Friday, 6 February 2015

Tax avoidance

If a company is paying what they are legally required to pay in tax and no more, and that seems unfair, then the target of your anger must be at the laws that allow that, and not the company.

We all want to pay only as much tax as we are obliged to pay.

I was surprised by the headline 'Accountancy firm PricewaterhouseCoopers (PwC) has been accused of promoting tax avoidance "on an industrial scale", in a report by MPs.' on this BBC article.

THAT'S THEIR JOB!

Even the smallest of businesses will have an accountant. One of the jobs of that accountant is to ensure the business does not have to pay any more tax than it is legally required to do. For small companies the effort and cost of setting up something in Luxembourg is not viable, but even so, the business will aim to pay only the tax that is has to, and the accountant will help ensure that is the case.

What really pisses me off here is the way people have a go at companies and accounting firms doing exactly what they are meant to do. Companies are expected (legally required, even) to act in the best interests of their shareholders.

Bear in mind, for many large companies, those shareholders may be your pension funds. If your pension fund invested in companies that did not act in the best interests of the shareholder, your pension would not perform as well as it could. So all this whinging about not paying a fair amount of tax potentially impacts ordinary people with a pension.

I challenge every one of those people complaining to contact HMRC and ask to pay more income tax this year - go on - ask for a "K" (negative) tax code as a gift to the government. No? Then why expect anyone else to pay more tax than the law says they have to.

Don't get me wrong - if someone is not actually obeying the law, then they should be punished accordingly, but if they are legally paying less tax, then that is what you should expect.

The other thing that annoys me is the complaints about some companies paying no tax in UK. This is crazy, those companies pay a fortune in VAT, employers national insurance, road tax, fuel tax, and loads of other taxes. Anyone employing people in the UK is contributing a lot to the UK tax system. They don't pay nothing!

So, yes, it is unfair that some large companies manage to pay a lot less tax than one might fairly expect - so change the laws. But for a start, consider how much they really are paying in tax (there is a lot more than just corporation tax to consider).

Indeed, one fix would be to reduce or cap corporation tax. Stick to taxes that relate to actual business done in this country, such as VAT and all that income tax from employees.

25 comments:

  1. I disagree that companies are required to do what's best for their shareholders. They're required to do what their shareholders want (within the law). GENERALLY the two are synonymous, but it's not a given, especially with companies that have a very small number of shareholders.

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    1. Indeed, as shareholder and director in A&A, I direct the company in policies on things like filtering and privacy which may not ultimately create the most profit, though that is hard to predict and I hope it will.

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    2. Yes, A&A is a good example I think where 'pure profit' isn't apparently the only aim. I'm fairly sure from what I've seen that pride in your work is way up there too.
      Going back to your article, I certainly agree that the people we should be madder than hell at are the idiots who created the convoluted mess we call a 'tax system'

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    3. Indeed. Sadly, I fear, the reaction will be to make even more complex tax laws to plug specific "holes", which will simply make matters worse.

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  2. IIRC one of the simplest ways to avoid paying tax, and bear in mind you don't need to be an accountant for this one, is to take the head of HMRC to lunch.

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  3. Agreed. It is a ridiculous double standard that applies to companies, whereby they are assumed to have some "moral obligation" to volunteer to pay more tax than necessary, even though it's perfectly OK for individuals to reduce their own tax liabilities by using ISA savings accounts and other financial techniques.

    The focus of companies should be to generate money for their owners while hopefully providing useful services to their customers and jobs for their employees. They are not simply revenue streams for a bloated, parasitic political establishment that would rather waste our money on useless military interventions, state surveillance and endless censorship legislation.

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    1. No this same thing applies to individuals as well as to companies.

      We have an anti-avoidance regulation, and it has been applied to both companies and individuals. You might remember a lot of celebrities were ordered to pay more tax? That's the anti-avoidance regulation in action.

      Avoidance is an artifice. Let me give a real tax example, and an example of similar artifice from outside tax to see if you can see why it's not enough to just say "If someone obeys the letter of the law that's all that matters".

      Tax example: We decided that certain activities should have tax relief to encourage them. This means people who do those activities pay less tax than they would otherwise, and so they're encouraged to do that rather than something else which might be similarly profitable but incur more tax. For example, we decide building houses is good, so we won't tax your profits from building homes. Now, you decide aha - I want to build a factory, but building factories is taxed. So I'll build a "house" but it'll be factory shaped, and then I'll get permission to change its use from housing to factory afterwards. That's avoidance, and it's immoral.


