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Richard Murphy on tax and economics
Updated: 54 min 9 sec ago

Should nation states ‘compete’? A call for papers

13 hours 47 min ago

I am on the organising committee for this conference and so encourage submissions ons in response to this call for papers:

SHOULD NATION STATES ‘COMPETE’?

City University, London, 25th / 26th June 2015

The 2015 research workshop co-organised by the Association for Accountancy & Business Affairs,i City University,ii and the Tax Justice Network,iii will explore the notion of national ‘competitiveness’. This opens up possibilities for papers on a wide variety of themes, including tax wars (tax ‘competition’), the dynamics of ‘beggar-thy-neighbour’ politics, regulatory degradation, regulatory arbitrage, policy responses to ‘competitiveness’ pressures, the impact of ‘competitiveness’ policies on home countries and third party countries.

Other related themes are likely to emerge as the workshop programme develops.

Offers of papers are especially welcome and early submission of an abstract of no longer than 300 words is encouraged. All submissions will be considered by the organising committee.

This workshop will bring together researchers, academics, journalists, policy staff of civil society organisations, consultants and professionals, elected politicians and/or their researchers, and government or international organisation officials.

The purpose of the workshop is to facilitate research through open-minded debate and discussion, and to generate ideas and proposals to inform and shape the political initiatives and campaigns already under way.

There will be a small charge for attendance at the Workshop. Participants are usually expected to finance their own travel although applications from students and others with limited means for bursary support will be considered.

More information about this workshop is available from: John Christensen, Tax Justice Network, john@taxjustice.net.

 

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Towards a progressive fiscal policy: work in progress

14 hours 1 min ago

My friend and co-author, the economist Howard Reed, had a powerful article on the Compass blog yesterday in which he trailed work we are proposing to do over the next few months.

Having dealt with Labour’s policy on the deficit first of all (with an analysis with which I concur, and which I recommend you read) Howard moved on to the measures that he and I think need to be taken to deliver fundamental change during the course of the next parliament. As he puts it:

Of course, it is very easy to criticise; but what should Labour’s policy be instead of the current Tory-lite offering? A full policy analysis and ‘alternative manifesto’ will have to wait until my forthcoming Compass report with Richard Murphy in early 2015. Here I offer only a few guiding principles.

Firstly, there is a desperate need not only to stop, but to reverse, most of the spending cuts made since the Great Recession of 2008/09. With spending cuts set to account of over 90% of total fiscal consolidation compared with only 10% tax rises, it is clear that many of the poorest and most vulnerable families – particularly low income families in work – are bearing the brunt of austerity. This pattern needs to be reversed and fiscal consolidation should be rethought from scratch, with the aim that poorer families should be spared any pain if at all possible. Labour’s proposed ‘zero-based spending review’ should be recast as a ‘spending convention’ – analysing each and every spending cut undertaken since 2010. At the central government level, all cuts with a regressive distributional effect should be reversed unless a more progressive alternative policy can be implemented at the same or lower cost instead of a simple reversal. Meanwhile, cuts to local government funding should also be reversed and similar enquiries into the impacts of cuts undertaken in each locality. Participatory budgeting techniques, as seen recently in Paris, could be used at both local and national level to advise on the biggest priorities for additional expenditure.

The ‘spending convention’ should be accompanied by a tax and social security commission which over a period of (say) 18 months should draw on a wide range of expertise from academia and the third sector to design a more progressive – and simplified – tax and benefit system. The key features of this new system would be: (1) a basic income payment for all families sufficient to reach an acceptable minimum living standard; (2) merging the national insurance and income tax systems into a comprehensive income tax; and (3) replacing council tax, stamp duty and other taxes on capital and property with an annual wealth tax and a land value tax. All these taxes would be designed to be steeply progressive. The new system could be introduced 2 or 3 years into the next parliament alongside the reversal of many of the spending cuts, and should be designed to raise enough net revenue to ensure a balanced current budget at revised spending levels when the economy is at full employment. At the same time, given that the economy is still very weak at the moment – despite a return to modest growth in 2013 – there is ample opportunity to use Quantitative Easing to provide extra funds for public spending as Britain makes its way through a long and drawn-out recovery. This approach, which combines a refreshed, progressive tax-and-spend fiscal policy with a radical monetary policy – will ensure that the people who got the economy into the mess of 2008/09 should pay for it, and not the impoverished innocent bystanders.

