Ritchie denies that a profits tax is a profits tax.

Because that is what he’s doing here:

Ironman says:
September 18 2015 at 10:51 am
Capital allowances in the CT regime are not a ‘subsidy’. That is really very simple. Since they make up the lion’s share of the £93m it isn’t “just fine”; it’s a misnomer.

Reply
Richard Murphy says:
September 18 2015 at 11:30 am
They are a subsidy

There is no universal principle of tax relief on capital spending

It is a choice made by parliament to give them

And one capable of review as to rates and assets they relate to

Shall we therefore discuss the real world – not your make believe?

And:

Ironman says:
September 18 2015 at 12:18 pm
“There is no universal principle of tax relief on capital spending”
Oh really. Try s2 CTA 2009: “Corporation Tax is charged on profits of companies for an financial year…” Those profits are based upon the accounts. Accounting profit includes depreciation and amortisation. Capital Allowances are the codified tax alternative to that. You do know this don’t you?

Reply
Richard Murphy says:
September 18 2015 at 12:22 pm
In other words there is no allowance for depreciation

And CAs are granted on occasion instead

Exactly as I said

Now stop wasting my time

Depreciation, capital allowances, are just ways of deducting the costs of doing business from the revenues so as to work out what the profits are. And by stating that they’re not a necessary part of a profits tax system Ritchie is really betraying….well, what? solidarity with a misled fellow traveller like Farnsworth? Not thinkin? Not actually understanding in hte first place?

22 thoughts on “Ritchie denies that a profits tax is a profits tax.”

  1. How can it possibly be described as a subsidy? It’s a deferral mechanism. The only benefit is the NPV of the delay, surely? And that’s inevitably going to be a very small number in relation to the value of the allowance. I was going to ask Mr Murphy but I don’t think I’d get a straight answer.

  2. For economist’s it’s PQE thay has them bashing their heads against their car windscreens, for tax professionals it’s this CAs are all corporate subsidy. Either way, Farnsworth, Murphy, McDonnell, all members of the Corbyn Flat Earth New Age Cult.

  3. “The only benefit is the NPV of the delay, surely?”

    That was pretty much the point I made to Kevin Farnsworth a couple of months ago.

    Broadly: on the margins, if you spend £100 on depreciating plant, and use it to make £100 of profit, you end up pretty much square in cash terms and profit terms: ie you have nothing left.

    Tax recognizes this, and so after deducting the £100 from your profit you have no taxable profit and so no tax. There’s no subsidy there, as you have actually spent your £100.

    Say the asset depreciates over 5 years and the profit accrues over 5 years. If you accelerate the relief for your capital spend so it’s all in year 1, then you get £80 of extra tax relief now (saving you £16) but pay £16 more in tax over the next 4 years. It all balances out, except that you get given £16 and repay it interest-free. So your “subsidy” is the extra NPV of £16 now compared to being spread over 5 years.

    This assumes you earn as much from the plant as it costs you. If you earn less, then you get extra tax relief to the extent that your costs exceed your profits – but that tax relief costs you £1 for every 20p you save 9and you may not get the saving, if you have surplus losses you can’t use), which is not really a subsidy. If you earn more, then the tax relief stops having any effect and you still pay full tax on the excess profits. So in those cases there is no subsidy either.

    I suspect the idea that there is a subsidy comes from the suggestion that if you spend £100 on plant and get £20 of tax relief, you now have a bit of plant worth £100 which has only cost you £80. This however ignores the fact that it’s only worth £100 if you can sell it for that, and if you do then all your relief gets clawed back (so you’ve paid £80 for something, and get £80 back for it). At best you only get relief for the net economic cost of the plant, so every 20p you get still costs you £1. Again, it’s only timing differences and NPV that generate any value for you.

  4. Capital allowances can hardly be a subsidy when most allowances are given on pooled basis and allowances are claimed as an annual fraction of the pool balance. In most cases the balance of the pool never reaches zero even when all the assets are depreciated to zero in the accounting books.

  5. The law specifically disallows depreciation, otherwise the accounting treatment would prevail.
    In exchange for that disallowance the law also says there are allowances for capital spending.
    As an accountant I assume RM agrees that a true and fair reporting must deal with capital spending. Or would he argue that it would be fair to tax non existent profits?

  6. “Or would he argue that it would be fair to tax non existent profits?”

    I’m sure he would.

    Because social justice demands it.

