Isn’t Ritchie’s logic seriously gorgeous?

So he goes through the accounts of Caffe Nero and finds out that while it make an operating profit it actually declares a tax loss. Because it’s paying interest on the loans the offshore companies took out to buy the chain in the first place.

This is offshore, therefore tax dodging and must be banned:

Three issues arise as a consequence.

Firstly, the U.K.’s policy of allowing tax relief on interest paid to acquire a trade must be open to question in the future: time after time companies appear to be in trouble because they are laden with debt that their owners have used to acquire them when that liability has nothing to do with the trade that the acquired company actually undertakes. A change in tax law to deny relief on interest incurred to acquire a trade seems long overdue.

Secondly, the use of a Luxembourg company within the structure noted here is not coincidental: under EU agreements tax may not be withheld on interest payments from one member state to another, even if the recipient state then allows the onward transmission of that interest to a tax haven without the tax that might have been deducted in the first state having been charged. This is, therefore, an exercise in tax avoidance. The time for the EU to reconsider the desirability of such arrangements is long overdue.

Lastly, UK company law needs reconsideration with regard to the ability of shareholders to load the debt that they incurred to acquire their interest in a company onto its balance sheet to secure a tax advantage. This debt loading creates financial instability that is potentially harmful to trade in the UK, the stability of employment in UK companies, and the tax revenue stream for the UK Exchequer, all of which are undesirable. Policy in this area is in need of reconsideration.

It’s time politicians realise people have had enough of this sort of abuse, whether it’s legal or not. Pogress towards reform is long overdue, but seems distant. Until it happens this issue is unlikely to go away.

So, what’s the bit he’s missed? It being Ritchie there has to be something he’s missed, of course.

That even if the loans were all onshore there still wouldn’t be any tax payable in corporation tax. Because the interest payments are higher than the operating profit. That it’s all offshore actually makes no damn difference at all to the tax position.

Further, the interest costs are so high that the company isn’t even meeting them in full.

Sop, what we’ve really got here is Johnny Foreigner sending his capital into the UK for us to enjoy tasty coffee (well, maybe) and losing money on having done so. To Ritchie this increase in our standard of living is an outrage that must be banned.

Is there no beginning to the Murphmeister’s talents?

47 comments on “Isn’t Ritchie’s logic seriously gorgeous?

  1. Plus there are already lots and lots of laws around the deductibility of loan interest in a group setting. The notion that he has had some sort of epiphany while HMRC has sat around scratching its arse is as untrue as it is laughable.

  2. I think his point is that the current thin cap rules only go as far as putting you in an arm’s-length position, and so they still allow for the possibility of an operating profit but a net loss. He just seems to want to tax operating profit.

    I hate to think what that would do to businesses such as buy-to-let, and financial services. Though I suspect that he might argue that bankers and landlords are inherently objectionable and add nothing to society, and so any obstacle put in their way is entirely reasonable.

  3. I wonder if he has any debt? If he does, could HMRC add his interest payments to his income tax? Or would that be wrong for some reason?

  4. So, with the incredibly flawed argument as it is, what bothers me more is that this has the potential to destroy a business. It is so ridiculously geared that they couldn’t sustain a significant drop in sales. Given media stupidity, an idiot propagating this nonsense and a general populace who aren’t versed on the subject but love a good cause, this could go beyond just a moron and his mouthpiece.

    They are pouring money into the country, at significant risk, they are increasing in size and capacity from a capital perspective also. I know, I have visited their roasting facilities in London. They should be applauded for their efforts. Their whole re-financing was such a big deal, that made the papers given how large it was at the time.

    I just cannot fathom the idiocy involved here, did he get a bad coffee from them? Did they not get the right level of foam on his latte?

  5. Hmmmm.

    Depends if borrowed capital is really “yours”, I suppose, dunnit?

    If you have your own capital in a company, you don’t as far as I understand get any kind of relief for the (opportunity) cost of that capital. If you borrow the money (and it’s not hard to do this Glazer-ManU style by buying a company using the company’s own creditworthiness) then you get to reduce your taxable outgoings by making the cost of capital part of your cost of running your business.

    Which I suppose it is, but like I said, why not give equal consideration to companies that don’t have debts?

  6. Having had a look at his ‘report’, it’s interesting to ponder how he would reconcile his love for unitary taxation with his criticism of Caffe Nero. For, in taking group relief in the UK operating company, their tax is being calculated on a basis that’s a lot closer to UT than it would be if they adopted a strict legal entity basis. For all the bluster about loan interest, they haven’t loaded the operating company with intercompany loans.

