Ritchie has a go at me

And I\’ve left a comment there but shall add it here:


Firstly this:

“That foreign capital was not used to invest in Boots. It was used to acquire Boots. That is something fundamentally different of course. Investment requires the creation of new assets generating a tangible rate of return.”

Yes, I know that’s the definition you like but I’m afraid that it’s not the standard definition.


“Investment is putting money into something with the hope of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income (dividends), or appreciation (capital gains) of the value of the instrument.”

I’ll stick with the language as it is currently understood if you don’t mind.

Secondly, although I don’t actually use the phrase in that post I am of course pointing to the use of “thin capitalisation” as the source of the reduced corporation tax bill. Not the move to Switzerland, but the loading up with debt.

My source?


“The Mail looks at the case of Alliance Boots, which was bought up by a private equity firm in 2008 and shifted (at least its legal base) to a nondescript building, 94 Baarerstrasse in Zug, Switzerland. A company which had a tax bill of £89 million in the last year it was quoted on the stock exchange cut its tax bill to a tenth of that amount now – even though sales and trading profits have consistently grown. The trick it used was an abusive transfer pricing trick known as ‘thin capitalisation.’ It’s a horrible name, but the Mail explains it very simply, and very clearly.

As part of the takeover, Alliance Boots borrowed almost £9billion from various banks. That debt incurs interest, and interest payments can be offset against profits when calculating the company’s taxable income. A higher interest bill means lower profits — and less tax to pay.

I’m using your own organisation as my source.

It comes to something when quoting the Great Man\’s own organisation means that I am \”so clearly wrong\”.

And Richard has responded!

@Tim Worstall

That’s as lame as your original post

a) Your definition of investment is unrelated to tax – I sued a tax definition

b) Sure TJN can say thin capitalisation – which is widely acknowledged as tax abuse. But that’s avoidance which can legitimately be protested against – but you argue otherwise

You are, as usual, way out of your depth – and offered gratuitous abuse as a result aimed at those who clearly know a lot more than you

That was my point and you have proved it for me

Please don’t bother to comment again – my usual policy of blocking your comments precisely because of that abuse you promote will apply

I guess I should ask those who know more than I do then: is that the definition of investment in tax? Is thin capitalisation widely acknowledged as tax abuse? (GM traded for a number of years with a negative equity didn\’t it? Is that tax abuse? What about commercial or rental property where only a 10-20% deposit is used?) And isn\’t it just great that I\’m banned from commenting further on a post which is actually about me?

24 thoughts on “Ritchie has a go at me”

  1. There is an issue with thin cap in the context of private equity deals.

    In the UK (unlike in most EUropean jursidictions, esp. France), the equity component of the acquisition financing could until recently be structured as a shareholder loan rather than common equity. The carried an interest accruing and payable “in-kind” which is (or was) tax deductible.

    I believe that the Labor retards changed the rules c. 2008 so that only acquisition debt raised on commercial arms-length terms (with respect to pricing and structure) was allowable for interest relief. I don’t know if this was pre- or post- Boots.

  2. 1. Is his definition a tax one? It depends.

    Yes, for capital allowances purposes you need to invest in new tangible assets. But that’s nothing to do with this case.

    When looking at interest deductions (which is what this is about), the investment can be creating new assets or buying old ones, and it can be tangible or intangible. It doesn’t matter – cen deduct the interest anyway. Your definition (“putting money into something with the hope of profit”) is far more relevant.

  3. 2. Is ‘thin capitalisation’ a tax abuse?

    Yes, but only in the sense of ‘thin capitalisation’ used in tax law. And what Alliance Boots have done isn’t thin capitalisation in the sense used by tax law, so it isn’t abusive.

    Thin capitalisation from a tax point of view is where one company lends to another associated company – and lends more than an independent lender would.

    It was a way of sucking profits out of a company (usually to an associated lender located in a lower taxed country). But it doesn’t work any more, because any ‘excessive’ interest deductions (including interest on an ‘excessively’ large loan) will not be deductible for tax purposes.

    But how does UK tax law define ‘excessive’ or ‘thin capitalisation’? It does so by comparing the amount lent to the amount an independent lender would lend (and the terms on which it would lend). If it’s on ‘arm’s length’ commercial terms, then it isn’t thin capitalisation in a tax sense.

    But Alliance Boots borrowed the money from unrelated banks. The lending is therefore clearly on commercial terms, so Alliance Boots cannot (at least in tax terms) be thinly capitalised, so it’s not (at least in any normal tax use of the word) abusive.

  4. Murphy thinks that the UK tax system is too generous in giving interest deductions.

    That’s his view, but that isn’t the view of the UK government. The last Labour government looked at this several times and decided not to change it.

