Calling this blog\’s beancounters

Here\’s a little something I\’d like to know about a piece I need to write over the weekend.

A software manufacturer is moving their customers from a buy a permanent license and buy the upgrade every couple of years to an online pay a monthly fee and get the upgrades as they come.

The software suite costs, say, $2,000. Now, with that sort of money, how would the buyers be accounting for it?

Obviously, the monthly fee is now just going to be operating costs. Just like the electricity required to run the computers. But before that: with 2k pieces of software. Would they have been writing that off in year one? Heck, it\’s an operating cost so the hell with it? Or would they have been forced to depreciate it over time?

My guess is that a £50 piece of s/ware just gets writtne off an an operating expense. A £5 million investment in Oracle is a capital expense amortised over time. But where\’s the cut off point for one treatment and the other? Are there HMRC rules on this or is it, well, depends?

HMRC as an unsecured creditor at Comet

Secured creditors, led by the financial investors who backed Comet, are expected to receive a return of 34p in the pound, while unsecured creditors, including HM Revenue & Customs which is owed £26.1m, will receive nothing.

I sorta expect this to cause another kerfluffle. HMRC being an unsecured creditor means that The State loses out when a company goes bust. And we know that The State losing out is a terribly bad thing.

I\’ve got at the back of my mind that HMRC being unsecured is a recent thing. But that might just be my faulty memory.

The other side of it is that if HMRC were secured then many more businesses would go bust much sooner. Which is why it isn\’t of course.

What an excellent point

Investors (and many others) don\’t actually use company accounts in decisions about investing.

Because an investment decision (as with a lending one and many others) is a forward looking one. We\’ve many sources of forward looking information: announcements to markets (which the directors have to make about anything that might impact on the business), changes in prices of products or raw materials (gold mining shares do change price along with the gold price, people don\’t wait for the annual accounts to see the effect on profits etc), interest rates, GDP, all sorts of places we get our forward looking information from.

Annual accounts come out what, 3-9 months after the end of the relevant period? The audited accounts that is? Just not useful for those forward looking decisions for we\’ve many month\’s worth or newer and better information about future prospects than what is contained in those audited accounts.

The value of the accounts is that we can now check and see whether what the directors have been telling us through the markets for the past 15-21 months was actually grounded in reality. Given that everyone knows that this check is going to come that works pretty well (although certainly not perfectly).

Which, as a piece of logic, rather neatly punctures Ritchie\’s insistence on all that information that must be included in company accounts. He really does tell us that people must be able to use them for forward looking decisions. But we don\’t use them to do so at all, because they\’re old by the time we get them. They\’re a check on past information releases, not the information releases themselves. We\’ve a whole new set of information releases by the time we find out whether the directors have been telling us porkies or not.

Accountancy joke

The feature that auto-corrects text as you type.

Every accountant I know has gone into the options screen and entered in that typo so that it automatically changes back to \’accountant\’ and spares their blushes.

No, that\’s just the set up.

Occasionally you come across a few howlers in the field. Such as this one I stumbled across today. The poor Irish lambs appear to have been hacked too. They have a thing or two to learn about safe hex.

Accountants are different Part 344

As you do under these circumstances, I then learned the whole chart off by heart, right down to the letters that were only a couple of millimetres high, by dint of leaving my right eye slightly open. A couple of days later the doctor told me that my eyesight appeared to have recovered, at which stage it was my turn to gaze at him horrified and tell him in no uncertain terms that his stupid chart was a test of memory, not a test of eyesight.

Is our Dickie right here?

UK forensic accountant Richard Murphy says: \”The fundamental question is how accountants got away with changing rules of accountancy, which state they don\’t have to assess the valuation of assets underlying the assets on a balance sheet. How did they get away with changing the audit rules?\”

I can see two possible statements here.

1) That accountants, when doing an audit, do not trouble themselves to find out whether a Gilt in hte books at £101 is actually, on the Gilts market, valued at £101. If they\’re not doing that then indeed, that would be absurd.

2) That auditors should be looking at the Gilts market and deciding whether the market valuation of £101 is indeed a true and fair value. To insist that they should be doing that would also be absurd.

So it becomes, I guess, which is it that Ritchie thinks they ought to be doing and which is it that they actually do.

Given his comments on the Madoff fraud, I have the horrible feeling that he\’s trying to insist upon 2). He\’s said that those who audited feeder funds to Madoff should have checked to see whether Madoff was a fraud: but that, of course, was the function of the auditors to Madoff, not the auditors to anyone else.