  7. I find the best way to explain this to people is to reduce the scale. For some reason people get confused by the size of multinationals. But if you talk about a builder, who takes out a £100,000 loan to buy his van and equipment and pays £2000 back to the bank every month, also pays £1000 per month for capital and expenses, and each month brings in £3000 in income, and ask them:

    Does this business make a profit on which it should be taxed?

  8. Oh, and he would have a point if the people involved were loaning the money to themselves (as opposed to having borrowed it form a third party like a bank). If you loan money to a company you control instead of owning shares in it in order to get your profit out as pre-tax loan repayments rather than post-tax dividends, then that is tax evasion.

    But being tax evasion, if you are caught at it you will go to gaol. So it probably wouldn’t be deducible from the public accounts, or if it is, he should be calling upon HMRC to start legal proceedings, not trying to drum up popular support.

  9. “A change in tax law to deny relief on interest incurred to acquire a trade seems long overdue” – Ritchie

    “Though I suspect that he might argue that bankers and landlords are inherently objectionable and add nothing to society, and so any obstacle put in their way is entirely reasonable” – Pellinor

    Yes indeed he would argue that…until the day he and only he and a few other brave and insightful economists realised that all the textbooks and mainstream economists were wrong and banks create money through lending and thus generate growth and so we need to encourage bank lending… except we need to deny relief on some interest payments and thus increase the cost of borrowing and…oh God it seems he might be confusing himself. That surely cannot be.

  10. Christie

    So let me get this right…

    ‘Loan’ your shares to the Labour Party or set up a personal services company for your domestic slaves (sorry, children’s nanny) or claim CAs or R&D relief (these last two are Howard Reed’s idea – Ritchie NEVER disagrees with him) and you’re doing the right thing because Parliament has expressly granted you these reliefs. Claim interest, however, on real borrowing or claim group RELIEF (note the word?) and, whilst it might be legal, is it ethical?

    So, Ritchie’s friends are ethical by default; those he doesn’t like aren’t granted this benefit of doubt.

    Isn’t that cronyism?

  11. S2,

    For us coffee lovers, Nero is about the best of the chains. We can all name some little cafe with better coffee in Soho, but if you’re in Croydon and want a good coffee, Nero.

    I don’t like Starbucks coffee, but they transformed the quality of coffee. You can now get a decent espresso in McDonalds because of them. Yay markets!

  12. Bloke in Germany

    Because you want tax to have as little impact as possible on genuine commercial decisions. Absent tax a company might raise equity finance – not its accounting cost, or it might borrow – which is. Its profit is after those costs.

    The business will mix equity investment and borrowing according to its own best interests and in light of its own circumstances.

    The real – i.e. non-Ritchie – tax issue is whether borrowing from outside UK is ramped up to claim tax deductions. In other words, is the financing being distorted by tax considerations? Arm’s length transfer pricing rules are aimed at eliminating this distortion.

    Christie’s point about unitary taxation is extremely well made, pending any transfer pricing adjustment.

  13. Getting distracted again, everyone. Go through the quote above and replace ‘shareholders’ or ‘owners’ with ‘the Jhooz’ and Ritchie’s real aims become abundantly clear once again.

    Ironman>

    “So, Ritchie’s friends are ethical by default; those he doesn’t like aren’t granted this benefit of doubt.”

    It’s simple enough. If you’re part of ‘the Jhooz’, then whatever you do is exploitative grasping-Jew stuff. If you’re not part of the Zionist conspiracy, then you can be trusted to be behaving honestly.

    I’m pretty sure Ritchie has been re-reading The International Jew again lately.

  14. Ironman (again)>

    Something interesting this time.

    “The real – i.e. non-Ritchie – tax issue is whether borrowing from outside UK is ramped up to claim tax deductions. In other words, is the financing being distorted by tax considerations?”

    Isn’t that the intent of the law? It makes perfect sense for us to encourage foreign capital to be invested more riskily than domestic capital. We see the benefits of any profits, while any losses aren’t ours. Why should we care if value is destroyed overseas in attempting to make us richer?

  15. G: … who takes out a £100,000 loan to buy his van and equipment and pays £2000 back to the bank every month

    24% pa ?! Your builder should be sectioned, not taxed.

  16. One wonders if Caffe Nero would qualify, in theory, for an award from R Murphy of the Fair Tax Mark?

  17. And today, regarding an abortive merger, he writes

    “As I have said before, tax cannot drive commercial logic.”

    This is the same person on the same day who calls for a denial of interest relief so as to change commercial behaviour.

    He really does have weapons-grade shit for brains.

