Should we judge HMRC by process or results?

Posted by Christie Malry on February 18, 2015 at 9:48 am

Imagine two taxpayers. One is a small business. Perhaps an entrepreneur and her husband. The business’s tax affairs are challenged by HMRC and she must go to court to fight her case. After a lengthy case, which is appealed, she wins.

The other is a large multinational. This business’s tax affairs are challenged by HMRC and the multinational must go to court to fight its case. After a lengthy case, which is appealed, it wins.

How would these cases be reported in the media? The SME case would be the tale of a plucky entrepreneur who has had to take time away from her business (and family) to fight an unfair challenge from a faceless government inspector. Whereas the multinational case would be the story of how big business dodges its tax responsibilities and, by employing its vastly superior resources, hoodwinked the tax authorities.

Of course, these are gross simplifications. But it seems - to me, at least - that the idea that HMRC is tough on small business but gives big business an easy ride is a selection bias problem. Everyone knows a family member or friend or friend-of-a-friend who has been taken through the wringer by HMRC. Whereas not everyone knows a tax director at a FTSE-100 company. That means we tend to judge HMRC’s interface with SMEs by its process whereas we judge the interface with multinational business by its results.

HMRC is an organisation that takes money off you. Invariably, it will focus on those areas where it thinks you haven’t paid as much as you should. So any interaction with it is unlikely to be pleasant. Judging HMRC by process will invariably create a negative impression of HMRC, which looks like it behaves badly in its dealings with ordinary people.

Assessing HMRC by its results creates a no-win situation. Either HMRC loses, which makes it look soft on big business. Or it wins, which merely reinforces the idea that big businesses are dirty tax dodgers. Whatever the outcome, tax campaigners can chalk it up as another piece of ‘evidence’ that big business and HMRC are unethical.

A better approach would be to recognise that both the SME and big business narratives are inadequate. We need to assess HMRC by its overall service standards, and business by its overall behaviour, not merely by the narrow parameters of tax investigation process or outcomes. Anything less might produce good stories but inevitably leads to terrible policy.

The impact of cutting taxes on tax avoidance

Posted by Christie Malry on December 18, 2014 at 1:24 pm

the Tories have realised, rather late in the day, that cutting taxes does not in any way end tax avoidance.

This is obviously untrue.

Imagine a country with a tax rate of 20%. And suppose companies are very, very badly behaved. So bad, they use no end of (legal) tax avoidance techniques to dodge half the taxes due. Suppose the cost of this is 1% of their taxable profits.

If the government of that country cut the tax rate to 10%, there would no longer be any need to avoid taxes. Companies would be better off sacking their tax advisors and simply paying the tax due. Because the net cost of doing this would be 10% of (pre avoidance) taxable profits, not the current 11% (yet don't lose sight of the fact that they *should* be paying 21%: the 20% statutory rate plus the 1% they've decided to spend on advisors).

But suppose they keep on paying their advisors to dodge even more tax. Suppose those devilish lawyers manage to produce a 5% effective rate of tax in return for their 1% fee. Then the company would be paying 6% instead of 10% so it would continue to avoid. But the amount avoided is only 5% of taxable profits, not the 10% when taxes were higher.

Lowering the tax rate necessarily reduces tax avoidance because of these two effects. Firstly because it reduces incentives to avoid in the first place. Secondly because it reduces, arithmetically, the level of any avoidance that does taken place.

Making it utterly ludicrous to suggest that cutting taxes doesn't reduce tax avoidance "in any way".

Why tax allowances don't belong in personal tax statements

Posted by Christie Malry on November 5, 2014 at 11:36 am

Ritchie is very proud at how well his alternative personal tax statement has travelled. But if there’s one thing in this world that is and will forever remain true it’s that popularity is a miserable gauge of quality.

And, given that we’re dealing with Ritchie, this is especially true. So let’s have a look at his methodology.

Then I assumed a number of quite reasonable things, all based on the fact that although there were explicit spends in 2013/14 of £726 billion there are additionally what are called tax spends, which are money not collected as a result of reliefs and allowances within the tax system, and there are also some implicit subsidies the government supplies not even included within those totals.

So he’s adopting his usual approach of arguing that various tax reliefs should in fact be considered tax expenditure. So - this argument goes - it’s “tax expenditure” to give me tax relief at 40% on my pension contributions because, economically speaking, it’s identical for the state to write me a cheque for the tax on my contributions as it is for it to simply not tax me on them in the first place.

While in some circles this might work, it produces results in this case that are - and I’m going to use a technical term here - Ritchiebollocks.

Imagine a country with ten identical employees. Each has income of £10,000 from which they make pension contributions of £1,000 and pay income tax and NI of £3,000 on the rest. Their tax return would look like this (sorry for formatting, I'll just have to tidy it up later):

Income                 £10,000

Less pensions     (   1,000)
Sub-total               £  9,000

Tax paid                (£ 3,000)

Total                       £  6,000

The total government tax take would be £30,000. To make the example easy, let’s suppose this was spent entirely on the NHS.

