Do we have a right wing Richard Murphy in Charlie Elphicke?

Mr Elphicke, a former tax lawyer, said: ‘Tax avoidance isn’t just a problem with big corporations. It’s also a problem with big unions who bankroll the Labour Party.

Sadly, no, because he is at least conversant with the law. It’s pure political opportunism lying therefore in Elphicke’s case, not ignorance.

Labour’s biggest union donors pay nothing in corporation tax despite making millions on their investments, new figures reveal today.

So, why don’t they pay any corporation tax then?

Instead they exploited an obscure provision in the law which allows them to offset costs such as sick pay, accident compensation and employment tribunal costs against their income.

Because they don’t owe any.

Corporation tax is paid upon profits, as we know, not upon income. Thus, if they spend the income of the union on doing things that unions ought to be doing there’s no profit and thus no tax.

There’s nothing terribly difficult about all this, is there?

29 comments on “Do we have a right wing Richard Murphy in Charlie Elphicke?

  1. Unfortunately, the truth has proved such a poor weapon against liars who rely on the ignorance of the general public. Elphicke is playing them at their own game.

  2. I think it comes back to what I said before; there is a perceived injustice in different tax regimes for different classes of economic agent. Individuals pay a tax on turnover (income tax) whereas organisations of various types pay taxes on profits, have many means of reducing those tax bills not open to many individuals, and so on. Individuals who attempt to switch from the turnover tax regime to the profit-tax regime are often harshly condemned and penalised, as with the IR35 thing. It is not unreasonable to perceive this as unjust.

    There is no particular reason either from practicality or principle that organisations should not be taxed on turnover just as wage earners are (income tax) or consumer are (sales tax) or hedonists are (sin tax) or drivers are (petrol tax) or importers (duties of divers kinds) or bankers might be (Ritchie Hood tax) and so on. It thus appears that corporate bodies are getting a special favour from the State.

  3. “There is no particular reason either from practicality or principle that organisations should not be taxed on turnover just as wage earners are”

    But that’s just a sales tax.. and we have one of those too. So can’t we also argue that organisations are given unfair treatment because they have to pay a tax on their surplus? People don’t.. which is, perhaps, because our surplus is mainly ‘nil.’

    To be honest, though, I don’t think there is a perceived injustice for the reason you mention. Most people I hear talking about this are quite happy with the idea that companies should only pay tax on profits. It’s the deceit of the campaigners/journos in constantly reporting the wrong numbers and referring to “deductions” and “allowances” as if they’re all shady adjustments dreamed up by clever accountants, that gets people thinking it’s all terribly unfair.

  4. Ian B

    No, everybody pays tax on income. The income of a trade is it’s profit – after business expenses. This is whether conducted by an individual, or in partnership, by a company or indeed a union.

    An employee’s income – his profits if you like – is simply his salary; his expenses being paid by or reimbursed by his employer. and yes, I know all about driving to work or working at home in the evenings.

    Interested

    He’s not playing them at their game; it’s his game too.

  5. Go with Interested on this. Well done Elphicke. This is narrative territory & fiction is not countered by truth in the same way as an accountancy guide isn’t going to outsell a crime thriller at the airport bookstall.

  6. Ian B: it is very hard to meaningfully define turnover for a business. You can restructure your operations very easily to increase it or decrease it.

    For example, if I sell widgets then at the moment I buy a widget from the manufacturer for 9 and sell it to the customer for 10, so I record 10 as my turnover, 9 as cost of sales, and 1 as profit. But if turnover were taxed I’d shift over to being an agent facilitating the sale of widgets direct from the manufacturer to the customer: the customer would pay 9 to the manufacturer for the widget (I would collect the 9 for him and pass it on – possibly in advance) and 1 to me as commission. The customer pays the same amount, the manufacturer is in exactly the same tax position, my profit is the same; but by changing the paperwork slightly my turnover has plummetted by 90%, and so has my turnover tax bill.

    OK, legally it wouldn’t be practical in all circumstances, but it would work in enough cases to make the playing field so seriously unlevel as to be grossly unfair. It’s why VAT is on value added rather than straight value.

  7. I’m not addressing the practicalities, or the rights and wrongs of it. What I’m trying to get at is where the perception of injustice arises from. This inevitable appearance of “unfairness” is one reason I think we should abolish (at the legal level) “employment” as a distinct category and just have everyone be a business. Then everyone has the same rules. It would also have fringe benefits like making it easier for any individual to indulge in “petty capitalism” on the internets, which would improve economic flexibility at the bottom end of the economy in a positive direction. The days of mass employment, jobs for life/security etc are over. We need to rethink a paradigm of employment that was built around that temporary industrial revolution phase in economic history.

