Zipcar creates cars out of thin air!

Posted by Christie Malry on June 10, 2012 at 12:22 pm

Zipcar creates cars out of thin air! No, really.

People might think that when they sign up for Zipcar, that a car is bought with their name on it. It isn't.

Instead what Zipcar does is a conjuring trick. They agree to provide you with a car when you want it. But at the point at which you sign up, they don't go out and buy another car. They merely create an account for you. Note that there are no cars involved in this process at all. It's just an accounting trick. Nothing more.

All that matters is that they can provide cars to those who need them when they need them.

Zipcar will charge you for the benefit of having opened an account for you. Even though there is no car as such, even thought you think there is. Because you can drive a car as if you really did own it. 

Of course, they need some cars. That's necessary to ensure that those who do want to drive can do so.

And of course they can't repeat this trick forever because if they did people would realise that there was no substance behind the promise they made to you when you agreed to sign up to their service. That promise is that the car that's notionally "yours" can be driven by other people, and it's a promise that is only as good as their own efficiency. If they're unable to supply cars to people when they need one, confidence in their service will suffer.

But that's the confidence part of the trick. So long as people believe that Zipcar will provide them with a car, they don't actually need a car. They can just pretend they own one. When people don't have that confidence, they will find that they do need a car. The risk is that companies like Zipcar will bring in too many members for the number of cars that they have.

Well, by now you'll probably have seen through what I'm doing here. People instinctively understand what companies like Zipcar are trying to do. But when the company is providing money, not cars, people throw their comprehension out of the window.

Banks aren't doing anything magical or mysterious. They merely take money from people who don't currently need it and lend it to those who do, thereby stimulating the economy. They act as an essential intermediary between these two people, ensuring that the borrower repays and that the 'lender' can actually access his/her money if needs be.

This notion that banks create money out of nothing is bona fide idiocy of the highest order.

Banks and accounting standards

Posted by Christie Malry on June 6, 2012 at 11:02 pm

From the Telegraph:

Royal Bank of Scotland RBS was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.

Tim Bush, head of governance and financial analysis at PIRC, claimed the undeclared losses meant banks have not been clearing their balance sheets of bad debts and releasing the funds to support viable businesses and households.

So, Tim, which is it? You can't both argue that banks are in danger of wiping out their capital buffer and that they ought to be freed up to loan more to businesses and households. At least, not if you wish to retain a shred of credibility.

It would appear that banks are painfully aware of the bad debt issue and are reluctant to lend because of it. But IFRS as currently in force doesn't allow them to provide against those debts in their financial accounts. Once IFRS 9 has been fully ratified, it is expected that they will be able to provide on an expected loss basis.

Ritchie, audit methodology and knowledge acquisition

Posted by Christie Malry on May 22, 2012 at 7:38 am

Ritchie shows his idiosyncratic approach to knowledge acquisition:

Perhaps the best quite on the issue is this, from Rolling Stone.


In other words, we’ll do what we like, we don’t care about the rules and we’ll deny what we’re doing, using the most expensiev lawyers money can hire if need be to do so .

I think that sums banking up.

Reading this, it's hard to imagine he was ever much of an auditor. You see, he's started with what he wants to believe, scouted around for something that supports it, and then latched onto it as proof of his position.

Audit methodology, on the other hand, would start with what you want to test, and look to devise tests that, on balance, would be expected to falsify that position if it is indeed false. In that respect, there are similarities between audit methodology and scientific methodology, as the APB pointed out in their think piece on professional scepticism. Both science and auditing start from the humbling perspective that the scientist/auditor may be wrong. Ritchie, on the other hand, starts from the arrogant perspective that he is always right.

Bunch of Pircs

Posted by Christie Malry on April 30, 2012 at 9:38 am

Not content with having a go at Barclays, Pirc is now taking pot shots at Standard Chartered and my old firm, KPMG:

KPMG IS THE latest Big Four firm to face criticism from shareholder governance group Pirc, which is calling on shareholders to vote against its re-appointment as auditors of Standard Chartered, Accountancy Age has learned.

The shareholder governance group is urging institutional investors to vote against the bank's annual report; auditors and audit committee chair Rudy Markham because it claims it has failed to to provide a "true and fair view" of its financial position.

In the case of Standard Chartered, Pirc is claiming that the bank's overstated profits include bonuses of $828m that have been deferred but not expensed, and provisions for bad debts that amount to $2.8bn.

Now, I'm no particular friend of the Big 4. But I'm afraid to say that Pirc has got it horribly wrong on both counts.

Bonuses under long term arrangements are recognised over the period over which they vest. Now, a particular concern of politicians and the public has been bankers taking big bonuses today when the bank falls over tomorrow. So pressure has been brought to bear to ensure that bankers must wait several years to collect their bonuses. In order to tie bankers in, the bonuses have "strings" attached, conditions that need to be met in order for the bonus to remain payable. Under IFRS, the bank makes an estimate of the likely level of payment and recognises it over the period of vesting, usually three years. The reason the bank hasn't expensed the profits yet is because they haven't been earned yet. They could still not be paid, should the conditions not be met.