A fair statement would look like this:

Tax paid: £3,000
Spent on: NHS 100%

Whereas Ritchie would have us say this:

Tax paid: £3,000
Spent on:  Pension tax relief 25%, the NHS 75%.

This clearly is an absurd distortion of what actually happened.

In order to make his numbers work, he’d have to pretend that actually, each employee paid £4,000 of tax and then received a cash rebate. But this isn’t what happens, and would require HMT to send out information to taxpayers that don’t reconcile to what they have in fact paid, because their payslips say they only paid £3,000.

This is why allowances simply don’t belong on the personal tax statement. Trying to shoehorn them in manages to create something even less accurate than what the Treasury came up with in the first place. And that’s really saying something.

You cannot accuse both Vodafone and Amazon of tax avoidance

Posted by Christie Malry on October 7, 2014 at 10:11 pm

So, some tax campaigners have been celebrating the news that the EU is to investigate Luxembourg's deal with Amazon that saw the multinational bookseller pay a special low rate of tax in the country. According to the campaigners, this allowed Amazon to avoid paying tax in the UK 1.

In supporting the EU's action, one is recognising that EU tax law takes precedence over national tax law. So countries do not have absolute liberty to set their tax policies as they might wish. They must obey EU law, or risk seeing it overturned upon challenge.

Then cast your mind back to Vodafone. In the case of Vodafone, tax campaigners were arguing that the UK should be able to set whatever tax law it likes, with no consideration of whether this might be permissible under EU law. Vodafone said that the UK must respect EU law and was working its way through the courts to force the UK to comply. The precise bit of law was the UK CFC legislation, which sought to bring vast swathes of foreign-source profits into the scope of UK tax. The EU said no; in the EU at least the UK may only tax profits that are earned in the UK.

One cannot logically deny Vodafone its appeal and support the EU action in respect of Amazon. Anyone who blithely claims both Vodafone and Amazon are guilty of avoidance is, I would suggest, guilty of some flaky thinking. Because you need to apply EU law in one case and completely deny it in the other.


  1. Never you mind that, on a consolidated basis, Amazon doesn't make a lot of profit, by design. So the idea that it's shifting profits about is weak, to say the least. But that's not important for the purposes of this post.

On Ritchie's latest tax gap report

Posted by Christie Malry on September 23, 2014 at 12:50 pm

Ritchie has a new tax gap report out. And he proudly proclaims that:

This was read by several well informed reviewers

Not, presumably, well informed enough to spot that the report claims both that the tax gap is £119.4bn (eg front cover, section 2) and £122bn (eg sections 1, 16).

Dismiss this as pedantry if you dare. This is a report which claims it has a methodological basis for arriving at the figures it does. That case is seriously undermined when it can't even agree the number it's trying to come up with.

Ultimatum games and taxes

Posted by Christie Malry on September 18, 2014 at 1:44 pm

In an ultimatum game, a sum of money is to be shared between two parties. If the second party is happy with the split proposed by the first, both get their shares. If he is not, neither gets anything. Research shows that, should the first party offer less than about 20-25%, their offer will be rejected as unfair.

I wondered whether you could extend this to tax, as follows. The game operates as before, only both parties are taxed on their share: 0% on the first £10, 25% on the next £30 and 40% thereafter. Tax money is discarded.

As far as I can tell, there is no existing study along these lines, which probably should be sufficient to tell me it's a stupid idea. But would it tell us anything useful? What would it reveal?

I suppose one line of thought might be that the 20-25% rule might reassert itself, based on post-tax amounts. In the scenario above, an offer of £16 would mean the second party would retain £14.50 compared to the first party's £58.90. The taxman would take £26.60.

An offer of £30 is needed to ensure both parties receive more than the taxman. P1 takes home £50.50, P2 £25.00 and the taxman £24.50. The minimum amount the taxman can be left with is £23.00 for offers between £40 and £60. Might one of these scenarios become an equilibrium, in order to maximise the amount players receive compared to the taxman?

Critics may reasonably point out that tax isn't wasted, so the exercise is artificial. A different experiment in which tax is obviously wasted or obviously spent on good things might help tease out this factor.

Any other thoughts?

The glorious gibberish of Richard Murphy

Posted by Christie Malry on September 4, 2014 at 2:30 pm

On being asked to explain why Go-Ahead Group's effective current tax rate is much lower than the statutory rate, he states:

The underlying tax rate is actually higher – deferred tax reduced the rate this year and you are comparing with tax paid – which is wrong

The Fair Tax Mark criteria (questions 7 and 8) presume that the current tax charge is a good proxy for the tax paid in the year. So it cannot be wrong to compare the two. And, indeed, in GOG's case they're only £0.2m different.

But it is gibberish of the highest order to argue, as he does, that deferred tax is responsible for reducing the current effective tax rate. It's not just wrong, it's Marks and Spencer wrong.

Remember, this is the man who is proud of his influence on the world's taxation system.

