Why is it that journalists just do not understand tax?

Meanwhile in Britain, Austin Mitchell, a member of the Commons Public Accounts Committee, said he would recommend that the panel of MPs looked into why Ingeus was paying so little tax in the UK.

The same committee has already closely questioned executives from Vodafone, Starbucks and Google over how much tax their firms pay in Britain.

The most recently accounts filed by Ingeus’s UK operation suggest the company paid £2.5 million of corporation tax on gross profits of £38.4 million during 2011. The company legally lowered it’s tax bill by deducting “administrative expenses” of £32.7 million against its profits – a completely legal arrangement that is similar to those used by Google and Starbucks to reduce their corporation tax bills.

“Any companies winning work from our Government should not be avoiding paying tax here,” Mr Mitchell said. “That does not appear to be happening in this case and I will be urging the committee to look into this. Tax avoidance by companies is nothing short of a racket – it must be stopped.”

Or even MPs for that matter.

Administrative expenses are part of the cost of doing business. You know, things like filling out the VAT forms, making sure that PAYE is properly deducted. These are indeed administrative expenses and they are indeed tax deductible.

I mean seriously: what tax system would not allow the expenses of conforming to the tax system to be tax deductible?

In fact, as I dimply recall it, Austin Mitchell\’s paying someone to prepare his tax return is tax deductible in a manner that it isn\’t for the usual PAYE bod.

15 thoughts on “Why is it that journalists just do not understand tax?”

  1. “administrative expenses”

    That’s fucking hilarious. There’s no point trying to challenge that level of ignorance… you’ve just got to sit down, raise a glass, and marvel at the wonderousness of it.

  2. In fact, as I dimply recall it, Austin Mitchell’s paying someone to prepare his tax return is tax deductible in a manner that it isn’t for the usual PAYE bod.

    That’s a bit on the nose. I think in Australia you can claim back expenses incurred in preparing your return.

    Yep… the tax office even publishes a note on the subject:

    http://www.ato.gov.au/Individuals/Tax-return/2012/In-detail/Tax-return/Deduction-questions-D1-D10/D10—Cost-of-managing-tax-affairs-2012/

    You can deduct quite a lot of things, including tax software. Is the UK’s tax system really that uncivilised?

  3. But why is “gross profit” seemingly calculated before “administrative expenses”? Surely profit is what you have left over after you met all your expenses, whether those expenses are administration, renting an office building, or paying your staff (whether productive or “administrative/overhead”?

  4. @JamesV: its a purely accounting thing I think. In my farm accounts you get the gross profit from farming (sales of produce minus the direct cost of producing them, ie seed, fertiliser, chemicals, etc), then you take off all the other expenses(repairs to machinery, buildings, insurances, utilities, depreciation etc etc) to arrive at the bottom line figure. And that figure is not even what you are taxed on, as there are other allowances and adjustments to be made to arrive at the taxable profit figure.

    Some of this tax avoidance bollocks is ignorance of how accounts work, and the rest is pure malevolence – people who know perfectly well how the system works but are being deliberately obtuse to further their own political agenda.

  5. Gross profit is revenue minus the cost of making and selling the goods/services. Net profit is the gross profit less other business expenses.

  6. Amusingly, if you deduct the admin expenses you get accounting profits of £5.7m. Expected tax on that would be £1.4m, but they’ve paid £2.5m.

    Which seems a little high, if anything, rather than low… 🙂

  7. Surely an esteemed member of the Public Accounts Committee cannot genuinely be that ignorant in their understanding of accounts…

    Actually, more seriously, are there not some basic competency requirements in place for the MPs that sit on that committee? Otherwise, isn’t it all just a big joke?

  8. PF, you’re spotted how politics works. In fact its a requirement of the job of being a politician to NOT understand a thing you wibble on about.

  9. @ JamesV

    People have told you what, but not why.

    Gross profit is that directly attributable to revenue. It’s important. Broadly speaking, it should move up and down in proportion to your revenue.. and someone reading the accounts is interested in the effect of sales going up or down.

    ‘Administrative expenses’ are fixed costs that, broadly, stay the same whatever the sales do.

    The separate analysis of the accounts at Gross Profit and Net Profit level gives the reader useful information. You can see, for example, if a business has very high fixed costs and so would be quickly vulnerable if revenue fell.

    This is how the accountancy rules say things should be done and is not even slightly controversial. For people to insinuate that there’s anything fishy about them demonstrates nothing other than a *total* lack of knowledge about company accounts. It’s the sort of thing you’d learn in the first hour of an ‘understanding financial accounts’ cash course.

  10. A minor variation, but admin costs are not necessarily always fixed (as compared to variable) – more a case of “indirect” compared to the “direct” cost of generating revenue. (I am sure others might quote more accurately).

    The point is that, in many businesses, a lot of admin (ie indirect) costs are “step variable”, rather than purely variable or fixed. Ie, they might be fixed at the micro level (an extra widget sold, no change in back office staff numbers), but not fixed at the macro level, say turnover doubles or quadruples and you might need some more back office staff / premises etc. (To put it at its simplest).

  11. I am so fucking sick of all this shit spewing from the mouths of people whose burblings appear in newspapers, MPs and the odd member of the aristocracy.

    Simple cure then.

    All MPs and writers who burblings appear in newspapers pay tax on all their income. Yes Austin, that 36k you claimed as expenses has just given you an 17k tax bill – and don’t you dare wriggle out of that one.

    Your editor sends you over to the US to cover a story? Why, that’s a £400 tax bill right there.

    Fun, isn’t it? And the best bit is, we can PAYE this. The Fees Office gets your bill for the mortgage on your second home and, wham, it pays you the 12k after knocking off 6k.

  12. The Thought Gang says:

    That’s fucking hilarious. There’s no point trying to challenge that level of ignorance… you’ve just got to sit down, raise a glass, and marvel at the wonderousness of it.

    Actually, I think that one comment just sums the whole thing up perfectly!

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