In which we are challenged by Richard Murphy

A couple of days back I pointed to our favourite retired accountant\’s pieces in The Observer. They seemed very much like advice on how to avoid tax. Nothing illegal, of course, this is avoidance, not evasion. Just every Englishman\’s legal right to reduce his taxable income in the manners and ways which Parliament has approved.

Richard\’s answer was that, well, they were written to show how tax could be avoided and thus to spur the authorities to close down such possibilities. That\’s what I take from his response at least:

The first was written because I could think of no better way of killing a scheme then being promoted on the professional lecture circuit than to give it publicity. I didn’t have blogs etc in those days. It worked. I call that a success.

OK, you can make up your own minds as to the efficacy of that explanation. It produced a mild fit of the giggles in me but reactions may vary. In that comment he says:

But keep whistling if you want to find dirt Tim – because you won’t

The thing is, that challenge inspired one reader to go looking and via Companies House we find: well, actually, what we find is that Richard Murphy has been exercising that legal right of every Englishman to reduce his taxable income using the manners and ways which Parliament has approved.

So let us return to those Observer articles. This one, the fifth that I highlighted. It tells how you can, if you are in certain fortunate positions, incorporate yourself as a provider of services. Yes, there is corporation tax to pay on any profits, there are accounting expenses. However, once you\’ve paid the corporation tax there is no more basic income tax to pay when you pay those out as dividends and of course dividends do not attract national insurance payments.

As he says:

But, if the company is run with strong discipline, and keeps good accounts, then dividends can be substituted for most of the salary paid in the previous example. Just enough salary is still paid to make sure that the director is credited with paying national insurance – currently £4,615 – although no national insurance (or tax) is actually paid on this. That leaves a profit of £25,385 in the company on which corporation tax of £3,654 is paid. This is low because the first £10,000 of profit generated by a small limited company is tax-free.

That means a dividend of £21,731 can then be paid. Because that level of dividend does not take the recipient into the higher rate bracket, he or she does not have to pay any additional income tax on the dividend. The only tax paid will be the company\’s corporation tax bill of £3,654, which is £3,581 less than the self-employed person pays.

Quite excellent and Murphy has done us all a favour in explaining how this could be done. However, do note that he says he\’s done this so people can be prevented from doing this:

The fifth follows the logic of 1 and 2 – and was the way I thought I could seeking to highlight an abuse to draw attention to it.

Would I use that method now? No! I don’t need to. Was it the best I could do at the time? Yes, I thought so.

Do I apologise for using the Observer in that way? No!

But keep whistling if you want to find dirt Tim – because you won’t

Not least because a) years before you’ll find articles from me arguing against incorporation.

Note that quite clearly he states that this method of incorporation is an \”abuse\”, that he\’s argued against it for years and that he wrote the article to expose this abuse and thereby, hopefully, lead to it being closed down.

So, what do we find from Companies House about the directorships of one R. Murphy?

Fulcrum Publishing Ltd:

“Publishes original written materials”, seems to have been his old vehicle for paid writing.

Jointly owned 50:50 by Ritchie and Jacqueline Murphy (same address, born 1963, presumably his wife).

Hasn’t traded since 2003, but when it was trading it paid out all of its profits as dividends. Incorporation and taking dividends from the company instead of a salary is a classic tax/NI avoidance strategy – as he set out in his Observer article.

I wonder how much of the company’s work his wife did, or whether giving her shares was just a device to save tax by transferring half of the income to her? Did \”the rewards paid [to her] match the underlying economic substance\” (Ritchie\’s own test of whether incorporation is \”abusive\”)? It seems unlikely that she was generating 50% of the profits from his writing.

It\’s difficult to see what legitimate non-tax reason he would have for incorporation, and (as he said in his reply to you) he regularly argues against incorporation – for other people.

(Via email, so no link).

Now that looks very like income shifting. But, as regular readers of his blog will know his wife is a GP. Working part time, paid pro-rata for her hours and as regular readers will also know they have young children. Now a GP, these days, working even part time, will be a higher rate taxpayer. However, a GP on maternity leave probably wouldn\’t be a higher rate taxpayer. So shifting income from accountant to wife, through the medium of dividends from a jointly owned business, would (or could perhaps, for this part is speculative) reduce tax paid by allowing two personal allowances to be used and two sets of basic rate income tax to be used before the very tippy toppy of the family income would be (possibly) subject to higher rate income tax. And, of course, there\’s the NI savings. Plus, of course, there\’s no corporation tax on that first £10,000 of profits and no basic rate income tax to pay on dividends either.