      Non-tax example. Sam offers to take Bill's kids to the cinema because he knows Bill is busy. He knows sometimes Bill's kids have friends over, so he says he'll take all the kids. Bill says sure, just come round, take all the kids, great. He then charges local kids £1 each to come for a free cinema trip. When Sam arrives, there are 60 kids there, who all expect a free trip to the pictures. Bill has behaved in an immoral way.

      One key change Anti-avoidance legislation makes it that it offers to move the liability. People who invent avoidance schemes can avoid all prosecution by simply registering their scheme with the tax man. If you don't register, and your scheme is illegal, you can be prosecuted, but if you do register, all your "clients" may get asked to pay the tax they owe, but you walk away free. Of course you have charged the clients a large sum of money for your clever idea, and you give no refunds if it doesn't work and they end up in court having to hire expensive lawyers and then still paying all the tax. Clever.

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  4. To my mind, the problem isn't the general idea that companies can often get out of paying tax, it is that the huge multinationals seem to have a hugely disproportionate ability to do this, giving them a massive advantage over the small businesses (who actually benefit the whole economy more).

    I don't blame the big businesses for this though - it is squarely the fault of the lawmakers. However, negative media attention to this issue is beneficial - in the absence of laws to prevent this behaviour, getting a major tax-avoider to pay voluntarily is probably a good thing. Make no mistake though, these voluntary tax payments are part of the PR budget to make the company look good in the eyes of the public (much like charitable donations).

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    1. Quite. As a small business I don't really have the resources to even explore some of these options let alone actually use them. It stands to reason that with more money in the first place you can pay more expensive lawyers and accountants, sadly.

      The one good thing for small businesses like ours is the R&D tax credits. We do a lot of R&D, though still pay some corp tax. I know some profitable small companies that pay no corp tax because of the amount R&D they do. I wonder what will happen when the campaigners find out about such companies.

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    2. If you spend money in this country, doing stuff that we decided should count against tax, nothing.

      Really a LOT of money vanishes in "loans" that exist only on paper to siphon profits out of the UK. This is pure avoidance, the loans make no sense, they exist simply to change the paperwork in order to pay less tax. Often the company "lending" the money is owned by exactly the same people, and exists only to "lend" money to the UK company so as to avoid tax.

      If your "R&D" consisted of payments to a company owned by you in a low tax country called "Kennard R&D Company Number Eight" with zero employees, and were arranged to be exactly the same as your operating profit, then that would be classic avoidance and you ought to expect protest. That's how blatant these tax dodges are. There is no grey area here, this isn't about doing something that you think is legitimate but then finding out others take a different view, this is doing something you know is morally reprehensible because it'll make you very rich. And about politicians turning a blind eye because rich people can be very persuasive.

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    3. R&D tax claims require a lot of justification and paperwork to back them up.

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    4. And I'm sure your R&D claims are entirely legitimate.

      But try something much simpler. Imagine you have a large loan from the bank (a lot of companies do) and you are paying £1M per year in interest on that loan. Your company does one very simple thing, it uses the money from the loan to buy something, and then it sells that thing for more money. Over a year it receives £1M in income more than it spends. But it has to pay £1M interest, so in the end profit is zero. No corporation tax. Everything seems fair, right?

      Now, instead of the local high street bank, maybe the business borrows this large sum of money from a foreign bank. Everything is much the same, except now the interest leaves the country and goes outside our tax man's visibility. Still fair, right?

      Now, instead of a foreign bank, the company borrows from a secretive company in a tax haven. Everything is the same, right?

      Now, the people who own the company set up their own secretive tax haven company, and that company lends the money. Still the same?

      And now, the interest rate is set arbitrarily, independently of any market rates, according to the expected "before interest" profitability of the UK company.

      So we've gone from an obviously legitimate rule ("Interest on a loan has to be paid before counting a profit") to a huge scam ("Never pay any UK corporate tax with this one strange trick"). Why is this still morally OK?

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    5. Good example, and I am not really saying it is "morally OK". I am saying that if that is legal, why the hell would you expect any company not to do exactly that? And certainly, why the hell would you not expect a large accountancy firm not to explain this "simple trick" to their customers, any less than explaining R&D tax credits.

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    6. I am also saying that this is affecting corp tax which is one small part of the overall tax paid because a company is operating in the UK.

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  5. http://www.theregister.co.uk/2012/11/25/tax_and_tech_biz/

    Some interesting views here. It seems the EU is set up to encourage companies to seek lower corporate taxes

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  6. I'm confused about your assertion that companies pay VAT. Doesn't a VAT-registered company just collect VAT from its customers then deduct the amount it pays to its suppliers and pass the balance on to HMRC? So there is an affect on cash flow but not profit.

