I note David Gauke, the Treasury Minister responsible for H M Revenue & Customs, has made a speech today to the Hundred Group of FTSE Finance Directors.
In it he said (and I quote extensively, but don't worry - it's all pretty vacuous so you can scan it quickly):
I believe that a Government who are focussed on supporting economic growth ... must ensure that we have a corporate tax system that is an asset to our economy, not a liability.
A tax system that encourages businesses to come here in the first place, not the reason they move away.
And that this is in the best interests of everyone.
Yet there are considerable challenges we face when trying to get this message across.
First, there is a perception that the total tax contribution businesses make is restricted to the corporation tax they pay.
Yes, corporation tax is important...
...but as the work carried out by the Hundred Group and PwC demonstrates...
...our largest firms make a vital contribution in terms of business rates, irrecoverable VAT, employers National Insurance Contributions, as well as the income tax and National Insurance Contributions paid for employees.
So his first point is that big business is right to claim that all the tax that they pay can be described as their tax contribution.
The first person I ever heard of doing this was Mohammed Al Fayed and we all laughed at how ludicrous his claim was.
No ministers endorse it and PWC sell the idea for blatantly political purposes to hide how little tax corporations really pay - just as Mohammed Al Fayed was doing years ago.
The tax debate has reached the level of farce if this is the benchmark Gauke wants to use. But it gets worse:
The second challenge we face is that people believe - or at least give the impression they do - that corporation tax is somehow a victimless tax, not paid by real people.
Of course, as with any tax, the incidence will ultimately fall on someone.
As far as corporation tax is concerned, the question is whether the burden falls on shareholders (largely in the form of pension funds) employees (through lower wages) or consumers (as a result of higher prices).
The consensus, among economists at least, is that it’s predominantly the employee who foots the bill.
This is based on the work of Professor Mike Devereux at the Oxford Centre for the Non-Taxation of Business. Mike is so neoliberal and so open minded he's banned me from his Centre for a) questioning his assumptions and b) challenging his objectivity when doing so. But ministers still listen to him because it suits their purpose to do so.
Devereux's work is, however, fatally flawed. What he has argued is that when corporate taxes increase then wages fall. There's a problem with this though. First, corporate tax rates have fallen almost universally for the last twenty years so he had to work really hard to find his data. Second, he tested only one way even though the hypothesis would have been vastly easier to test the other way - did wages rise when corporate taxes fell? If they didn't then clearly the relationship when corporate taxes rise is explained by other factors and the correlation he finds is just coincidence. Devereux must have known corporate tax decreases do not result in wage increases, but he chose to ignore the evidence running his tests in this direction could have given to ensure he could deliver the desired result of his work - that corporate taxes are, in accordance with his neoliberal mantra, and that of his funders (for the FTSE 1000 Group of Finance Directors do fund the Oxford centre) desired.
There are many other flaws in his work - but this is the fundamental one - and it reveals (in my opinion, but I know not his) clear political bias to the work which of course also appeals to David Gauke.
But let's move on, as Gauke does:
And it is testament to the lack of understanding of this fact that - when this point was made to a member of UK Uncut on Newsnight - his response was to say that this demonstrated the unfairness of the tax system.
It is rather like someone complaining about the law of gravity if an apple fell on his head.
And the third misperception is that a competitive corporate tax system somehow involves being weak on avoidance.
This Government is determined to be tough when it comes to reducing avoidance.
As part of the Spending Review, we strengthened HMRC’s capacity in this area.
No you didn't. You're cutting HMRC's budget by over £2 billion in four years.
Under our watch all the major banks have signed up to the code of practice on taxation for banks.
Which is legally unenforceable - as they all know.
In December, we set out bold policies to tackle longstanding avoidance opportunities, including disguised remuneration.
And we have asked Graham Aaronson QC to explore how a General Anti Avoidance Rule might work in the UK and what it would look like.
Because we all know, at the margin, some people try to be too clever by half in an overly aggressive pursuit of lower tax bills.
True.
The truth is the public will not wear this - especially during times like these.
And as their representative, nor will we.
Might I mention Vodafone?
But it is equally unhelpful to try to exaggerate the scale of the problem.
We have all seen some campaigners choosing to stoke the fires of public opinion.
It is a feature of this debate that legitimate behaviour by taxpayers — consistent with both the letter and spirit of the law — is being classified as ‘avoidance’.
This action artificially inflates both estimates and perceptions of the ‘tax gap’.
It is, I think, to the credit of Richard Murphy, author of the oft-quoted TUC tax gap estimates, that he acknowledges the use of allowances and reliefs within his calculations.
Only last month he wrote that:
'It is a persistent argument of business that the tax gap on corporate profits (which I have estimated to exceed £10 billion a year in the UK) is not the result of any form of avoidance at all, but simply the use of perfectly acceptable allowances and reliefs.