Perhaps we should turn here to Ritchie\’s report for the TUC, The Missing Billions. Listed as a method of tax avoidance is:

Tax is paid by a person who did not really generate the income that they declare.
For example, income is quite often switched between members of a family to
ensure it is declared by the person with the lowest tax rate even though the
family member in question did not really earn the income in question.

Hmmm.

It is for this reason that Professor David Ulph, formerly of HM Revenue & Customs,
has sought to distinguish tax avoidance from tax planning. To do so, he has said
that tax planning happens when a taxpayer adjusts their real social, economic or
organisational affairs to obtain the “best outcome” in response to the tax system.
In contrast, tax avoidance happens when a taxpayer uses artificial or contrived
methods of adjusting their social, economic or organisational affairs to reduce their
tax liability in accordance with the law while not affecting the economic substance
of the transactions3.
This definition makes clear that tax avoidance is artificial. The purpose of tax avoidance
is to obtain tax relief no matter what the circumstances of the transaction that gave
rise to the tax. Tax planning, on the other hand, is obtaining tax relief for something
you would be doing anyway, or which the Government wishes to encourage. This puts
tax planning firmly within the domain of tax compliance.

OK. We do seem to be still in a grey area as to whether this is tax planning or tax avoidance. It could be either, there could have been, in fact I\’m absolutely certain there was, a reason why a freelance writer would incorporate: other than reduction of tax bills. Similarly, the payment of the income as dividends rather than a salary would not have been influenced at all by the NI savings: recall that Ritchie tells us that the Observer article is not a guide to what to do, it\’s a guide to what is possible and a guide to what must be stopped.

In our list of ways in which tax is avoided from the Missing Billions we get:

1. putting a transaction that an individual might undertake into the name of
their partner or children or alternatively into a company or trust, or in the case of
a company choosing to create a separate subsidiary that enjoys a tax advantage
in a group of companies

OK,

3. paying the income of a director of a company as a share dividend rather than as
a salary so that National Insurance is not paid

Similarly, OK

A little later we get:

What is the cost of individual tax avoidance?
This figure is best estimated by considering the main techniques that individuals use
to avoid tax. These are as follows.
1. Income is reallocated to a person or entity that has a lower tax rate than the
individual whose activity really generates the income. The people or entities to
whom the income is diverted might be:
a. other members of a person’s family e.g. a spouse or child
b. a trust for the benefit of a person’s family
c. a company owned by the individual but taxed at lower rates than those they
might enjoy personally

Something of a restatement of the above.

3. Changing the nature of a transaction so that it appears to be something different
from what it actually is. This is commonplace, the most popular tactics being to:
a. convert income into capital gains, which are almost always taxed at lower rates
b. convert earned income into unearned income such as dividends to avoid
National Insurance charges that only apply to earned income

Umm, yes.

And he calculates income shifting as costing around £1.3 billion in lost tax revenues. Even quotes the Treasury as arguing that:

data published in the pre-Budget Report for 2007 that
at least £250 million a year has been lost from income shifting between spouses
within privately owned limited companies5.

And the dividend thing?

However, it is thought that there are at least 200,00019 (and maybe many
more) companies now registered in the UK that are owned and managed by the one
person who also generates all the income of the company who then substantially
rewards themselves by way of payment of a dividend to avoid the payment of National
Insurance Contributions that would arise. Assuming each of these persons has above
average income, because if they do not there is little or no incentive to incorporate
a company (it being easier to be self employed), the likely distribution from each
company might be as high as £50,000 a year, or £10 billion, a sum within the plausible
range. If this whole sum had been subject to the employer’s and employee’s National
Insurance Contributions avoided in each company, the figure lost probably exceeds
£9,000 per annum, or a total of £1.8 billion.

Now, I have to point out here that absolutely none of the above is in any way illegal. Indeed, I don\’t think that there\’s anything wrong with doing these things at all. The law is what the law is and we all, as Englishmen, have the right to order our affairs to as to reduce, to the legal limit, the invasions of the State into our wallets. So it\’s not just that I don\’t think there\’s nothing wrong with doing such things, I tend to think that they\’re actually admirable.

But as we can see, Richard has slightly different ideas about what is morally and ethically acceptable: at least that\’s the way I read his report. That while certain things are legal they shouldn\’t be is perhaps one way of reading it all, that some things are legal but shouldn\’t be done anyway another.