  18. BraveFart

    I’d like to know the grounds he would have for refusing it. Indeed, it would be a quite wonderful way for the businesses he targets to spike his guns.

    Someone he hasn’t banned should ask him. Hint hint.

  19. Well apparently if you have a model railway in your office you don’t need to pay tax, or something like that. He’s off his rocker.

  20. It’s commonplace for private equity deals to be financed with borrowing via Luxembourg in order to avoid tax being paid on the underlying business. Sometimes that just means the tax happens elsewhere, sometimes it means it never happens.

    Agree or not about whether this should be stopped.. but it’s entirely logical that the LHTD should comment on, and oppose, such arrangements. They are far closer to his supposed remit than the usual suspects of Amazon et al.

  21. @Dave

    Getting distracted again, everyone. Go through the quote above and replace ‘shareholders’ or ‘owners’ with ‘Curly Kale’ and Ritchie’s real aims become abundantly clear once again.

    I’m pretty sure Ritchie has been re-reading Gardener’s Weekly again lately.

  22. Interested>

    I’m not aware that anti-curly kale-ism is a thing. Whereas Ritchie’s pronouncements stop being bizarre idiocy and start making complete sense once you cut through his fairly unsubtle code. He only appears inconsistent and stupid because he’s using euphemisms for the things he’s really talking about, and once you understand that he’s railing against the International Jewish Conspiracy everything falls into place.

    With Ritchie, it really is always The Jhooz.

  23. @Dave

    Ah, the old ‘everything falls into place’ line.

    Just because you’ve missed the international kaleist conspiracy doesn’t mean it’s not there.

    Might be proof that it is!

  24. I suppose if all businesses followed Ritchie’s model for FTM then the question of the deduction of interest would be moot.

    Unfortunately, such businesses would fail to qualify for a FTM.

  25. Ironman

    Re “Someone he hasn’t banned should ask him. Hint hint.”

    It is true that I have not been banned from commenting there. However, following what I considered to be particularly spiteful and disrespectful comments posted by his camp followers gleefully celebrating the death of Mrs Thatcher, I complained to him and he defended his arse-licks. Not what I would have expected from a devout Christian – I guess the unprincipled play to their audience.

    I swore then I would never post on his site again.

  26. I have been banned, several times – though he always seems to let my initial comment on a topic through and respond to it.

    It’s only later in the conversation that he deletes my comments and bans me (although he has now started invoking Section 5 instead of banning).

    I would ask him, but I suspect I know the answer already: he is re-writing the FTM criteria to make it clear that companies which avoid tax cannot get the FTM. So the answer you want will be in there, and you will have to wait until it comes out.

    Strictly of course the FTM is re-writing the criteria, not Murphy; it may be that Murphy actually does the re-write, circulates it for comment, and publishes it, but it will all be done under the auspices of the FTM as he is not an integral part of the organisation.

    My suspicion will be that the tax policy will have to echew tax avoidance, and the company must demonstrate that it follows its policy, so the FTM will not be granted where there is clear avoidance of tax (either to policy or the implementatio will be flawed). I will be interested to see how “avoidance” will be defined – it will of course have to be defined, as otherwise third-party assessors are going to have an awkward time sending their assessments off to the FTM Co for confirmation.

  27. Most economists would say that getting rid of the tax deductibility of interest (or at least leveling the tax position vis-a-vis equity) would be sensible. However, this bizarre belief that we should not allow tax deductibility specifically for takeovers is typically stupid.

  28. I’d be happy with making interest non-deductible so long as it’s also non-taxable when received.

    It’d be a major change to make unilaterally, though…

  29. Pellinor

    re the FTM: again I would be very interested to know how he/they is going to write an anti-avoidance test into the FTM. Defining ‘avoidance’ is difficult for those of us who know what we’re talking about, so Ritchie… and if any unsuccessful applicant challenged, citing inconsistent application of standards… ooh the legal problems!

    re interest dedcutions. Borrowing is an essential part of busienss and economic growth, so I wouldn’t agree to the elimination of interest either as a deduction or a charge.

    The Thought Gang

    Whether paid to Luxembourg or to a UK bank, the interest payments cover the operating profit, can be group relieved and so there is no avoidance. There may be economic policy converns about LBOs generally, but no tax avoidance that I can see. Not yet anyway.

  30. In theory, if interest becomes neither taxable nor deductible then interest rates should be able to adjust such that everybody gets the same post-tax position. Changing the tax position shouldn’t change the economic position, except where there are anomalies and differences in treatment (eg deductible in the UK at 20%, taxable at 0% elsewhere).