And some of it may be... of course that has to be true.’
And he then went on to argue:
‚Äò‚Ķ[that] the use of such reliefs is a valid element in the tax gap.’
That is not my view, nor, I think the view of most people.
But David - my point is - how do we know? The data published by companies is becoming almost impossible to use to assess their compliance. I have told you the answer - country-by-country reporting - but you won't endorse it. Why not? Until we have data we have to work on what we've got - and if that absent data does not tell us what part of the gap is from abuse of allowances and what part from legitimate use then we'll rightly assume the worst - when the evidence is compelling that big companies are paying less tax than small when you intend otherwise.
But it does demonstrate the difficulty and confusion that can exist in this area.
Yes - which you could help diffuse, but won't.
Where a combination of complexity in the law, fluidity in definition and, quite rightly, a strong desire on the part of the public to see that everyone pays what’s due, can often conflate the problem.
It is not surprising, therefore, that individual businesses - some of our biggest high street names, even the guardian media group, whose publications regularly provide comment on tax, for instance — are finding their individual tax affairs under intense public scrutiny.
And it strikes me that this won’t be the last of it.
It will just run and run.
You're right. UK Uncut are here to stay. And the Tax Justice Network is not going away either.
At present many of the more questionable assumptions that fuel this campaign are taking place without effective rebuttal.
Maybe that's because we're right?
So, having set out the challenges that faces a Government wanting to put in place a competitive tax environment, let me set out a challenge to business.
I know that, for most businesses, the sensible course of action is to keep a low profile here.
Don't plead guilty in other words.
To avoid being drawn into a contest that is both complicated and unpredictable.
But although that might make sense for the individual, there is a danger that the collective voice of business is getting lost.
We could have a better-informed debate over the coming years if businesses were willing, perhaps, to be more transparent about the tax they pay... and explain the story behind the figures.
We're back to country-by-country reporting.
At a time when, across the board, the public expect greater openness...
...I think it could be in your long-term interests to engage more forthrightly in this discussion.
Legislate then.
To set out your own position. To be more robust on the essential contribution you are making individually to reduce the deficit.
Yes, that may mean greater scrutiny and, for some, this could be uncomfortable.
You bet! He admits there are abusers!
But it could also be an opportunity... an opportunity to address some of the myths and confusion that exist.
That’s why I welcome the work undertaken in respect of the Total Tax Contribution.
It is a valuable source in the debate
And a constructive first step towards meeting one of the key communication challenges for UK business over the coming years.
A first step toward, generating and maintaining public consensus in support of an effective and competitive tax system in the UK.
Thank you.
Oh dear - and then he endorses PWC's Total Tax Contribution - their contribution to the Mohammed Al Fayed School of Accounting.
The PWC TTC is utterly flawed. It adds together all the taxes companies pay - even their TV licences and road fund licences in their desperation to prove they should not pay a penny themselves.
But it's worse than that - it provides no data at all to prove that the information provided is right. So VAT may be reported, but not the level of sales it's charged on. And PAYE will be reported but not labour costs. And corporation tax but not profit. This is not accounting data. This is joust an exercise in coming up with a big number. And worse still it's a boy's game - where one company says 'mine's bigger than yours' but without any context or relevance.
We need accounting data. That is country-by-country reporting.
But we also need some economic logic in this debate. Not the faux logic of Mike Devereux - choosing data to suit his purposes. No we need some logic on some simple issues - that are gloriously confused in what Gauke has to say. If he had any understanding at all of the incidence argument he'd realise the glorious irony of PWC's TTC. That adds up all the tax a company pays and says it's all the company's doing. But the incidence argument Gauke refers to says companies can't pay tax at all - that someone else always does. Amazingly Gauke embraces both wholeheartedly in the same speech - saying companies don't pay - and labour does - and at the same time saying companies pay lots, as do PWC.
Come on David - you can't have it both ways. They either pay or they don't. Or they pay some - such as corporation tax, but not VAT paid by consumers and PAYE and NI paid by labour.
The fact is that in this arena taxes are paid by those labelled with the liability. That's the real truth. Devereux denies it. But Gauke swings both ways. And the nobly consistency is from those like me working on the Tax Gap. And our argument resonates and won't go away because it's right.
In which case the solution is simple:
a) Make companies pay
b) Make them report they pay
c) Close the gaps that let them avoid both obligations.
d) Stop offering excuses and do (a) to (c).
NB There's more on this here and especially here.
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So nothing from the minister about Corporation Tax in the context of companies owned and run by UK nationals serving the UK economy by providing it with goods and services?
Am I to understand that the taxes which I pay n my employment income are not my contribution?
An extraordinary and sinister stance from our government.
