The tax gap revisited
Posted by Christie Malry on February 22, 2012 at 9:01 pm
Ritchie is still plugging his estimate of £120bn for the tax gap.
And it's still wrong. Here's why.
A tale of two citizens (and a company)
Posted by Christie Malry on February 8, 2012 at 11:44 pm
It won't have escaped your notice that yesterday we celebrated the 200th centenary of the birth of Charles Dickens, generally considered (by Wikipedia at least) to be the greatest novelist of the Victorian era. So who better to use when trying to think of a cheap theme for a blog post, eh?
Citizen one is Paul Chambers. Paul's sorry story has been much better documented elsewhere, such as on Jack of Kent's website. Paul made a joke tweet, which was deemed to be an "indecent, obscene or menacing" message under section 127 of the Communications Act 2003. His appeal at the high court started today. Much of the commentary has suggested that the Crown Prosecution Service was wrong to bring charges against Paul and that, the CPS having done so, the judiciary were wrong to find him guilty. These commentators, it would appear, would prefer a world in which the CPS exercises significant discretion in determining who to prosecute, rather than using their knowledge of the law and assessing evidence to determine whether, in their view, an offence has been committed under the law.
Citizen two is Harry Redknapp. He was also in court today, to hear that he had been found not guilty of tax evasion. Payments which HMRC claimed were employment-related were deemed to be just gifts (on which no tax is due). Many commentators criticised the fact that the case had been brought at all. They pointed to the apparent £8m cost of bringing a case in which the amount of tax recoverable was a mere £189,000. Again, these commentators, it would appear, would prefer a world in which HMRC exercises significant discretion in determining which tax cases to pursue, rather than using their knowledge of the law and assessing evidence to determine whether, in their view, there is a liability under tax law.
The company is Vodafone. Vodafone weren't in court today, so far as I know. But they have been in discussions with HMRC over whether they had avoided tax by the use of a corporate structure that routed certain profits via Luxembourg. HMRC settled with Vodafone due to fears that, if the case were lost, other taxpayers might be able to reclaim tax already paid. The risk seeming too great, HMRC decided to take a little rather than possibly lose a lot. Here, commentators were outraged that HMRC used its discretion to not bring the case. They wanted HMRC to prosecute, even if it led to greater revenue loss, merely to send a strong message to taxpayers that avoidance doesn't pay.
How can we resolve these positions? In Paul's case, it's clear that the law is totally fucking stupid. No amount of discretion by the CPS or the judiciary can get around that. Our politicians need to remove stupid laws from the statute books and sit on their hands when they are tempted to pass new ones. They must take the legislative process seriously and look to their own conscience, rather than the whips office, when determining how to vote. They must take a proper interest in the debates, to ensure that concerns about how laws will work in practice are taken into account. Once a bad law is on the statute books, it's too late. We cannot expect the CPS and judges to make good what our politicians have failed to do.
Yet, in tax issues, a more nuanced approach may be possible. Unlike the CPS, HMRC can weigh up the costs of success with the costs of failure because success means money in the door (for the CPS, "success" means somebody being found liable, which is altogether different). So it can make value judgements as to whether it's worth prosecuting a taxpayer or not. Sometimes it will be better to settle, because the potential impacts on other cases if HMRC loses is too high. Sometimes it will be better to proceed, even if the case costs more to prosecute than it will raise in tax, pour encourager les autres. Showing that HMRC is tenacious can work wonders in encouraging self-motivated compliance.
More #ukuncut tax balls
Posted by Christie Malry on January 6, 2012 at 9:59 am
From a particularly idiotic online petition:
Our tax chief had secret lunches with Vodafone and Goldman Sachs and then handed them billions in tax breaks – while keeping Parliament in the dark!
No. HMRC hasn't handed out tax breaks. It has taken a view on how the tax law should be applied and, in both cases, decided that it the benefit of settling now outweighed the cost of enforcement, taking into account the likelihood of success and potential impact on future cases.
The tax under dispute in the Goldman Sachs case is measured in the tens of millions, not billions. It's by no means a trivial sum, but it's a country mile from UKuncut's hyperbole.
The idea that HMRC kept Parliament in the dark is particularly lunatic. Parliament is an oversight body, not a managerial function. All sorts of activity takes place in government departments of which Parliament is unaware. That's why we put each department under the watchful eye of ministers. Ministers are then accountable to Parliament for what happens in their departments on their watch.