    All you would do, of course, is change the type of anomaly that can exploited.

  31. As for seeing tax avoidance, the logic appears to go:

    – There is UK operating profit
    – There is no UK taxable profit
    – This factor turns operating profit into tax loss
    – Therefore this factor is a problem

    This is nothing new, of course: as you know, “This factor” has been interest, capital allowances, royalties, paying for goods, and so on.

  32. ‘It’s time politicians realized people have had enough of this abuse, whether it’s legal or not’

    To hell with the rule of law – it’s wrong I tell you. Really the guy is beyond satire, as I’ve said many times. As Dan Arlington (#4) says, the worry is given general lack of understanding on this issue, a pushy, utterly ignorant buffoon masquerading as an ‘expert’ despite evincing near total ignorance of finance and a compliant media, these policies could be adopted, with calamitous impact on inward investment.

    Regarding ‘bans’ he normally bans you, usually designating you a ‘Troll’ for good measure when you have exposed his lack of internal logic. I’m persona grata currently having been banned three times – but like Bravefart find it wearing to listen to people who are self-evidently wrong on every issue of substance and can’t abide correction, and was also disgusted by his endorsement of the Thatcher insults (although it would seem typical of him based on his blog and Twitter output) Indeed, DannyB, who managed to get the better of Murphy on every occasion he commented (any takers on here for that ID’ has been sent packing with the usual comment ‘ Please don’t call again’

    Tim – wanted to check that you were going to respond to his piece from yesterday which seemed riddled with fallacies ‘Oxfam know their facts, it’s Tim Worstall who is peddling a fantasy’ although I know you responded to Oxfam themselves. Hasn’t stopped a few new Sockpuppets at his blog from taking your silence as ‘proof’ Murphy is right….

  33. Did Worstall advertise on this blog about his Forbes drivel?

    I’ve noticed he’s reined in his direct and grotesque personal attacks.

  34. Patten. You’re a sock puppet. But not as bad as Ironman, who’s full on being fisted.

  35. Arnald – nice to see you again. Hadn’t seen you posting your acute insights in quite a while. Glad to see the quality of your arguments (A powerful combination of ad hominem insults laced with profanity) remains undiminished…..

  36. Patten

    Two thirds of worstall’s output is about inciting sock puppets like you to personally insult Murphy. The rest is mostly hormonal excitement about homosexuals or casual misogyny.

    There’s about ten people on here that bleat daily at worstall’s whistle, achieving nothing but regurgitating private jokes.

    Put it this way: whenever anyone has come here to dispute anything worstall has typed, there’ll be a number of vitriolic comments from worstall’s lunatic fringe. Why bother trying?

    So you dozen types can swim about in your effluent, but you don’t command any respect. Mostly ridicule. Even amongst those that may be more politically aligned.

    Fuck off and hang. I hope timmy hasn’t trademarked that.

  37. Hello Arnald, I too am delighted to find you are safe, if not it seems well exactly.

    To sum you up:

    Comment 1: Tim Worstall makes “grotesque” personal attacks.
    Comment 2: I – Ironman – am full on being fisted.

    I won’t it personally, that would be just too painful!

  38. Arnald

    It’s utterly pointless to attempt to engage you in any way whatsoever (more the fool me for trying) Murphy’s treatment of those who offer counter- opinions on his blog, is, as any number of contributors on here can personally attest, just as abusive as we manage here. Note that Tim doesn’t even bother to respond to you(although from memory he has in the past), just allows your own lack of coherence to speak for itself.

    He doesn’t liberally throw words around like ‘troll’ or ‘neo Liberal’ in a fashion that denudes them of any meaning. As far as I’m aware he has no ‘Comments policy’ dripping in self-importance that effectively means ‘I can’t take criticism so offer it elsewhere’

    You might respect Murphy’s quasi-fascist outpourings as intellectually stellar stuff, but as far as I’m aware it isn’t yet illegal to question them? (Mercifully ‘The Curajus state’ is not yet in place) As for your characterization of this blog’s regulars as ‘swimming in effluent’ and ‘not commanding respect’ I’ll take those remarks, coming from someone as pathologically ill-informed and offensive as you, as a great compliment. The poverty of your arguments is once again on display, for which you have my gratitude.

  39. A large percentage of private equity investors pay no tax whatsoever. So any deduction in the operating group is entirely in sided and not taxed in the recipients hands

    Isn’t this an outrage. Someone should stop this immediately……..

    What is the biggest class of PE investor…….

  40. Patten

    I’m not sure how many mental somersaults I have to achieve to understand and get any where near what you’ve so poorly tried to describe.

