No, I like this, I really do.

OK, so our man tells us that perhaps companies should join a scheme where they can show that they\’ve been paying the right amount of tax. And he recommends one here. Which leads us to a .pdf prepared by the Tax Justice Network.

Which is, of course, just our man and his mates again. Which contains this:

‘Appropriate levels of tax’ are the rates stipulated by
the relevant tax authority within the country where the
company’s tax liability falls minus 3%. For example, in the
UK, HM Revenue & Customs set a small companies’ tax
rate of 21% on profits up to GBP 300,000 (with the rate
for 2010 still ‘to be advised’) and a main tax rate of 28%
on profits of GBP 1,500,001 or more. Therefore, for the
purposes of this question, the ‘appropriate levels of tax’
would be 18% and 25% respectively.
There is a simple reason for defining this ‘appropriate
level’ a little less than the tax rate laid down in law: taxable
profits and accounting profits are not the same thing.
As a result, it is unlikely a company will pay exactly the
tax rate laid down in law on its declared taxable profits.
The rate may be higher because some costs allowed for
accounting purposes are disallowed for tax. Examples are
entertaining costs and many legal and repairs expenses.
In contrast, some expenditure is treated more generously
for tax purposes than it is in accounts. One example is
the purchase of many capital items, especially if those
costs relate to IT, and other electronic equipment, which
often receive a tax allowance earlier than the assets are
expended in accounts. For these combined reasons,
Tax Justice Network has set parameters within which,
in normal circumstances, they would expect to find
the payments of a company that was not undertaking
aggressive taxation planning to fall.

Which is interesting, don\’t you think, especially if we compare it with the original report about how much tax is being avoided by companies, prepared by our man back in 2006. Where we see that the tax gap is 7.5%.

But, umm, we\’ve also got this assumption of tax compliance if the numbers are out by 3%, to allow for the existence of allowances. A 3% which our man doesn\’t allow for in his calculation of the gap.

So, erm, the tax gap is, by Ritchie\’s own estimations, just over a half of Ritchie\’s own estimation.

Surprise!

What would be fun though is if someone could, someone who knows more about corporate taxation than I do, tell me whether the TJN assumptions are reasonable? Just as a feeling in my water I would suspect that a business investing heavily in capital equipment (or with a heavy R&D spend, given the 125% allowance there) would find their effective tax rate diverging rather more than 3% of profits from the headline rate.

Finally, there\’s rather an opportunity to compete with this scheme:

All business participants in the SEE scheme are required to pay fees. This is the primary income for the management of the SEE scheme. However, our fee structure is currently under review.

I suggest a simple labelling scheme: \”I obey the tax law\”. The right to use such a logo will be made available for minor level fees.

We can afford to licence it on the cheap because of course we shall be using HMRC as our judges of who is and who isn\’t obeying said tax laws. If the CFO isn\’t doing pokey for fiddling the books then they\’re obeying the law, obviously.

I think we could probably get this started for a few mere hundreds of thousands, don\’t you? think the Ford Foundation would pony up? They are the people who fund Ritchie after all…..

15 thoughts on “No, I like this, I really do.”

  1. Can I be your scheme’s marketing manager. I’ll want a big bonus based on ‘realistic’ targets and you can have me for 100 grand (or 80 grand cash in hand), ooops, shouldn’t have said that, should I.

  2. So the tax gap in percentage terms in 7.5%, but now 3% is ‘allowable’, meaning that the remaining 3.5% is not. The gap then is 40% of what he previously thought.

    But then remember that, of the c.£23bn claimed gap, £12bn is attributable to businesses. 40% of £12bn is less than £5bn.

    Much of that £5bn gap is explained by the fact that he really should have excluded vodafone from his analysis: they are a massive firm who incurred some whacking great losses as a result of paying so much to the Govt for those 3G licences.