Richard
Thanks for the break down of Gauke speech. I probably wouldn’t have read it otherwise. Having done so, however, and set it in the context of the emerging narrative of this government, I think it signals something quite significant all of which relate to PWC’s snake-oil formula.
First I think we’ll now see the big companies becoming more ‘transparent’ but they’ll do so using the PWC formula.
Second, I think we’ll see government accepting – and heavily promoting – the PWC TTC formula.
I think this is what this speech was designed to signal to its audience. And, as I say, this is entirely consistent with the overarching message and direction of the Tory government (note: I have stopped using the term ConDem as it no longer reflects reality. Indeed, I confidently predicts that all LibDems currently in the government will defect to the Tories before whenever the next election is and will be ‘offered’ Tory seats to fight).
@Ivan Horrocks
You’re right, I suspect
And I am tending to your way of thinking on ConDem
They’re on the Tory bus after all
Is your country-by-country reporting about saying how much of the profits a company makes is made in each country?
If so, I’ve been thinking this’d be a good idea (although I’m not sure how easy it’d be to implement?).
However, I do wonder whether, if you could do this, you could then get rid of corporation tax and just tax individuals? If you get rid of capital gains tax and dividends tax and just charge an individual’s marginal income tax (which would be merged with NICs), then all you need to do is multiply the dividend by the share of profits made by that company in the UK, and pay 40/50% on that. That way as long as the profits of a company are reinvested in the company (or given to charity or suchlike), then it doesn’t get taxed, but ultimately will as soon as it goes into the hands of individuals, at their marginal tax rate. In one sweep you’ve gone from 5 taxes to 1. If you really wanted to you could charge a rate of, say 5-10%, on profits over some reasonable amount.
I know that it seems wrong not to tax companies, but to me it seems to make a lot of sense, both in terms of simplicity and in terms of the reduction in tax avoidance associated with it.
With regards to country-by-country reporting, there are certain companies you could easily coerce into doing it, for example with Vodafone saying that cannot sell goods in the UK, online or in store, without declaring their report, an once you get a few countries doing this the power becomes even stronger.
I can, however see one potential reason for corporate tax, which you may now a way around(?), but if, say with Philip Green’s wife, she says she lives abroad, do you then end up with no tax at all from that company? (You’d also need an asset transfer tax too I guess).
irrecoverable vat is not the same as vat paid by consumers, and employers national insurance is not the same as national insurance paid by employees. are pwc presenting them as if they are, or are you misrepresenting what the minister said?
you make excellent points re. the wage rise argument and need for better reporting… but what about all the tax paid on dividends from post-tax profits? personally, i think divis are a much better place to levy taxes than profits (which are subjective at best) and would welcome consideration over this. and yes, they should still be taxed even if paid to residents of monaco.
you must admit, though, that there is a lot of deliberate and/or negligent comment floating around and being spread by the uncut movement. the awful coverage of barclays being a classic. so your ‘maybe that’s because we’re right’ quipped is childish and disingenuous. there are real issues here, and real truths… if you persist in trampling all iver them with spin then what good will come? the ukuncut movement has momentum… don’t waste it by turning it into a leftist propaganda machine.
Question: if TTC is such a good thing according to Gauke et al, what’s the TTC of the UK civil service? After all, if banks can claim their employees’ tax as their own, so can the public sector, surely 😆
@theboynoodle
Re payments of dividends by a UK company to a shareholder living in a tax haven, the answer to this would be to introduce a withholding tax on dividends. If a dividends of £2.5 b (for example) are paid then a simultaneous payment to HMRC in respect of the receipients’ income tax would be required. If the dividend tax was set at 50% then the payment to HMRC would be £2.5 b (ie the same cash amount received by the shareholders). I personally support this arrangement.
@Ivan Horrocks
The Total Tax Contribution (TTC) is properly reported in a Value Added Statement (VAS). These statements are an alternative to the traditional income statement. If the banks and PWC are keen to have their TTCs reported then there is no better way than in a VAS. A VAS would enable readers to put the TTC paid by an organisation into context. A VAS would show the valued added, and to whom and in what proportions this value added has been distributed. Standard recipients of value added are government (TTC), labour (net wages), financiers (shareholders and lenders). The balance is shown as being retained for reinvestment. VASs can provide an elegant way of presenting an organisation’s results and would faciltate comparisons of TTCs based on percentages between different organisations.
If the banks and PWC want this, then bring it on! Let’s see how much they contribute.
