Oliver Huitson had a thoughtful piece on tax transparency on Open Democracy yesterday. Having noted my call for the corporation tax returns of large companies to be put on line he said:
But there is a limit to how far the general consumer will acquaint themselves with the returns published and the problem of “we need to know” would, to a lesser degree, still remain. What seems to be needed, in conjunction with public returns, is a simple, visible indicator of tax probity at the transaction level. The “green, amber, red” nutritional information provided on food packaging could potentially be adapted for tax purposes for all firms over a certain size and/or all publicly listed companies. If firms lack a physical good for packaging, they can be required to display their tax rating prominently on all literature and websites. We already have substantial amounts of compulsory information we require UK firms to provide. Costs of implementation, both to the state and the firm, would be relatively miniscule in comparison to the scale of tax lost — currently estimated at around £25bn a year, or around 15% of the deficit (the figure is just for avoidance, not evasion). There is no reason why only food producers should have to show consumers the information they would rather hide.
In the land of market efficiency knowledge is king, and those who purport to uphold free-market principles should recognise the importance of tax knowledge; consumers have a right to know who they are dealing with if they are to arrive at rational outcomes for their purchases. For we don't simply rely on the goods and services we purchase, we rely also, to a great extent, on citizens and firms contributing to the collective costs of running a civilized society. More than ever, we need transparency and knowledge to empower the public to make the right choices on which firms to do business with.
The information to provide the appropriate risk warnings on tax to consumers does all exist. H M Revenue & Customs have risk assessed all the large companies in the UK - that's about 700 of them. And in each case they have given them a tax risk rating - low, medium or high.
The rating is a combination of two things, broadly speaking. the first is the inherent risk in the industry in which they operate. So, for example, banking and pharmaceuticals will always have higher tax risk. But as importantly, the companies attitude to risk is taken into account. So if the company is risk averse, avoids tax products to minimise risk, is open in its dealings and clearly wants to settle its tax bills openly and accountably it is given a low risk status, and gets a lighter touch tax regime as a result. There is a payback for the company with low risk in this system. The corollary ios that high risk companies should get more attention.
I believe HMRC should publish these risk assessments.
Of course this is market sensitive information. So it should be. Many of us want low risk investments. Those who do not take unnecessary tax risk and who pay their way to society should be given a market advantage.
And this does not divulge taxpayer details: just HMRC management data. I believe parliament should demand it be put in the public domain, now. It would transform attitudes to tax, investment and portfolio management, all for the better. What's stopping them?
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I would dare to suggest that litigation would rapidly follow if these internal assessments were made public, primarily because such assessments are clearly quite subjective and HMRC would need to justify them. Food packaging is a very different proposition because it is difficult to dispute how much salt there is in the food we purchase.
Furthermore you have to ask yourself whose tax assessment should be on the physical packaging of a product that is sold. Should I be looking at an assessment of the retailer, the haulier, the producer (perhaps based overseas), the importer (where appropriate), the distributor or in fact all of the above? If the information isn’t available for smaller distributors then does that give them an advantage or disadvantage as I might decide that I prefer to buy from people whose tax status is known?
Ultimately I would suggest that the UK public wouldn’t be greatly influenced by these labels. As an illustrative point how often do people look for a “Made in Britain” label and use that to determine their preference over products?
Litigation could be prevented by a simple law allowing publication
That’s a couple of lines in a Finance Bill
Why do you people think law unalterable when it protects your secrecy?
And would people be influenced? You bet they would. Investment appraisal would change forever
So you think it should be publication without any recourse to the courts or ability to appeal in any way? I can think of very few things that are beyond the scrutiny of the courts in some way or other.
If as you suggest it will make a major change to investment appraisal then what compensation will be available to companies that are able to demonstrate negligence on the part of HMRC in determining their status incorrectly?
Wel, let’s get round it then
Let’s make it a legal requirement that the companies publish the assessment in their accounts
If they don’t they can be sued
Why not make the published tax risk a self-assessed position by the company with the directors having personal liability if the risk assessment is incorrect?
As I recall finance directors of companies already have to take personal responsibility for the adequacy of their company’s accounting systems, so this wouldn’t be a major step.
It’s a poor substitute
But I’d accept it for now
Richard, you are being a bit more compromising than usual, are you already dosed up on Xmas spirit? The ratings agencies already publish their views on sovereign and corporate bond risk and nobody sues them and look how much of a mess they make of it. I suspect a lot of large corporates would be caught out looking inconsistent with their CSR if HMRC publish their risk view and i strongly agree they should do that. Norman Tebbit was on the radio the other day saying we need to bring back a bit of shame and I agree. Hartnett has persuaded the powers that be that its ok to name and shame individuals who incur penalties for tax year April 2011 onwards so this should be no problem for large corporates, it even smacks of evenhandedness.
One more thing, corporates have to pay rating agencies to rate their products and I think large corporates should have to pay for HMRCs risk rating. They should also be able to get a 100% discount for full disclosure of all relevant infomation and a low risk rating.
Yes of course there is a limit to how far the general public can be expected to acquaint themselves with the tax returns of large corporations. But there are surely enough people outside HMRC who have the ability to do this – and it is these people who will be able to interpret the data and inform the rest of us what is going on.
That transparency in itself would go a very long way. It would also enable HMRC to properly defend themselves against unfounded accusations of making cosy arrangements. By the same token HMRC would have little defence against any accusations that are well founded. Many purposes would be served.
The food packaging model alone would certainly be a useful indicator but that is all it would be.
Without access to the tax returns we can’t do what you suggest – we can only guess on the limited data available from accounts and that’s not good enough
This is why HMRC should publish
You read me incorrectly Richard. I am saying that publication of the tax returns is essential – as opposed to a food packaging type indicator alone.
Sorry
I most be more fatigued than I realised
It’s nearly time for a break