodafone and did not pursue the case.
If on the other hand one believes HMRC was in less of a certain position then one can see why they settled, did not pursue the case, and (ostensibly) are tightening up the rules. Particularly when one understands that, if HMRC proceeded but lost, a hundred other companies would have been able to stick up two fingers at them.
So I’d appreciate it if you could provide a link or two to discussion of how Vodafone 2 v Revenue and Customs [2008] EWHC 1569 (Ch) (04 July 2008) was a “win” for HMRC.
@Richard Murphy
i agree. we live in times when it is almost impossible to justify anything other than on an economic case. this will be how the coalition can and will justify inaction on this (i.e. this will destroy the jewel in the crown of the UK economy).
Nick Shaxon uses a good analogy in slavery. i.e. people would have argued that the abolition of slavery is economic suicide.
I do agree with Lee T that there are dangers with UKUncut. I used to follow them but find their arguments too extreme and too caught up with other issues to provide a solution that is pragmatic and politically acceptable (tax reform on this scale wasn’t in anyone’s election manifestos so it’s not as if anyone can argue that the public care about this).
Sorry I don’t know the history between worstal and you, nor do I know worstall, nor do I know you or your past work, so sorry. I just stumbled on this blog after reading a book. So let’s tone down the ad hominem please and get on with the details.
The point is, the apartheid comparison is completely out of left field and pretty close to Godwin’s law. Weather we like it or not, the ‘ethics’ argument doesn’t work on tax avoidance. The only thing that works is FORCEFUL changes in legislation. You’re wasting your breath trying to argue that it’s unethical to avoid tax.
Because most people don’t view the government as entirely ethical (hello Iraq war?), and I’m sure nobody wants to try to answer the subsequent question of “what is an ethical level of profit?” is it 20% richard? is it 12%? what number is it?….or perhaps the UK Uncut mantra of attacking companies for ‘unethical profit’ is a waste of time, and it’s better to just squeeze the necks of the pencil neck politicians and put in legislation that has real teeth? For example, does the UK have a GAAR yet??
Tax avoidance is not illegal.
Low income earners can avoid tax on interest earned at building societies. Are they being unethical?
Until there are rules that make tax avoidance illegal, you’ve ‘lost’ the argument, or rather, you and worstall have talked past each other.
@Lee T
On the street UK Uncut are winning
Even the Daily Mail are on their side
So you’re wrong, sorry
@DaK
a) Economics is usually wrong – and it definitely is when it comes to discounting future cash flows as a basis for valuation
b) No – it was the law – like it or not. I didn’t. I sought to change it. I seek to change the law here now. And that’s much the same thing too
@fred G
You sau elsewhere you’ve just fund this blog
That does not mean I have to reiterate all I’ve written over many years for your benefit now
And I have dealt with this issue, like the others you raise, time and again, and so will not repeat myself now
@ukliberty
Ditto re last comment to Fred G
@the admiral
I don’t speak for UK Uncut and have never been on a UK Uncut demo
I made the point Worstall was wrong
And he is
And that we have answered time and again the points made here
Since I actually have work to do this comment section is now closed