  7. Slightly off topic, but can anyone recommend a good book that explains all this accounting stuff in a clear manner?

  8. You can explain depreciation and capital allowances to ignorant undergraduates in less than a lecture, complete with worked examples, explanations of jargon, practical context, the lot. The idea that someone has practised accountancy for a whole professional career and yet doesn’t appear remotely to understand these topics implies to me that he is terribly limited intellectually or deeply dishonest. These are not mutually exclusive categories. Golly, he’s an arse.

  9. Prof Murf is quite right, as always. Ironman, you should know that the Taxes Acts, like the markets, simply deal in fiction.

    We already have in effect sales taxes (ie VAT); and at the other end we have a Corporation tax, based on net profits.

    There is nothing whatsoever to stop us having all sorts of other taxes in between using different bases, for example a Gross Margin tax? For which, depending on the sector (shape of costs), prices would need to rise accordingly.

    Hence, under a new Jezzbollocks government, we could for example have a profit before “Potty Prof Murf’s expenses” tax, which might say exclude any neo liberal or other socially undesirable costs?

    Once he’s firmly in the saddle, I’m sure he’s going to prove to be very good at this…

    dearieme – It is what most of us would call “deeply dishonest”, but what he calls “politics” (and as he freely admits).

  10. If a company has income of 100, revenue expenses of 60 and depreciation of 30, there’s no logical reason to describe the tax relief on the 30 as a “subsidy”. Even if you accept Murphy’s point that you only get relief for depreciation (in the form of capital allowances) because Parliament allow it, that’s also true for the revenue expenses.

    So either you say the entire 90 is a subsidy (which is an intellectually consistent position, though you are effectively arguing corporation tax should be replaced by a turnover tax) or none of it is. Arguing only the capital allowance part is absurd.

    As an example, compare two companies who need (say) a crane: one elects to buy a crane, the other leases one. Murphy wants to give tax relief to the lessee, but not asset owner.

    [I’m aware the tax rules on leases are more complicated than that, but the point works for illustration].

  11. “They [capital allowances] are a subsidy. There is no universal principle of tax relief on capital spending.”

    Actually, I’d love Murphy provide the name of one nation on the planet whose tax system doesn’t allow tax relief on capital spending.

    Ironman –

    You should see if you can get Murphy to cough up a nation whose tax system doesn’t provide for such tax relief. If nothing else, it should be good for a laugh.

  12. Actually, thinking about it some more … if the cost of an asset may not be deferred then the full cost should be set against profit in the first year (which minimises tax in that year and would hit HMRC’s cashflow). The cost could be allowed in the year of disposal, I suppose, and that would benefit HMRC. But both these options defy the principle of matching costs to the revenues they generate. The other possibility is that the asset cost is not allowable at all, in which case wave bye bye to any discretionary investment.

    It’s just bloody stupid.

  13. He asserts bullshit with supreme confidence. That is a dangerous tactic unless the bulk of his audience ( or likely audience on the political stage) know enough to know that he is talking bullshit. If they don’t–as they won’t on the larger stage–then its Goebbels time or Goebbels lite at least.

    An on-air Waterloo has to be carefully arranged for this cunt, to trip him up and bring him down by showing his ignorance of the matters he is speaking about. A freak-out would also help to finish him.

  14. DtP: I’d be willing to bet that North Korea doesn’t allow its private sector to claim capital allowances.

  15. Capital allowance or not the question is where in the world aren’t companies taxed on profits, what is allowed to be included in profit at what point is a technical issue. As for his parliament can change that, well that’s stupid parliament can change anything, they could tax you based on number of left handed people you employ if they wanted. Historically tax has been levied on some odd basis in the past.

  16. I see Ritchie is doing his usual trick of changing the question mid-string and claiming the answer to that different question proves he was right all along.

    So, for the avoidance of doubt, the question was:

    “Do you support in any way the figure of £93bn ‘corporate subsidy’ that is being touted by, amongst others, John McDonnell?”

    Please note the FIGURE of £93bn was an essential part of the question.

    His reply: “The figure is fine”.

    He now wants us to believe he doesn’t support the figure, nobody does and nobody should try to pretend that anybody does. However, CANDIDLY, that is a blatant lie. He supported the figure and was then bounced very hard into disavowing it.
    P.S. All praise Andrew Jackson for his ‘HMRC GAAP’.

  17. @Geoffers: “The cost could be allowed in the year of disposal, I suppose, and that would benefit HMRC”

    A long-ago audit client, had a capital asset on their books, valued at £1, which they’d had since 1822.

    But as it was only a hat-stretcher, I don’t think it was that fiscally significant. 🙂

  18. Pretty much every company that could would move its base elsewhere. Ireland perhaps.
    So be under Irish taxation and capital allowances.

    Having warehouses and staff here is not having EU base here…

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