But wait, I hear the call. This all stopped in 2003 didn\’t it?

Well, yes, with Fulcrum, yes, it did.

The Tax Gap Ltd (formerly Tax Research Ltd):

Carries out “social science research”. Shares owned 90% Ritchie, 10% Jacqueline.

Paid out small (£3-4k) directors’ salaries in 2005, 2006 & 2007 (another classic tax/NI avoidance strategy, keeping the salary under the personal allowance).

Paid out a £12,000 dividend in 2006 (classic NI avoidance strategy, to take money out as NI-exempt dividend rather than salary).

Profits of nearly £13,000 retained in the company (another classic tax avoidance strategy, to delay paying dividends until a year when your income is below the higher rate threshold).

Oh. If we are to continue our speculation about GPs and maternity pay, we might assume that income shifting is now not a useful strategy. For why shift income to someone who is already in the higher tax band? But we do note the other parts of the Observer technique. Low directorial salaries, enough that the director is credited with having paid NI (ie, that State pension accruals continue) without having to actually pay NI and then the rest of the profit being paid out as dividends.

And do note again, the tax free first £10k of profits was abolished in 2006, so at least in 2005 the first £10k of dividends would have been entirely free of either corporation tax or basic rate income tax.

As I shall have to repeat myself: there\’s nothing illegal about this. To my mind there\’s nothing immoral or even the slightest tinge of moral turpitude about it all. This is simply the exercise of the legal right to reduce ones\’ taxable income.

In fact, I think that the whole thing is extraordinarily admirable. Richard Murphy has, from this information, the biggest brass balls on the planet, cojones to make a prize stud bull jealous.

He writes reports about how appalling certain tax arrangements are while using said tax arrangements himself.

The only thing which leaves it not quite entirely perfect is that the income from the report, The Missing Billions, presumably went into Tax Research LLP, not The Tax Gap Ltd, so we cannot actually say that the money received for writing the report was subject to the treatment that the report denounced.

But as they would say around here, cojones grandes Mr. Murphy, cojones grandes.

Update: and here is Richard\’s response.

I will admit to not finding it hugely convincing but that is no doubt an issue with me rather than anyone else.

A couple of things though:

I note the right wing blogosphere is seeking yet again

No, come along now, it\’s me, Tim Worstall. Get the name right if nothing else, any publicity is good…well, you know the phrase.

Secondly:

\”I make no claim to being a paragon of virtue, or to having not changed my mind on occasion (if I’d been wiser, for example, the Tax Gap Limited would always have been an LLP – but I didn’t get that right at the time I incorporated it) or to having not learned from experience. Well, that puts me amongst the rest of humanity then doesn’t it? But apparently not for these people. If I am flawed like the rest of us – and if my thinking has changed over time (as it obviously has) and my behaviour with it then apparently I’m a hypocrite in their book – which is absurd.\”

I similarly am no paragon of virtue: you can find on this very blog the story of how I bribed a North Korean KGB official. Nor am I worried about people changing their minds: on this very blog you can read my admission that I once voted Green Party.

Finally:

First of all – as I’ve often said the issue is one of intimidation – they seek to propagate the message that if anyone stands up to their vicious form of capitalism they will seek to crush them. So much for a belief in liberty! It takes courage to stand up to such behaviour. They know that. They want to stop others entering the fray by behaving as they do. In that way they hope to crush our current democratic way of life in the UK, Europe and beyond, not least by eliminating debate.

No, I do not wish to \”crush them\”, I do not want to \”stop others entering the fray\”, am not interested in \”eliminating debate\” and have a very strong \”belief in liberty\”.

All of which, of course, is why I argue against so many of Richard\’s ideas, for I am engaging with those entering the fray, debating rather than eliminating such, am taking the arguments seriously rather than crushing them and am, by doing so, contributing to that very liberty that I believe in so strongly.

As to his explanation, well, I leave it up to you to make up your own minds on that. You know, like free people, living in liberty do?

28 comments on “In which we are challenged by Richard Murphy

  1. Warmest congratulations on this piece of work.

    Let’s see what lies the sanctimonious twat dreams up to defend himself.