@Stephen
i agree, though i would not set it at 50%.
companies are not faceless evil sentient entities.. not even starbucks. at the end of the money trail there are always people. what we shouldn’t do is unreasonably double tax those people by taking bigger slices of the corporate profit AND the dividend. i think profits shuld be taxed once, and instead of trying to tax accounting profits.. which are subjective and unconstrained by national boundaries.. we should tax distributions.. they are, after all, a better indication of ability to pay in any case. many companies continue to pay dividends during times when profits are down.
if the tax happens at the point of distribution, in the manner you suggest, then it’s a tax on the owner of the business.. and that seems sensible. ideally, the tax rate is the marginal rate of the shareholding individual.. which keeps things progressive.. though we have to add in some complexity to make that work. higher earners can do it through a tax return, but for lower earners there would need to be a reclaim system via HMRC. if the withholding was set at the higher rate tax level of 40% then that would work for me. non-uk taxpayers would then, at least, pay that. uk companies would also get back tax witheld (and effectively only pay it when they distribute).
i think that corporation tax as we have it is simply unfit for a global economy where, with a few pen strokes, a company can move to a more favourable tax regime. instead of playing this dumb game of cat & mouse with companies and their advisors just scrap it and levy tax on whatever funds the company pays to it’s ownership.
our whole tax system.. for companies and individuals.. is outdated, overly complex, and deeply inefficient. the core principles are decades and centuries old.. if someone started from scratch with the knowledge of how the world works today, and the technology we have available, how close do you think they’d come to our hotchpotch of corporation tax, paye, national insurance, capital gains and the likes?
if your great great grandad had built a little wooden shed 150 years ago, and your family had just kept on patching it up and adding little uncoordinated bits every year, wouldn’t you now look at the needs of modern living, and the capabilities of modern construction, and then flatten the damn thing and build a proper house?
only if they offset against the money the receive from the state. and i’m not being facetious.. the true net cost of public sector would be far more useful than the presently reported gross.
and, for the avoidance of doubt, yes i would argue that private companies should do the same. i’m all for a sensible and properly analysed reporting of ttc.. but it needs to show both sides of the coin. what i’d REALLY like to see (but almost certainly never could) is the extent to which companies have the earnings of their employees subsidised by the benefits system. it would be fascinating to see how many serial low-pagers only exist because the state makes sure their workforce can afford to feed their families.
“Mike is so neoliberal and so open minded he’s banned me from his Centre for a) questioning his assumptions and b) challenging his objectivity when doing so. But ministers still listen to him because it suits their purpose to do so.”
There is a difference between banning and not inviting someone.
The Oxford Centre for Business Taxation is a private institution. You have no more right to be there than anyone else. It’s not as if you are a recognised tax academic.
And the Centre did invite you to their annual conference in 2007. You sat at the back and didn’t contribute a bean to the proceedings. Then they found you’d been posting all day on your blog slagging them and their guests off.
So why would they invite such an obnoxious character to their future events? Especially when it’s patently clear that you have nothing of value to add to proceedings, other than your trademark rudeness.
@Jason Schwartz
It’s not a private institution – it’s a university
And I have been an accredited academic
Oxford fellows advise me that the decision contravened Oxford rules
And you’re wrong – I did contribute in 2007 – but Mike did not like the contribution
And yes – I blogged – because it was an open session – and a lot of people said very silly things
As to my contribution – the Minister is forced to acknowledge it – and it’s changed the debate. More than Devereux ever has…..
@theboynoodle
We are very much in agrement. I too advocate the abolition of corporation tax. Like you I think the incidence of tax should be on dividends. I suggest a 50% tax because this is the top rate of marginal tax in the UK. Most recipients of dividends will be in this tax bracket. Those who don’t can reclaim the over payment. A tax credit would accompany the dividend to reflect the tax withheld and paid over to HMRC.
I agree that this is a much simpler system and avoids the double taxation issues that corporate taxation presents. The withholding tax would ensure that all shareholders who benefit from the UK economy pay their share of tax. Moreover, a zero rate of corporation tax might encourage companies to locate in the UK.
If a company decided to move its headquarters outside the UK to avoid the withholding tax then UK shareholders would pay income tax on dividends paid by the relocated company on the remittance basis at their marginal rates. They would only receive a tax credit if a withholding tax had been paid to the tax authority in the new location and subject to a bilateral treaty.
@Stephen
I will note the moment that I do not agree with you. I will post in much greater detail on this issue sometime soon
@Stephen
mr reticence to have a 50% rate would be that too much credit would go unclaimed by the people who need it – as is always the case where government policy is to take first, and then give back if asked. of course, it probably would be no better if the rate was 40% or, indeed, anything above basic rate. what we don’t want to do is disincentivise ordinary folk from investing in companies because the tax is so high (which, almost inevitably, will become a widely held view).
i am very interested in hearing richard’s view. my liking of the idea comes very much from idle thought rather than actual analysis or deeper consideration. i’ve not come across any great substantial study of the idea – though i’m sure it must exist.
whilst we’re at it, mind, can we scrap employer national insurance (at least on non higher-rate employees) but implement a proper living wage?