MPs are outraged, claiming we are owed over 25 billion pounds in back taxes from these and similar dodgy deals. But the tax agency has blocked an inquiry into the scandal and refuses to release documents to shed light on why these tax breaks were ordered in the first place.
MPs didn't claim we are owed over 25 billion pounds of back taxes. The PAC report noted that there is some £25 billion currently under dispute. But that's not the same thing at all. HMRC thinks it is owed £25 billion but the taxpayer disagrees. Therefore there will need to be some form of dispute resolution, potentially involving the courts, to decide who is right. Do UKuncut really believe that the tax due is the amount HMRC asks for first time? Do they really believe HMRC never gets it wrong?
Tim Worstall covers this issue in more depth here.
By acting together now we can ensure full transparency on the Goldman Sachs and Vodafone deals, and get them to pay the tax they owe. Let’s turn up the heat -- sign the petition to David Cameron for tax justice -- we’ll deliver it with a splash next week.
I think you'll find that the Vodafone case is settled and that due process will make it impossible to reopen.
And let's all be thankful that we do actually have a process for determining the tax due in this country instead of the stupid Humpty Dumpty process that UKuncut seem to think they want.
Eoinomics: still bleating on about Vodafone
Posted by Christie Malry on December 30, 2011 at 8:32 pm
The huge profits amassed by Vodafone should have been viewed as a problem by Labour. We should have been concerned. But of course a New Labour principle was that we were 'okay with the filthy rich'. This principle led to a policy of Low Taxation. Tories reading will more readily recognize these as Tory principles in operation, not Labour ones. There was most clearly a detachment from core Labour values in pursuing this principle.
For the love of God, will someone please nail the facts to a baseball bat and then use it to bludgeon Eoin about the head until he accepts some basic facts about Vodafone.
Vodafone doesn't earn all of its "huge profits" in the UK.
Therefore it's totally right and proper that it doesn't pay tax on all of its "huge profits" in the UK.
Got me so far?
The dispute between HMRC and Vodafone hinged on whether certain profits earned outside the UK should be taxed as if they had been earned in the UK under the UK's controlled foreign companies legislation. That legislation sails pretty close to the wind with respect to EC law and has needed clarification as to its scope. You can't realisitically expect Vodafone to pay UK tax on its overseas profits without also foregoing UK tax on profits earned here by foreign companies.
But this isn't about some concerted campaign to reduce tax on the "filthy rich". It's about taxing in the UK only those profits that are earned in the UK.
Let's hope that Eoin has made a New Year's Resolution to think before he blogs.
Deal or no deal?
Posted by Christie Malry on December 20, 2011 at 9:45 pm
Oh my days. A lot of complete crud has been written in the last 24 hours about how appalling it is that senior staff at HMRC would even contemplate cutting deals with the companies it is supposed to be enforcing the existing tax law against. Especially in austere times, HMRC should be doggedly pursuing every legal challenge to ensure that it maximises the country's tax take.
This is, I'm afraid, a load of naive hogwash. There's a simple formula to determine whether it's worth proceeding with a tax case:
If L x s - (1-L) x S > C then it's worth proceeding with the case.
Where L is the likelihood of the case succeeding, s is the amount at stake, S is the amount of similar cases in other companies that will succeed or fall with this test case and C is the cost of bringing the case to court.
Of course, all of L, s, S and C are estimates. It requires enormous amounts of judgement to estimate suitable values for these variables.
The big risk is that, in bringing and losing the case, you open up the watershed to lots of other companies who had previously accepted HMRC's tax treatment but now find themselves in for a free tax refund courtesy of the brave company that brought the test case. For example, in the case of Vodafone, it rather suits HMRC to let Vodafone 'get away with it', even for a supposedly sizeable sum because, if HMRC loses, the entire edifice of CFC taxation might come crashing down, and with it many billions of pounds of tax revenues might need to be refunded. Given that the word on the street is that the UK's CFC legislation is on fairly shaky legal grounds, it's hardly a risk worth taking.
It's worth remembering the formula when you read the gibbering analyses of left-wing commentators. Because their hatred of big companies makes them oblivious to a very important fact about business: that the future is uncertain. Dave Hartnett may well have been doing dodgy deals. But anyone in his position would have needed to have taken a view about the likelihood of success, the amount at stake in the specific case, the amounts at stake in wider cases and the cost of legal action. Therefore, necessarily, there would always be a point at which it would be better to cut a deal than to stand and fight. The mere fact that the Goldmans and Vodafone deals were done cannot be used as ex ante evidence that Hartnett was bent.