Bad debts in banks are recognised on an "incurred loss" model, ie the bank must have some evidence that a debtor is likely to fail to repay their debts. Now this does understate the level of bad debts because there will be some debts for which there is no evidence today but on which the debtor will default in the future. In the bad old days of 1980s accounting, banks were allowed to provide general provisions for such debts. But the intention wasn't better accounting, it was used to smooth profits out of good periods in order to hide some of the dismal performance in bad periods. This flattered profits during periods of downturn and allowed managers more discretion about meeting targets that might trigger bonuses. Unimpressed, the standard setters removed this subjectivity. The loss provision in the accounts isn't "understated"; it's a deliberate approach that the standard setters are demanding in order to prevent management from cooking the books.

But political pressure being what it is, the standard setters are returning to the "expected loss" model and are very likely to reintroduce it at some point. The idea that it will solve bank reporting at a stroke is, shall we say, unproven.

I find the Pirc campaign pretty frustrating. It's a shame that their knowledge of IFRS is so poor that they can make such fundamental errors. It's also a great pity that their ignorance has gone completely unchallenged by the business editors of the major newspapers. Is there anyone (other than me that is) that is prepared to tell the world they have no clothes?

Tax Journal on "government approved tax avoidance"

Posted by Christie Malry on April 18, 2012 at 8:58 am

A special low rate of UK corporation tax on finance profits from overseas financing within multinational groups will offer a ‘very significant’ benefit to groups setting up a structure that represents, according to a leading tax expert, ‘almost government-approved tax avoidance’.

Although, as you might expect, Ritchie approves heartily, this is just silly.

While, technically, you could have government approved tax avoidance, this ain't it. An example of government approved tax avoidance would be where government instructed HMRC to turn a blind eye to cases of tax avoidance. Imagine the shitstorm that would create in Parliament when it came to light.

What's happening in reality is that the government has proposed changes to the way in which controlled subsidiaries are to be taxed, with a special rate for controlled finance companies. These will be voted on in Parliament. Once passed by Parliament, it's completely idiotic to argue that a company using the structure expressly approved by Parliament is somehow acting against the will of Parliament. So it cannot be tax avoidance, by definition.

Incidentally, George is doing something quite clever. He's trying to hoover up all the finance companies in Europe by taxing them at the cutdown rate. That should see the UK get 5.5% of a much larger pie instead of the standard corporation tax rate on a smaller one. The other European countries should be whining, but no one in the UK should complain. We're bringing economic activity to the UK and taxing it. That's a good news story, no?

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Tax avoidance, an apocryphal tale

Posted by Christie Malry on April 10, 2012 at 1:14 pm

The young man cleared his throat and adjusted his tie, then knocked on the door.


He opened the door and went inside. The Chancellor of the Exchequer sat behind his desk. He pointed at a chair.

“HMRC, isn’t it?” said the Chancellor.

“Yes, sir. I had a few questions about income tax that I wanted to run by you.”

“Fire away.” The Chancellor was very proud of his income tax idea. It would ensure that the very richest would pay their fair share towards the nation’s coffers.

“Well sir, it’s like this. You announced to the House that you would be taxing the rich’s business profits. But we’ve received some questions about the way that those profits should be calculated.”

“It’s very simple,” the Chancellor replied. “You recognise all income and then you deduct business expenses. The difference is your profit.

“Yes, sir. But some of these businesses have borrowed money from banks. That means they’re paying interest to those banks. Does that reduce their taxable profits?”

The Chancellor felt a wave of irritation but used his experience to hide it. “Of course it does. Interest is a business expense, so it gets deducted just like any other business expense. Anyway, the interest income will end up in the bank’s profits, so we’ll get our tax back there.”

“That’s what we thought too, sir, but it’s always better to check these things with you first. Anyway, we had another question.” He paused for a moment, before continuing, “Businesses have been asking us what to do about losses. You see, we tax them when they make profits. Should we give them a refund when they make losses?”

The Chancellor laughed out loud. “No, dear boy, of course not! We’d go out of business before we know it. But I understand their concern. It’s clearly unfair to tax them in good times but not to relieve them in hard times. So, I’ll tell you what we’ll do. Any business that makes a loss can claim relief for that loss against its future profits. In the long run it’ll all even out.”

The Chancellor sat back in his chair smugly.

“Thank you, sir. There was just one more thing. On the personal tax side.”

“Yes, what is it?”

“Some of the charities have been asking us whether charitable donations can be made before the tax is payable, or whether they’re only paid out of post-tax income. They seem to think that it’ll encourage people to give more if they can give money to charity before tax.”