Prem Sikka, missing the point again

It\’s amazing that an accounting Professor gets this so wrong.

The fledgling economic recovery requires that more spending power be placed in the hands of normal people and small businesses. All political parties should look at the operations of the insolvency industry, which is enriching itself at the expense of normal people.

The point of an insolvency, of a practitioner in it, isn\’t to get back as much as he can for the creditors.

Sure, it\’s a nice thing to do, they have a duty to do it as well. But that\’s not the actual reason that we have the system of bankruptcy and so on at all.

The aim is to get the productive assets out of some limbo where they cannot be used into a position where they can be. We simply don\’t want productive resources, whatever they are, labour, buildings, piles of steel or whatever, to be sitting around while someone tries to get the best price for them, or while there are arguments about who owes what to whom and so on. We want them flogged off and being used by someone else as fast as possible.

For the very definition of wealth creation is the movement of productive assets from low productivity uses to higher ones.

Insolvency methods are therefore the tail end of the process: it\’s the bankruptcy and the reallocation of the assets that is the important part and thus the part that we concentrate upon.

Prem Sikka, he\’s a lad, ain\’t he?

In general, an individual cannot receive tax relief on interest payments whether the debt is for buying a house, car, fridge, cooker or anything else. In contrast, the tax concessions to corporations have been maintained regardless of whether the debt is for buying productive assets, or speculating in markets, paying exorbitant dividends, setting up operations in tax havens, or even champagne parties for friends.

You would sort of hope that a Professor of Accounting would know that interest for business expenses is allowable….whether it\’s a corporation, partnership, sole trader or entirely an individual. Buy to Let landlords offset mortgage interest against rents for example.

He also rather misses the major point:

Elimination of the tax relief on corporate interest payment would not prevent companies from using debt finance. Instead, it would add an element of neutrality into their choice of capital structure since payments of dividends to providers of equity do not qualify for tax relief. The ending of the taxpayer subsidy would also force companies to maintain more moderate levels of leverage. The measure would increase tax revenues that can be used to fund pensions, healthcare, education, public transport, reduce public borrowings and even tax cuts for normal people, and provide a much needed stimulus to the economy.

You get to tax these flows once.

Dividends are taxed at the level of the recipient (different in the US, I know). So is interest. So, if you\’re going to tax interest at the level of the company you have to make it tax free at the level of the recipient.

So there ain\’t any more tax revenue to be had….and you\’ve created a rentier class who, at least in appearance, are living tax free off their interest.

I can really see the lefties buying into that, can\’t you?

Really?

Can anyone explain the logic of this second sentence to me?

And the reality is that tax yield is based on the combination of tax base and tax rate. You can control one of those two at any time, but not both at once.

I\’m pretty sure that the UK can determine both what are corporate profits and the rate at which they can be taxed at the same time.

Why am I wrong and Ritchie right?

Google and Corporation Tax

The Sunday Times investigates Google\’s tax arrangements in the UK. Well, actually, they have Richard Murphy read the accounts for them.

In a nutshell when you buy an ad from Google you do so from Google Ireland rather than Google UK. Thus tax on any profits ends up in the Irish Treasury rather than the UK one.

How awful.

Now, can we actually identify how this state of affairs has come to pass? Why, actually, yes we can. It\’s called the European Union.

Part of this Single Market thing is that any company registered anywhere in the EU can trade anywhere else in the EU. VAT is to be collected and paid at the rate of and to the government of where the sale takes place (the physical location of the customer).

Corporation tax is paid at the rate of and to the government of the country where the supplier is located (legally located and registered that is. The brass name plate.)

That\’s it. Google is simply doing not just what it is allowed to do under EU law but what it is positively encouraged to do under EU law. Take part in the Single Market.

Strangely, we don\’t see any of the federasts complaining about Google paying Eire instead of the UK pointing this out. That it\’s an inevitable consequence of the EU and the Single Market.

Excuse me?

Another former senior tax inspector said: "One of the problems the Revenue has is that the company doesn\’t have to disclose the amount of tax actually paid in any year and the accounts won\’t reveal the liability. Each company has its own method of accounting for tax: there\’s no uniform way of declaring it all."

Surely the Revenue can just look at the cheques it has received to work out how much tax a company has paid?

Bwahahaha

Oh, boy, this Grauniad investigation is indeed fun:

International companies based in the UK may have hundreds of subsidiary companies, which many use to take advantage of differing tax regimes as they move goods, services and intellectual property around the world. It is estimated that more than half of world trade consists of such movements (known as transfer-pricing) within corporations.

No you innumerate little twats.