    Murphy doesn’t like that, but it’s absurd to criticise companies as ‘abusive’ when they are just claiming a deduction that the UK government deliberately decided to give them.

  5. A quick squizz at the HMRC website shows that the info available in tax manuals relates to inter-group lending and is meant to prevent funny rates of interest and shuffling money around to evade (rather than merely avoid) taxation.

    The Revenue haven’t redefined thin capitalisation in any particular way. The legislation is there to prevent an abuse of thin capitalisation to evade tax rather than preventing thin capitalisation itself.

  6. Ted Baumann – the “arm’s length” rule has been there for yonks, not just since 2008.

    2008 might have been when they extended it to connected individuals rather than just connected companies (although I thought even that was earlier), but that doesn’t seem to be the issue with Alliance Boots.

  7. Ah, Murphy says it himself:

    It is a “fundamental breach … of the tenets of tax allowance … that should apply, even if present we let something else happen”

    So he’s now judging companies on whether they comply with what he thinks tax law SHOULD be, rather than whether they comply with what it actually IS.

    That’s what we knew all along, but it’s good to have him admit it.

  8. He’s a Marxist. He has a different dictionary from us. Thus making it impossible to argue, because words mean different things to him.

  9. Right, let me get this straight. If I’m in business, and I borrow £100K to finance machines, that’s OK. I can set the interest payments against my income.

    But if I borrow £100K to buy a company that has the assets I want already in it, thats tax evasion and I can’t set the interest against income?

    What about property? If I buy a factory or a warehouse, unless its only just been built, no new assets have been created by my ‘investment’. Does that qualify for interest relief or not? Does ‘investment’ in only brand new machinery count, or am I allowed to buy second hand machinery?

    The whole thing is nonsense.

  10. There are few things more despicable than a man shutting down debate because he’s not convinced he can win. Either concede defeat or outwit your opponent; blocking responses is the mark of the coward.

  11. Nothing says “I hate free speech” like posting a blog entry about someone and not letting them comment on it.

  12. Richard,

    I am not a tax expert but I have structured a few odd dozens of buyout financings in the US and Europe. Something happened in the UK around 2006/o7. Private equity sponsors who previously took it for granted that the interest on shareholder loans would be tax-deductible were told it would no longer be the case.

    Any help welcome.

  13. Ted,

    As a very rough summary, transfer pricing (including thin capitalisation) rules only affect you if you have a ‘controlling’ equity stake in the company (otherwise you’re regarded as an independent lender rather than being ‘connected’ with the target company).

    Therefore private equity had generally thought that it didn’t affect them, because there were lots of partners each of whom only had a minority shareholding.

    There were several changes around 2006 that removed that comfort, in particular:

    a) the Revenue started applying the ‘control’ test to the private equity partnership’s total shareholding, rather than looking at each partner’s individual stake;

    b) new legislation introduced the concept of “acting together”, under which the tests could be applied to all the funders in a deal as a group rather than individually.

    But basically the underlying rules didn’t change; there were just some amendments to the definitions that brought a lot of private equity deals within the definition that hadn’t been before.

    Sorry for anorak post – carry on as you were, the rest of you.

  14. But remember, even if you’re within the transfer pricing / thin cap rules, interest is still deductible providing the loan terms are on an ‘arm’s length’ commercial basis. It’s just that private equity can no longer point to the ‘control’ rule and assume that they are automatically arm’s length.

  15. Strange to see you using that definition of “investment” Tim, because that’s not how economists think of investment. In economics investment is increasing the capital stock (including replacing depreciated stock) however defined. What you’re talking about, “investing” by buying an existing company, isn’t growing the capital stock, it is just changing the identity of its owner.

    Here is the definition of investment from the New Palgrave Dictionary of Economics

    Tim adds: From that definition: “Investment is capital formation – the acquisition or creation of resources to be used in production.”

    “Acquisition”, no?

  16. “and offered gratuitous abuse as a result ”

    I can’t see it in your response. What does he think is gratuitously abusive/ad-hom?

  17. The emphasis is on “capital formation” – when a firm “acquires” a new machine, it is adding to the capital stock, likewise when a household “acquires” a car. But there is a pretty sharp distinction between capital formation, and merely passing already formed capital between hands.

    Of course you can say from the point of view of a household or a firm, taking ownership of already existing capital is an investment for them, but it is matched by dis-investment by somebody else.

    I’m not arguing that the word has no other valid usage than “capital formation”, but it is most definitely the case that when economists use the word investment, that’s what they mean by it, not merely changing the owner of already existing capital

  18. @11 sums up my views of home perfectly.

    His morality is contradictory and simply doesn’t add up. A case of do as I say not as I do, but the protesters who follow his words can’t see it yet.

Leave a Reply

Your email address will not be published. Required fields are marked *