    Yes the effective tax rate came down, but only ‘cos they paid so much for the spectrum! To the Govt! Jeez…

  3. Speaking of tax avoidance, have the folks at SEE summed up the “tax avoidance” costs to the rest of us of the likes of the Ford Foundation, Rockefeller Foundation, John D. and Catherine T. MacArthur Foundation, the Bill Gates and Warren Buffet billionaire’s fund…?

  4. This is utter nonsense, even by his standards. While it MIGHT be true to say ‘across the board’ effective rates might be 3% (or whatever) lower than headline ones, any given company could be miles further out than that in any given year. Any small company investing in new capital machinery for example can currently take the first £100k of investment off its accounting profits.

    You don’t get much nowadays in terms of machinery for 100K I can assure you. In my line of work, farming, it would get you perhaps 2 new tractors. It certainly wouldn’t get you a new combine harvester. A small (by national standards) limited company in farming could easily reduce its taxable profits from say £200K to half that just by buying a few new machines. Its effective tax rate would halve.

    So Ritchie is saying that any small business that avails itself of the capital allowance currently provided by law (presumably introduced so as to encourage businesses to invest) is actually involved in ‘Evil Tax Avoidance’. Nice.

    I’m guessing the production of ‘papers’ on the tax gap and how nasty Philip Green and Vodafone are doesn’t involve a great deal of capital outlay. If it did his attitude would undoubtedly be somewhat different.

  5. “All business participants in the SEE scheme are required to pay fees. This is the primary income for the management of the SEE scheme. However, our fee structure is currently under review.”

    Seems honest & above board.
    Now I wonder if he’d be interested in this stock I have in the Brooklyn Bridge………………

  6. “I obey the tax law”.

    Yeh, I will place that logo on my ‘letter head’ 16 years after the European Union obey the audit clauses established in the various Treaties which have been pulled together under the Treaty of Lisbon.

    Why………..because my tax payment is uncounted for.

  7. Is 3% reasonable?

    No, because the availability of allowances varies hugely between business sectors and between different businesses.

    For example the government is proposing a lower tax scheme for intellectual property (a proposal started under Labour). So in the near future one major factor determining a company’s effective tax rate will be the importance of IP in that business.

  8. Hello Tim

    i have finally found your blog.
    How are you doing?
    Becky and I are having a baby in the next few days, We were talking about the old days in O,neils .. can you remember the film crew… and did you get any taller
    I’ll have a look at you blog, say hello to julie.
    all the best
    becky and rich the golfer
    P.S good luck with the book

  9. Jim and Richard say it all.

    As the person legally responsible for preparing the accounts in my company I have:
    A legal duty to my shareholders to maximise available funds for investment and distribution and to pay the minimum legal amount of tax.
    A duty to the state of Spain to comply with tax law and pay the legally determined amount of tax (which is so complex, that frequently the tax authorities are not sure of the answer: more work for accountants).

    My firm has allowances for different reasons at different times according to what turns the current government on. I would be failing in my duty if I didn’t take maximum advantage of all the deductions available to my firm. I would be legally liable to my shareholders (actually a pretty decent bunch of people).

    There is no one suit fits all. A friend of mine is the MD of a foundry with over 400 employees and some pretty expensive equipment. Our taxes work out different (and legally correct in both cases). Every year, he has intricate arguments with the tax authorities. Sometimes they admit he is right, sometimes he has to accept their opinion.

    What makes me think that Tim’s best friend has never actually run a real company (other than for tax avoidance, sorry, efficient, reasons)?

    Have a look at SEE and check out the sort of companies that are promoting it. No giggling, but ypu will find what you expect and won’t find what you don’t expect.

  10. So when I send in my tax return, do I LIE about my deductible capital expenditure, or do I list it and say “please ignore it as I need to deduct only 3pc”?

  11. So in a sense ritchie is actually advocating a flat tax set 3% points below the current rate?

    Well that’s not a bad start…

  12. Interesting. The website lists all the businesses who have applied and been judged to meet the standards. But Mr Murphy’s Tax Research LLP is not listed there.

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