  8. “There is no particular reason either from practicality or principle that organisations should not be taxed on turnover just as wage earners are”

    Yet organisations are just collections of individuals. Tax the individuals, not the organisations. This is principle recognised in the different rates of tax for dividends, the way partners are taxed and not their partnerships, and so on.

    The reason corporate profits are taxed at the ‘half-way’ mark is nothing to do with practicalities, rather public ignorance and bureaucratic self-preservation.

  9. I must say I was very surprised to read recently that Elphicke was a tax lawyer. (Though at what level, and what experience? Is it like a bookkeeper calling themselves an accountant?)

    This is an MP, for example, who supports the abolition of capital allowances. No, really.

  10. I think the perception of injustice comes from the fact that the perceivers don’t know what they’re looking at :-)

    Everyone gets taxed on the income they receive, less the costs incurred in earning it. For a business there are lots of costs, for employees very few. If you abolished the “employed”/”in business” distinction you’d end up with pretty much the same taxable incomes – to change that you’d have to change the rules on deductibility of expenses. Renaming the income would have very little impact.

  11. “I must say I was very surprised to read recently that Elphicke was a tax lawyer.”
    Why?
    There are plenty of MPs who are lawyers who have little understanding of law. A whole slew with P+P+Economics degrees who’re clueless about economics. H’sofC is the place they get themselves into because their education doesn’t enable them to get a proper job.

  12. Pellinor, the problem is that an individual’s “costs of doing business” cover most of his subsistence, it’s just that the State doesn’t formally recognise that. In order to function as an employee, he needs shelter, food, transport, clothing, beer, some entertainment, all the rest of it. Once all that is paid for, many lower earners make no “profit” at all. Employees have lots of costs, we just don’t recognise them as such.

    The definitions of what counts as profit and business expenses are rather artificial. The employee’s business is *himself*; his own existence available for labour. I think we need a profound rethink on all of this.

  13. Elphicke might have a point.

    Normally you cannot deduct expenses from investment income.

    There are generally only two situations in which you can deduct expenses from investment income:

    1) Banks and suchlike, where the investing is regarded as part of their trade.

    2) If you have a business that makes a loss then you can offset that loss against your investment income (but only if it’s a loss from a genuine trade that had a real hope of making a profit).

    Unions don’t seem to qualify for either of those; they aren’t a financial services business and their union activities aren’t really trading, certainly not with a profit-making motive.

    I can’t be bothered to look up the specific legislation that he’s talking about, but on general principles I wouldn’t expect unions to be able to deduct expenses from their investment income – which implies that there is something in legislation that gives unions a preferential treatment and it would be interesting to know which government first passed that.

  14. Ian B, I see what you’re saying, but three points:

    1) The technical problem is the “dual purpose” rule, that if an expense is for mixed business and non-business motives then it’s treated as non-business. Since most of us would want food, shelter etc. anyway, even if we weren’t going out to work, then it’s regarded as mixed purpose and so not a business expense. This is the same whether you’re an employee or self-employed.

    2) There’s a problem with some of the specific expenses rules, e.g.:
    a) home to work travel (can be accepted as an expense for self-employed but not for employees); and
    b) work clothing that’s regarded as ‘normal’ clothing (Ann Mallalieu’s case).

    3) More generally, isn’t this what the income tax personal allowance should do – stop you being taxed on the amount of income that you need to cover those basic costs? Although there’s a problem that the personal allowance isn’t big enough for that, so it needs to be increased (which our host and I have both argued for).

  15. Ian B: no, in order to function as a live animal the person needs food, shelter etc, and for his own private purposes he wants beer and entertainment and so on. That sort of cost is there whether he has a job or not, so can’t be related to the earning of the salary.

    It’s entirely different from the cost of the widget you sell on, or of driving to a business meeting, which do have a direct relation to the income earnt.

  16. Sales tax isn’t paid by a company on sales, its collected by a company but paid by the consumer. Company pays a sales tax on stuff it buys, but thats not on its own sales.

  17. Am I right in thinking that in broad brush terms, GDP could be described as the nation’s ‘turnover’? And therefore in order to generate the same tax revenues as we have today, if all taxes were replaced with a turnover one, its rate would have to be the same as the current % the State takes of the economy – namely 39% in the UK?

  18. @ Ian
    I’m surprised at you. All employed get an allowance for the expense incurred in employment. It’s called the Personal Allowance. It’s even uniform to prevent high earners proportionally overclaiming on that expense.

  19. Martin Davies

    Just a small point – which doesn’t detract from the merits of your point – VAT isn’t a sales tax. It is, or is supposed to be a tax on “vaule added”. So there is, or is intended to be, a whole series of VAT points right up the supply chain.

    I wouldn’t mind, but it’s getting boring for me at the moment trying to explain this to some American counterparts.

  20. And therefore in order to generate the same tax revenues as we have today, if all taxes were replaced with a turnover one, its rate would have to be the same as the current % the State takes of the economy – namely 39% in the UK?