“I already covered this with the Archbishop of Canterbury!” snapped the Chancellor. “I made it abundantly clear to him that charity comes before the State. I’m not the bad guy here!” he exclaimed.

“Again, sir, I just wanted to be clear with you before we draft the legislation. We’d hate for this to come back to bite us in the future.”

“No, of course. Thank you for your caution. Good day!”


The Chancellor picked up the report from HMRC on tax avoidance by the super rich. It claimed that the super rich were using clever tax avoidance schemes to reduce their tax bills, sometimes down to as little as 10%. He flicked through the executive summary. There were three main tax avoidance techniques being used: utilisation of brought-forward losses, deduction of loan interest expense and charitable donations. This was an outrage! How dare they use clever accountants to avoid their obligations under such a simple tax system!

He picked up the phone. “Get me HMRC, please”

Of course some banks will gain from the corporation tax cut

Posted by Christie Malry on March 23, 2012 at 10:33 pm

The Telegraph runs an unsurprising story:

Barclays and HSBC will record a gain as a result of the cut in corporation tax, despite George Osborne saying big banks would not benefit from the move.

Well, duh. Corporation tax is based on taxable profits. Whereas the bank levy is based on the bank's balance sheet. They're two totally different bases. Osborne can increase the levy so as to offset the estimated profits that specified major banks will make, but he cannot prevent:

  1. banks making more taxable profits;
  2. banks having smaller balance sheets; or
  3. some banks gaining while other banks lose.

So The Telegraph's "scoop" is pretty underwhelming stuff, really.

There's another point too. Corporation tax is intimately linked to financial reporting, with companies required to account for any timing differences between recognition for accounting purposes and recognition for tax purposes via something called "deferred tax". So, if you record a gain in your accounts today but don't pay tax on it for another year, you record a notional tax charge against that item in the profit and loss account and set up a deferred tax liability on the balance sheet. Next year, this item will reverse, all things going according to plan. Now, you're required to record the deferred tax at the expected tax rate. Now that Osborne has changed that rate, you have to go back and revalue all your deferred tax assets and liabilities. To the extent that there will be deferred tax liabilities being reduced, this will be recorded as a reduction in the tax charge line.

The bank levy, by contrast, is accounted for differently. There's no deferred tax accounting for it. So the increase in the levy won't impact the accounts until the year it's due.

Update: Jaimie Kaffash has an alternative perspective on the bank levy.

Outrage over Barclays and Diamond's tax bill

Posted by Christie Malry on March 10, 2012 at 12:45 pm

Oh, Jill...

Most of the focus was on Barclays after the bank also paid £5.7m to cover Diamond's tax bill and he was awarded more in shares which will pay out, according to performance, in coming years.

Liberal Democrat peer Lord Oakeshott said: "The only tax Barclays pays seems to be for Bob on his bonus."

Jill Treanor wants to leave us with the impression that Barclays decided to pay all of Bob Diamond's tax bill for the year.

Now, I've warned readers about the corrosive and irredeemable fuckwittery of Jill Treanor before and this is no exception. It's not his entire tax bill for the year that Barclays is paying. It's because they wanted him to relocate from the US to the UK to run the bank. In order to get him to do that, they needed to agree to cover his expenses, one of which happened to be tax. That's why Barclays describes the payment as 'tax equalisation' in the accounts. It's not to put him ahead of lesser mortals like us. It's to make sure that he doesn't lose out.

The word on the tweet is that it's to do with the sale of his house in the States which, had he not had to move to London, he wouldn't have had to sell.

Blowing my own trumpet: City AM on Barclays and tax

Posted by Christie Malry on February 29, 2012 at 9:04 am

There's a piece in today's City AM by me on the Barclays tax issue.

I argue that the real story isn't the broken promise over the bank code of conduct on tax, but that it demonstrates that disclosure of tax avoidance schemes works. So we don't really need to change the regulation substantially, as Ritchie has been peddling all day. 

Go read it.

In which Ritchie claims a voluntary disclosure scheme proves that voluntary schemes don't work

Posted by Christie Malry on February 27, 2012 at 10:07 pm

Second, this shatters the myth that voluntary codes with people like banks work.

So says Ritchie, in relation to two abusive tax avoidance schemes that were being undertaken by a bank.

HMRC is now closing the loopholes to remove the benefits offered by these schemes. But how did HMRC get wind of these schemes?

The bank that disclosed these schemes to HMRC has adopted the Banking Code of Practice on Taxation which contains a commitment not to engage in tax avoidance. The Government is clear that these are not transactions that a bank that has adopted the Code should be undertaking.

Yes, that's right. A bank that disclosed two tax avoidance schemes to HMRC under the Banking Code of Practice on Taxation is proof that voluntary codes with banks don't work.

The man truly has mastered whole new planes of idiocy.