Schop and change

Posted by Christie Malry on July 16, 2014 at 8:34 am

Change is then predicated on the existence of disruptive thinking and, as Schopenhauer suggested, it usually provokes a three or four fold response. At first it can be ignored. That clearly did not happen in this case. Second it is ridiculed, which most certainly occurred. Then it is violently opposed. It may be fair to say that happened, although I mean in terms of the argument, and no more. Last it is accepted as being glaringly obviously appropriate and the right thing to do, with the idea then being adopted by those who usually have no idea how it might have emerged.

A couple of reflections on this:

The original quote isn't about change, or even disruptive thinking. It's about truth. While it's often attributed to Arthur Schopenhauer and sometimes to Gandhi, it's unlikely either were the true source.

But Ritchie has gotten the quote the wrong way around. The quote isn't a manual for how to bring difficult new concepts into common acceptance: first make sure they ignore you, then get them to laugh. It's descriptive, not normative. It says that, for a given truth, it will have followed these steps. And for novel scientific advances that's probably true. But Ritchie is holding it up as a scorecard. Because he has been ignored, because he's being pilloried, he's effecting change. And this is clearly a fallacy of affirming the consequent. Silence and ridicule are products of truth, not determinants of it.

Carl Sagan explains the latter point brilliantly:

But the fact that some geniuses were laughed at does not imply that all who are laughed at are geniuses. They laughed at Columbus, they laughed at Fulton, they laughed at the Wright Brothers. But they also laughed at Bozo the Clown.

Responding to the Fair Tax Mark consultation on its criteria for multinational companies

Posted by Christie Malry on July 5, 2014 at 12:21 pm

The Fair Tax Mark is looking for feedback on its draft criteria for UK-owned multinational companies. Well, they say they are. But they haven't actually asked any questions to help reviewers direct their energies towards particularly contentious or difficult areas of the criteria. And they have given a mere two weeks for people to respond.

I think the approach taken by Fair Tax Mark is flawed. It is, in my view, insufficient either to ensure that companies who pay a fair rate of tax are eligible for the Fair Tax Mark or to ensure that companies who use unacceptable tax avoidance schemes are ineligible for the Fair Tax Mark.

I've commented here. My comments are blunt and in places a bit rough around the edges. I'm sorry; I didn't have time to tidy it up. Given a 12 week comment period and an indication of the areas the authors had struggled with, I could have had time to clean it up.

My main comments are:

  • The scope of this document is unclear - is it just UK parent companies and does it apply to listed and unlisted companies?
  • The meaning of ‘Fair Tax’ in respect of MNCs is unclear - the objective suggests all taxes worldwide must be 'fair' but the criteria look only at UK taxes.
  • The impact of accounting standard choice should be explained - because the criteria look at effective tax rate, it would appear the choice of accounting standards (IFRS, UK GAAP, etc) would impact the assessment.
  • The MNC criteria notes do not make use of HMRC’s processes for ensuring that UK companies pay the right amount of tax in the UK at the right time according to the spirit of the law in the UK - it presumes HMRC does nothing.
  • The MNC criteria equates “transparency” with “disclosing more”, which is incompatible with the Financial Reporting Council’s work on cutting clutter in financial statements
  • The document is in places inconsistent with the UK-only criteria
  • The consultation process makes it unlikely that FTM will have captured viewpoints from all stakeholders

Bad Technocrats and Good Technocrats

Posted by Christie Malry on June 16, 2014 at 9:19 am

Jolyon's post continues to generate debate, including this astonishing wibble from Ritchie. I've already explained why it's not unreasonable to expect Moralists to ground their social campaigning in the truth. But thinking about this some more, I can distinguish a "good" form of Technocracy from a "bad" form. So that's what I'll explore here.

The Good Technocrat identifies flaws in Moralist arguments. The Good Technocrat demonstrates where data have been incorrectly derived or have been abused, whether mathematically or otherwise. He warns when seemingly  innocent proposals might bring dangerous unwanted consequences or offend basic liberties. He speaks up where there are other, better or simpler solutions on offer.

Contrast this to the Bad Technocrat. He refuses to debate with any Moralist until they can demonstrate competence in the subject. However, he fails to help them get this competence. He is encapsulated by the single sentence once uttered by a French-speaking African audit manager of mine who shrieked at his audit staff "Don't ask questions until you fully understand!" Pointing out that Moralists aren't tax experts isn't, in itself, helpful. But the Bad Technocrat offers only that statement of the bleeding obvious.

Now there is a place for a bit of Bad Technocracy in all disciplines. For example, there's only so much the medical community can and should do to rebut homeopathy or anti-vaccine campaigners when they wilfully ignore evidence and make wildly unsupported claims. Sometimes you do simply have to profess something to be, in your professional opinion, "bollocks".

But one must strive to be Good wherever possible. Contrary to popular opinion, I do try. Hopefully, I've sought to show where Moralists have got it wrong, rather than merely asserting that they are wrong. Remember, "you're wrong" is not debate. And when I point out that there are unforeseen consequences, I'm opening up the debate in a very complex area, not seeking to close it down. I wouldn't be so bold as to suggest I've always got it right. But, unlike some commentators on the Other Side, the comments on this blog are, and have always been, open to anyone to explain where I've got it wrong in their own terms.