    So some commentators get called names! How about you sift through worstall’s spuff over a couple of years and that’s just blindness in the name of intellectualism is it?

    I’ve no doubt you’re a clever thing, but read what the majority say on this forum. Fucking read it.

    If you support it that’s fair enough. one more chance. read it all. no? no?

    Don’t pretend you think you know more about the world like worstall believes.

    Worstall is a modern day preacher of self denial.

  41. @ Van Patten

    Thanks for the support. To say it’s frustrating debating with Murphy is an understatement. He has simply no clue when it comes to mathematics or statistics (see the debate on Gini) and his stance of tax is wholly inconsistent – deep down I think he can see the massive flaw in CbC but is simply unwilling to recognise the elephant in the room. I’ve posted this now, let’s see if it gets through.

    I suppose you could answer a question referring to a simple example regarding CbC then? Assume 2 countries (A and B) both with 20% corp tax rates. Company ABC operates only in country A. It has revenue of 200 based on 100 of costs. Company XYZ operates in both countries. In country A is has revenue of 50, with 100 of costs. In country B, where it exports to, it has no costs but revenue of 150. How much tax does each company pay?

  42. Arnald

    I’m afraid you’ve completely lost me with your train of thought. I thought I was reasonably clear but apparently not. I have read a lot of what is said on this forum. It can be strong stuff and certainly laced with invective – if that’s an issue for you what brings you here?

    As for Tim being a ‘modern day preacher of self-denial’ I find it an odd comment – some religions would view it as a compliment, but Timmy has never struck me as overly religious….

  43. Danny

    I thought he’d sent you packing. Many on here who are perhaps sometimes less scathing with their comments in this forum (Substantial intellects like Pellinor and Ironman) have manfully tried to adhere to the man’s ever – mutating policy on Comments (from Trolls, NeoLiberals and Astroturfers – the three synonyms for ‘someone who disagrees with me’) keeping it civil, clear and grounded on his turf, and there simply is no point to doing so. You point out quite correctly he has no understanding of Mathematics or Statistics (you could add History, Economics and Geopolitics to that list – I’m sure many could add far more topics) What he does have is the single-minded belief in his own rectitude and inherent infallibility. It makes him a very dangerous man indeed.

    He is required to have the last word, usually with an attached put down that is reminiscent of a medieval feudal seigneur in its superciliousness (hence the quite valid epithet LHTD – Lord High Tax Denouncer employed for him by many here) Other than with fellow adolescent revolutionaries (4 spring to mind, ‘Theremustbeanother way’, ‘Andrew Dickie’, ‘Ivan Horrocks’ and ‘Howard Reed’) he doesn’t usually permit comments. Good luck with posting that example but I have my doubts as to whether it would be published, and my guess is you are now classified as a ‘troll’ so may struggle to get anything through for little while. Most people on here have been banned 4 or 5 times, usually for outarguing him as you have done every time I’ve seen you on the boards….

  44. @ Van Patten

    Well, he’s taken the bait. Posted my comments plus replied to them. The example I set him was a trick question – in both the current regime and UT both companies should pay the same tax. Which becomes a little bit of a problem as the group structure above and including Café Nero is losing money – so no tax is due.

    The only way you can get to the statement he made – that Café Nero is avoiding tax – is by treating it as a standalone entity, using his nonsense CbC reporting, and disallowing debt financing as a tax deductible cost of doing business. Which would pretty much screw every small business out there.

    He has studiously avoided answering the question I posed properly. I’m not sure if it is because he simply doesn’t understand, or that he does understand and it pokes a massive great hole in his logic.

    Either way, Café Nero owes no tax, and using CbC to try and say who does and doesn’t owe tax is a complete mess.

  45. Danny

    The proof of your victory is in his final entry. once he gets confused and realizes he has tripped over his own lack of internal logic, you are automatically deemed to be ‘trolling’ and your future contributions will be deleted. And according to Arnald this is fair behaviour and evidence of a great intellect? The mind boggles. An excellent exchange by the way. Few have managed to get such clear evidence of his incoherence and lack of intelligence ‘on the record’ as it were

  46. @ Van Patten

    Thanks mate. I see he hasn’t been able to answer the fundamental inconsistency in his argument. So as you say he has simply resorted to calling me a troll. I’ll try one more time to get an answer out of him but I doubt he’ll publish.

    I’m not sure if he recognises what he writes is rubbish before he writes it – knowing full well it is polemic tax propaganda which is likely to get him more media gigs – or that his world view is so secure that he thinks whatever he writes is gospel, only to be shattered when someone points out that what he has written is pure nonsense.

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