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    1. Not anywhere near so simple. econmics can be complex at times. At one end, if the price they charge for goods to consumers (eg coffee) is the price the consumer is prepared to pay then that price would be the same if no VAT so it would be all profit. In practice the price would be different but not entirely the VAT free price either. It is a tax on value add, and it is the value add that the company provides. It is like saying that If there was not corporation tax the company could charge less for its products and make the same profit so they would. Ultimately all of this is just tax, one way or another.

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  7. Another problem is the closeness between PwC and government, they advise the government on their tax laws and then advise their other clients how to get around those laws.

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  8. http://liberalconspiracy.org/2011/03/29/why-tax-avoidance-is-among-the-biggest-issues-of-our-generation/

    "You may start by pulling out that old canard: ‘everyone wants to avoid taxes surely? What’s wrong with it?’ I answered it here. In brief, if everyone really had the opportunity to avoid income taxes then society as we know it would collapse. What actually happens is that tax avoidance allows rich individuals and major corporations from avoiding tax, forcing middle-income earners to shoulder a greater share of the tax burden."

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  9. Also: http://www.theguardian.com/commentisfree/2015/feb/13/british-society-favours-rich-tax-avoidance-loopholes

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  10. I pay VAT tax. I pay council tax, road tax, fuel tax, etc.... Consider what I am paying. Why should I pay income tax also?

    Whilst I agree the lawmakers needs to get its acts together to cut down the legal opp to optimise, just using the argument of "companies pay VAT, employers national insurance, etc... " to justify tax avoidance (as this is what big cies are doing), is just so flawed, it beggars belief....

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    1. It was not to "justify" it, it was to say how daft it is to say that they pay no tax in the UK, which is what is often said. If the hype was "pays a bit less tax that they would have if they had not been careful" it would not have he same message as "pays no tax in UK".

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    2. I appreciate that. But bringing up this argument is also echoing (and giving credence to) what big corp say as a way to justify their "my corporate tax rate is in Ireland, my VAT in Luxemburg and my IP rights in the Virgin Islands" so I am not paying tax in profit but plenty of "others".

      As I said, their argument of "we pay a lot of tax, VAT, fuel duty, our employees pay tax, etc..." is poppy cock as, in that case, why should I pay income tax? I'll also add my children will also pay VAT, etc... (I pay to raise them) when they will be working so another reason similar to "our employees pay tax".

      Clearly, it doesn't prevent the issue of gvt having to clamp down on all these schemes set up by PwC etc..., sadly international "race to the bottom" isn't making things easy. And as I doubt PWC will set up a scheme to enable me to be domiciled in Luxembourg/Cayman/etc... while earning in the UK, who is left to "pick up the bill"?

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    3. You are missing the point. It is quite valid to say that the "pays not tax in UK" is wrong, as these corps pay lots in the UK. It is also quite correct that you don't pay any more incoming tax (or corporation tax) that the law requires you to. Yes, if law changes, that changes. But done pretend (a) that these companies "Pay no tax in UK", or that (b) paying more than you are required to is sensible. If you think they should why don't you pay more - have your tax code changed to "1K" - go for it - pay more than you are legally required to?

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    4. I don't believe I miss the point, sorry I wasn't clear.

      1- Yes, there is a duty for gvt to close the tax engineering which is legally possible. I don't deny this and you are entirely right. I haven't said either "cies should pay more than they are entitled". But the race to the bottom sadly will prevent a rapid resolution to the tax optimisation schemes with the likes of intra companies payment for IP rights...
      2- If peeps say "big cies don't pay tax", it's pants they are BUT, and there is a big BUT, the big cies use the argument of "we pay a lot of tax and our employees pay income tax (how cynic)" to mask the fact they generate billions in sales but no corporation tax for the legal reasons we know, courtesy of big accountancy firm advising gvt, see 1- above.

      I only find weird that someone who is not a spoke person of a big co supports their argument of "don't forget, they pay fuel duty, VAT and their employees too so they contribute to the UK tax system" which is no more than a smoke screen they use to mask close to nil corp taxes on billions of effective revenues in countries they operate in.

      So question: Because I also pay VAT, road tax, fuel tax, council tax, then shouldn't I, actually we SME and tax payers, also have access to tax avoidance schemes developed by the likes of PWC that would allow us all, not just big cies but also SME and individual tax payers to avoid paying income/corp tax? And if this happens, if the tax playing field was evened out, when we'll all be paying rates in the region of 3% (because this is what we are talking about), then where would this leaves us all?

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