Some half of global trade is indeed estimated to be intra-company trade. Dell\’s motherboards (to take an example which I have no idea is true or not) are shipped from China to Ireland where they are assembled into a computer and then shipped to Dell\’s UK subsidiary for sale to me sitting in London. Dell owns the plant in China, the one in Ireland and the mail order place in the UK.

That\’s intra-company trade and as I say, on some estimates it\’s half of world trade.

Transfer-pricing is something rather different. OK, at each stage of this process there will indeed be an intra-company price at which the goods are transferred. Transfer-pricing however normally refers to people manipulating those prices to take advantage of tax rules. You see the difference? With global companies and dispersed production, intra-company trade is inevitable. But whether they\’re using transfer-pricing (in the meaning of being naughty about it) is another matter. 

Eh?

The second would be a state-funded programme to build 100,000 houses a year, which would provide homes for those who need them and create 50,000 jobs in the construction industry.

Is John Cruddas seriously trying to say that each house built requires 6 man months of labour?

Serious Farce Office

So, we\’ve got something called the Serious Fraud Office. They investigate financial crimes.

Very important, of course. Stuffed full of the finest forensic accounting brains our nation can produce. Of course.

Serious Fraud Office asks for £15m to cover \’urgent\’ hole in budget

Mhm, hmm. They cannot even manage their own budget. Fills one with confidence at their ability to investigate those of others, no?

Yes, Murphy Again

But the strangest comment was by BAT, which paid no tax in the UK in 2007:

A spokeswoman for BAT, the twelfth-biggest company in the UK by market value and the owner of the cigarette brands Lucky Strike and Pall Mall, said that its head office operated at a loss and that 99 per cent of its profits were earned overseas.

There is only one commercial response to this. If a head office loses money it cannot add value. In that case the group is not worthwhile mainatining and should be broken up on commercial grounds. Shareholder value must be increased in this case if it were.

Snigger.

Bit odd for an accountant to miss that making a profit and adding value are not quite the same thing, isn\’t it? Fire stations don\’t make a profit but we accept that they add value, Parliament doesn\’t make a profit but we accept that (sometimes) it adds value, the courts system doesn\’t make a profit but definitely adds value.

Head Offices are a cost to a business, one that (may) add value to said business, but there\’s no reason on earth to compare that to whether the head office makes a profit or not.

To take it a little futher, does he accept that audting adds value to a company? But does it make a profit? Human Resources? The canteen?

Would the canteen being subsidised (ie, making a loss) mean that the company was therefore ripe for breaking up? Anyone want to tell that to Google?

What worries me is that this man actually has public influence!

The Guardian on Corporate Taxation Again

I\’m not an accounting expert, by any means, but I think The Guardian has the wrong end of the stick again here.

More than 50 PFI schemes have now been included in portfolios held in Channel Islands tax havens by three major PFI investment companies, HSBC Infrastructure, 3i Infrastructure and Babcock and Brown Public Partnerships.

Once the buildings have been completed, up to 90% of the ownership of the UK-registered company running the PFI is transferred to the companies which are based in the tax havens. This means that the income and profits from running the PFIs will be free of UK tax for up to 40 years, depending on the duration of the PFI.

I don\’t see how transferring ownership of a UK registered company offshore reduces a tax bill. Any profit that the UK company makes is taxed here in the UK, before any distribution or earnings to the owners. Now, a capital gain created by selling the shares of the offshore company would be tax free: but any capital gain created before the transfer would lead to a tax bill at the time of transfer, wouldn\’t it?

Now I can think of ways in which an offshore company could be used to dodge tax: use the offshore company as a bank, load up the UK PLC with debt borrowed, and thus convert profits into an interest stream, that interest stream then being untaxed in the haven.

Maybe that is what is going on, but if it is, why doesn\’t The Guardian tell us so? Do they actually know? Or have they just grasped this "offshore" bit and assumed that it\’s all a grand tax cheat?

Prem Sikka, professor of accounting at Essex University, said yesterday that the latest revelations should be the subject of an inquiry at Westminster.

Prem is, as we know, a mate of Richard Murphy. Still the same people behind all of this then.

Richard Murphy Explained!

Look, I think the man has had the odd thing sensible to say, Well, I had:

But the reality is that those who want radical social change that will destroy the concept of walfare(welfare, sic) want to exploit this as an opprtunity to destroy society as we know it.

And I oppose the far Right perception of society. There’s a simple reason. It’s evil. And these comments seem to promote that evil.

"It\’s evil"

So I won\’t talk about it.

Still think of yourself as a liberal?