Goldman Sachs whistleblower and the law
Posted by Christie Malry on December 10, 2011 at 12:00 pm
Twitter is getting very upset at this news:
A solicitor at HM Revenue & Customs who turned whistleblower to disclose that senior managers had quietly let off Goldman Sachs from paying millions of pounds in tax penalties is facing disciplinary procedures and possible prosecution for speaking out.
There's an awful lot of nonsense being written about this. So here are a couple of observations:
The Public Interest Disclosure Act
The concept of 'whistleblowing' has its own Act under UK law. It's called the Public Interest Disclosure Act 1998 (PIDA). I'm not a lawyer, but in broad terms the Act protects employees who make a 'protected disclosure' from any recrimination from their employer, after making the disclosure.
A protected disclosure is defined in section 43B of the Act; it is one which shows (a) a criminal offence has been, is being, or is likely to be committed; (b) a person is failing to comply with a legal obligation; (c) a miscarriage of justice has occurred, is occurring, or is likely to occur; (d) health and safety of an individual is endangered; (e) the environment has been, is being, or is likely to be damaged; or (f) information has been concealed in respect of any of (a) through (e). Where an employer takes recriminatory action against an employee who has made a protected disclosure, they may be liable for damages and PIDA made these damages potentially unlimited.
There's a load more information about PIDA over at the excellent Public Concern at Work website.
Mba's legal position
It all therefore hinges on whether Mba's disclosure is a 'protected disclosure'. This is a matter of law, and it looks like 43B(b) is his most likely defence. If it's deemed that Hartnett was failing to comply with a legal obligation, Mba is in the clear. If it's not, then he may struggle. But if he has made a protected disclosure, then HMRC making his time a misery will come back to haunt them. Or, rather, it will come back to haunt us, because ultimately taxpayers will foot the bill for any compensation that HMRC may have to pay.
Unfortunately PIDA doesn't protect employees from the negative actions that may be taken by future employers. So if Mba looks to get another job, there's not much he can do to stop employers from blacklisting him. Although other employers may be impressed by such a public display of integrity.
Dave Hartnett and business judgement
Posted by Christie Malry on December 10, 2011 at 11:15 am
Today's prime Ritchiebollocks:
Erm, Ritchie,this isn't the way business works. We don't make individual employees liable for the losses of their employer, even in cases where you believe you are able to apportion liability to an individual. That's because it's frankly a totally stupid idea. Are we really to say that we should find the employee who - say - failed to tighten a bolt properly on Deepwater Horizon and send them a bill for tens of billions of dollars?
Equally, we aren't commencing a witch-hunt to identify precisely which miserable sod in the London 2012 organisation can be blamed for the tripling of the Olympic budget. Nor are we singling out a Department of Health civil servant to land them with an invoice for the NHS supercomputer overruns. Instead we establish lines of control and responsibility within organisations in order to reduce the risk that an employee goes off on a frolic on his own. In Hartnett's case, this includes lines of political accountability.
The very idea that we should seek to make individual employees liable for the economic outcomes of their business decisions is an extraordinarily right-wing - one could even say 'neoliberal' - point of view. I simply don't know why Ritchie espouses such a view. Other than, in the case of Hartnett, it fits his political narrative to say it. I don't think for one second he actually believes it.
Eoinomics and the coalition's approach to closing the deficit
Posted by Christie Malry on December 6, 2011 at 9:45 pm
Eoin isn't happy.
According to the OBR (table T4.7 29/11/11) George Osborne is planning to raise more than £300,000,000,000 in extra taxes this parliament over and above what Labour were taxing people in 2010-11. That in itself will shock many Conservatives but since I'd prefer that taxes were raised as opposed to cuts, I will not take him to task for that. My issue is how George Osborne plans to raise those taxes. If you are going to raise more than £300bn in new taxes it is important that the burden falls on the broadest shoulders right? Well, not according to Osborne no.
According to the OBR, Osborne is planning to raise an extra £96bn in Income Taxes, and extra £92.8bn in VAT and an extra £72bn in National Insurance. You remember National Insurance at the last election was referred to as a 'Jobs Tax' by the Chancellor? He then promised that he would cut this so-called 'jobs tax'. You trust a Tory at your own peril. But, to top it all off, George Osborne has opted to only raise £4.5bn in taxes from profit. Yes, that's right, he'll tax consumers and workers to the hilt but profits escape the hit. Osborne is happy for the profiteers to go on raking in large profits and for ordinary people to foot the bill through taxes.