    Yep, pretty much. That’s why they hide it by taxing multiple points in the production cycle- incomes, corporations, sales, sins, excise duties, etc etc etc.

    Tim adds@ No. NO. In fact, NOOOOOOOooooooo

    GDP is akin to all profits plus all wages. In fact, that’s one of the ways we measure it.

    It really ain’t turnover.

    So, yes, if we scrapped all of the zillions of taxes and had just the one then it would be 39 % of all profits and all wages to make that 39% of GDP.

  21. Pellinor-

    Just to drink a bit more of the Devil’s Advocaat-

    Ian B: no, in order to function as a live animal the person needs food, shelter etc, and for his own private purposes he wants beer and entertainment and so on.

    Not really so. Social outlets, relaxation and entertainments are needs too. No play doesn’t just make Jack a dull boy, it makes him a depressed, stressed and unproductive one too.

  22. Ian B: Any link is prety tenuous, though. Arguing that a pint is a necessary business expense because you’ll be tense and irritable tomorrow so will be marginally less productive is a whole different kettle of fish from arguing that the cost of the widget you’re selling is a cost of the sale. Especially as the second pint could cause more problems than the first solved :-)

    I think your argument is that as there are a whole range of costs that could be related to income and you can’t tell which is good and which is bad we should ignore all of them and just tax the gross income. But in my view it’s much more reasonable to take the current approach, which is to allow costs which have a direct link to gross income and disallow any that don’t. I think there are problems with where the line is drawn in some cases, and the “wholly and exclusively” can cause unfairness, but I think there should be a line.

  23. @ Richard
    Unions were originally created to provide for the common interests of members and it is perfectly valid for the cost of sick pay, strike pay (for a legal strike), unemployment benefit, funeral/death benefit (especially the latter) to be met partly out of contributions and partly out of the investment return on those contributions. So the cost of these benefits (or the appropriate %age after calculating how much is met directly from contributions) should be deducted from investment returns before tax liability is calculated.
    FYI It is Friendly Societies legislation. which pre-dates the creation of the Labour Party

  24. OK, if GDP isn’t the same as a nations gross income, what is?

    Basically I’m trying to work out what level of turnover tax you would have to apply to get the same amount of tax revenue as we do today (c. £550bn IIRC).

  25. Tim’s right and I was wrong, but let’s not let that stop me pontificating.

    Because GDP is (supposedly, if you believe in faeries) a measure of production (which is also consumption) it measures only final use goods and services. So the turnover tax would be less than the GDP percentage by some unknown figure dependent on how many businesses are in the production chain to get a product from raw materials to the consumer.

    I think.

    That’s just the private sector, ignoring the larding on of government spending etc.

  26. Also would a turnover tax not encourage the reversal of specialisation, which is one of the main drivers of economic efficiency? Ie it would make more sense tax wise for me as a farmer to sell my grain as bread direct to the consumer (one tax taken on the sale) than for there to be a supply chain of farmer-grain merchant-miller-baker-supermarket (5 tax chunks taken out at each transaction)?

  27. Yes, taxes always suppress economic activity. But then, so does income tax, which is a tax on employment.

  28. John77, thank you – it wasn’t clear (at least to me) that he was talking about benefits paid to members rather than the costs of running the union.

    If they’re effectively running an insurance business then they should of course be able to deduct the amounts they have to pay out under that.

    However that still leaves the question as to how they allocate the costs between investment income and membership dues.

    From a quick look it seems that they are allowed to allocate the full cost of paying deductible member benefits against the taxable investment income, without having to allocate any against the tax-free (probably; mutual society) membership fee income.
    http://www.hmrc.gov.uk/manuals/ctmanual/CTM41260.htm

    I’d normally expect it to be the other way round (pay-outs made first out of current year subscriptions and only then out of income on reserves). So it does still look like a valuable tax break.

  29. @ Richard
    Yes, it is a very valuable tax break. Friendly Societies and Life Assurance Companies have been using it for years. What it means for the latter is that they can, if properly managed, only pay tax on the profits going to shareholders.
    The reason why you take current benefits out of investment income is that they overwhelmingly relate to contributions in the past and current contributions relate to future benefits. Not precisely accurate but the average tax inspector would take months to check the actuarial calculations of a fair apportionment so HMRC opted for a simple rule.
    Anecdote – when I was working for a Life Assurance Company in the Wilson era, one of our brighter* Actuaries was promoted to Chief Accountant and after about a year persuaded the directors to create a separate job of Tax Manager as he could add more value there than as Chief Accountant.
    *Yes, there degrees of intelligence among Actuaries just as there are ranges of speed among Olympic athletes. This guy was equivalent to a losing finalist, or decent semi-finalist, so brighter than I but not so far out of my league that he wouldn’t talk to me.

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