  2. My own expressed doubts about the veracity of his account (I basically said I might have believed a Damascene conversion, but his current version just didn’t ring true) was deleted from the comments section of his blog (as indeed is anything that genuinely challenges his world view or starts to make his arguments look like they hold no water (as is frequently the case))

  3. Absolutely beautiful, this made my day!

    Information is a little out of date now though, this isn’t as attractive strategy as it used to be with the £10,000 allowance being removed (in 2005 I believe) and the “Arctic Systems” case makingthe whole thing a bit tricker in some respects.

    A person who genuinely believed the tripe he spouts would pay themselves a salary of just under whatever the distributable reserves of the company was at the end of each year. Then you’d be liable for Tax and NI on it just like the rest of us plebs, no more guilty feelings about getting rich of the blood of the workers etc…

  4. excellent investigative journalism! Look forward to his confused , contrived refutation. I can see him spluttering agitatedly over his keyboard!
    But after all, he spent his entire career as a tax accountant. The raison d’etre of a tax accountant is to minimise tax bills, so why are we surprised?.
    I would have a modicum of respect for him if he would simply come clean – assert a religious conversion if you like , a visitation from the tax angel.

  5. In Ritchie’s response he argues that he (as an individual) has payed no less NIC as a result of the dividend arrangement. However my understanding is that if his company paid him a salary, there would be employer’s (as opposed to employee’s) national insurance to be paid by the company at 12.8%. By paying dividend in lieu of salary the company avoids this tax, and the owner of the company is better off as a result. Can anyone confirm this is the case?

  6. Taxresearch LLP is a limited liability partnership. I wonder who the other “partners” are in this enterprise. After all an LLP is defined in the LLP Act as “two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document”.

    I wonder who the other partners of tax research are? From everything I have seen about Tax Research LLP it is a one man show. I wouldn’t want to think that there is some type of sham arrangement going on in order to give Mr Murphy the protection of limited liability. If say there was really only Mr Murphy carrying on business on his own then surely that means he is abusing the LLP structure by having say his wife as nominally a partner when she in fact undertakes no work for the partnership and it is not being carried on by two or more persons for a profit.

  7. Nice piece of forensic work, well done.

    Murphy is a pathetic little bully, the sort of guy whom I imagined would have grassed up his classmates at school. I hope he was badly bullied.

  8. A company is permitted to be a partner of an LLP.

    So in theory the LLP could be R Murphy and the Tax Gap Limited.

    Can anyone do a Companies House search on Tax Research LLP and find out who the partners are?

    Tim adds: The LLP is Richard and his wife. An LLP is tax transparent so there’s no particular tax reason for the use of one. Liability would seem to be the purpose.

  9. Further, R Murphy might have a nominal stake, say 1%, in Tax Research LLP, and a company a 99% stake in TR LLP. If this is the case then the whole operation is effectively a sham and the economic reality would be that he’s operating as a limited company and the company’s share of the LLP’s profits would be taxed under the corporation tax rules and distributed to the shareholders of the company.

    As I say, someone needs to have a look.

  10. If the LLP is Richard and his wife, then how is this a business in common with a view to a profit. I agree that there are no tax reasons for using an LLP as they are tax transparent, the income is simply attributed to the partners in accodance with the partnership agreement and taxed as personal income.

    Of course Mr Murphy is constantly going on about the abuse of limited liability entities, and how anyone who wishes to use a limited liability entity must sacrafice any confidentiality surrounding his or her affairs. Interesting that he has chosed to use an entity which does not require the constitutive document, the partnership agreement, to be placed on the public record.

  11. Having read the 2003 article & the Missing Billions document I’m minded that there is a word for someone who, for money, will perform any contortions required of them whilst keeping their earnings well secreted.

    Begins with ‘W’
    Rhymes with bore.

  12. Surely if a ‘Road to Damascus’ event has occurred, and you are struck by the immorality of all this tax avoidance you have been involved in, the first thing you would do would be to calculate how much tax you had avoided and send a donation to the the Treasury to make amends?

    Merely to stop and start preaching to others would seem a little hypocritical, no?

  13. This reminds me of all those Labour MPs and Guardian columnists who send their own kids to fee-paying schools while forcing everyone else to use the local “bog-standard” Comp. It’s not the hypocrisy of their actions that bothers me, it’s what their professed beliefs do to the country.

    Richard Murphy is well within his rights to minimise what he pays to the Exchequer. And Diane Abbott and Polly Toynbee are right, as parents, to do whatever they can to further the development of their own offspring. But they then pour forth poisonous ideas that prevent others doing the same. Perversely, I think they genuinely believe that they are making the world a better place.

    I wish I could understand their point of view.

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