Like so much with Eoin's work, the precise calculations are hard to verify. I found Table 4.7 but no matter how I jigged and poked the numbers, I couldn't get them to add up to £300m, which is, after all, only £60m per year. Put another way, the growth in taxes from2010/11 to 2015/16 is only compound growth of 4.6% per year, or approximately inflation. So portraying this as a giant smash and grab on the working poor is rather over-egging the cake.
Then we can take issue with his hypothesis that taxes on income hit 'ordinary people' whereas taxes on corporate profits don't. This is an idiotic viewpoint. Remember our favourite HMRC table, which shows who actually pays income tax. The 1%, much hated by #occupylsx, actually pay 27.7% of all income tax collected in 2011/12. And the richest 25% pay almost a full three-quarters of all income tax. Income tax is very much a tax whose weight falls on the broadest shoulders. Given the 1% rate of NICs on higher incomes, you would expect the distribution of NICs to be less progressive. But VAT, as we've shown before, is progressive on expenditure. Given that it's a consumption tax, it's silly to try to measure it against incomes.
Similarly, the issue of who bears corporation tax is hotly debated, as Tim Worstall often reminds us. But who are these fat cat owners of UK companies? By and large, it's ordinary working people through their pensions and insurance assets. Even if you believe the incidence of corporation tax is the company's owner, taxing companies more would only hurt ordinary people.
And then there's the logical flaw. Eoin assumes that all increases in tax over the base year of 2010/11 must be due to deliberate tax increases. But there are a raft of reasons why the tax take will increase without such deliberate action, including growth and fiscal drag. Or indeed, any successful attempts to reduce tax avoidance and evasion would also increase the tax take.
Isn't it wonderfully ironic that a possible explanation could be that George Osborne has finally cracked the problem of tax evasion, and left-wing commentators criticise him for it?
HT: Jonathan M
Taxpayer views on taxation
Posted by Christie Malry on November 15, 2011 at 11:15 pm
HM Treasury has released a short video that shows just how confused taxpayers are about tax.
There's a transcript of the video too. It highlights that there really are lots of muddled taxpayers out there. And, with tax being so confusing, who can blame them?
Fantastic tax gap news!
Posted by Christie Malry on October 31, 2011 at 11:01 am
Today's Hallowe'en Horror story:
A shocking £35 billion Tax Gap has just been uncovered in the City of London. The Tax Gap, the result of large scale corporate tax avoidance, has been found to be directly responsible for the loss of public services across the UK.
Help us plug the Tax Gap by sending an email to the Chancellor of the Exchequer, George Osborne, today, calling for tougher action against tax cheats.
Remember: Every pound lost in tax avoidance is a pound less to spend on vital benefits or public services. Help us close the Tax Gap now!
Well, Niall doesn't give us a source for his figure, other than linking to the rather nice photoshopped image he produced to accompany his article. But the £35bn figure ties in exactly to HMRC's latest estimate of the tax gap, so it looks like he's getting the figure from there.
This is fantastic news, because it means at least one NGO, in this case Church Action on Poverty, might finally be turning their backs on the idiotic estimates produced by one Mr R Murphy, Esq., and using the much more reliable HMRC figures.
However, their rhetoric is still a bit daft. There has always been a gap between what HMRC "should" collect and what it eventually "does" collect. So it's misleading to describe the £35bn gap as representing money that now can't be spent on vital benefits or public services. The gap has always been there and HM Treasury has always had to accommodate it into what it can spend on services. The Chancellor has, in effect, already taken account of the gap in his forecasts, even while he takes steps to try and reduce it.
And there are also upsides to the tax gap, which tax campaigners never seem to take account of. Suppose there's a builder who does a job "off-book" and doesn't charge VAT. That means he can either charge the same and pocket the VAT for himself, or (more likely) he splits the difference with a grateful customer. Note, I'm not condoning this kind of arrangement. Now, the builder has more money than he would have had if he had declared the VAT properly. The customer also has more money than he would have had if he had paid the VAT-inclusive price. Both parties can now spend that additional money in the economy, stimulating growth in other sectors. The conclusion from this story isn't that tax avoidance is good, but that tax avoidance brings with it benefits in the real economy, at the expense of the country's tax take. But some of these transactions would never have taken place at all, so it's a fallacy to count the lost money as a result of tax avoidance without also making some estimate of the transactions that took place only because of this tax avoidance.
But it does mean that each pound of tax avoidance is not directly a pound less to be spent on public services.