The third plank of policy should be aimed at rebalancing the economy in the medium term to stand the UK in much better stead in the event of further financial turmoil in future. This includes better financial regulation, a green new deal to make the UK economy much more sustainable and resilient, a rebalancing of the the economy away from the City and financial services to reduce the likelihood of another crash, and a decisive shift away from the industrial feudalism of the plc and private equity dominated neoliberal economy towards a social economy which foregrounds worker-managers, cooperatives, social enterprises and crowdfunding. Compass’s recent report on the economy, Building Blocks, offers some excellent initiatives in this vein.

It looks like we have some work to do over the next few months.

 

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Why haven’t we got an Office for Tax Responsibility?

14 hours 24 min ago

The UK has an Office for Budget Responsibility. I admit I have my doubts about it, and its independence. There are good reasons for that. When it sits right in the middle of the Treasury and has no apparent independent funding and is not allowed to, for example, look at alternative policy proposals to those put forward by the government the idea that it is somehow free of the influence of the Chancellor is a little hard to sustain, although I would like to think it possible that it might be otherwise. We all benefit from a genuinely critical eye that if it seeks to offer constructive advice.

And in that spirit, and having looked at the fiasco that is this year’s Tax Gap report from HMRC, isn’t it obvious that we really do need an Office for Tax Responsibility in the UK?

The first thing I would say is that if we were to have such an Office it would have to be independent of the Treasury. An endowment fund sufficient to let it operate for ten years would allow for this.

A Board, made up of senior civil servants, but not connected to the Treasury, and a single representative from each party in the Commons with more than 30 seats might ensure sound governance.

The Office should report to the PAC. That is where the accountability should lie, I think, well away from the Treasury.

The primary task would be to monitor the tax gap. Ex-HMRC staff could be engaged on this, but no revolving door would be allowed.

Others might also be engaged. These could include private sector specialists and academics. But again, a revolving door straight back into large companies may not be allowed.

And the budget must allow for research to be commissioned on this issue from a variety of sources: one viewpoint would clearly not be enough.

What else might this Office do? Well, it could monitor tax proposals in advance of announcement. We would all do with preventing another Gordon Brown 0% corporation tax mistake, or the raising of personal allowances based on the claim that they take people out of tax.

And this Office’s commentary could be published on budget day to provide some objective appraisal on the day. Research would have to be in house in that case: real expertise would be needed, so the budget will have to allow for it.

All this, I stress, is not a full fledged idea. It is just an outline right now.  But I think it’s an avenue to pursue, not least because it would stop HMRC publishing self congratulatory nonsense and would also make them accountable to someone with the means to hold them to account- which is not the case at present.

Thoughts?

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What SSE have done to get the Fair Tax Mark

Mon, 10/20/2014 - 19:45

I have applauded SSE for getting the Fair Tax Mark today, but I have also seen comment that suggests that SSE have not done much to achieve this award.

This is quite wrong. They have significantly changed their tax reporting. First they have published a new tax policy.

I may not have written it quite like that, but this is SSE’s policy, not mine. The Fair Tax Mark looks at the commitments made and this one clearly rejects tax avoidance, and that is what we expect.

Second they have considerably enhanced the tax disclosure previously made in their 2014 accounts. To imply this is the same as any other company is just incorrect. Take, for example, the fact that there is a country-by-country reporting note here. You won’t find a note like that in any other FTSE 100 company right now.

To say SSE got this without making a significant change to their reporting is just wrong.

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Who’s next for the Fair Tax Mark?

Mon, 10/20/2014 - 15:20

The Fair Tax Mark is focussing on UK parent companies right now – so some energy companies do not fit the scheme as yet, but after SSE getting the Mark there are plenty of other FTSE 100 consumer facing companies who could also get the Fair Tax Mark, such as:

  • Tesco
  • Sainsbury’s
  • M & S
  • Morrisons
  • WH Smiths
  • Associated British Foods (owners of Primark)
  • Easyjet
  • ITV
  • Next
  • Kingfisher (owner of B & Q)
  • Whitbread
  • Severn Trent

And, of course

  • Vodafone.

And whilst not in the FTSE there is also, of course, John Lewis

I’m sure the FTM would be happy to take their calls.

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Margaret Hodge on SSE being awarded the Fair Tax Mark

Mon, 10/20/2014 - 07:33

Margaret Hodge MP, Chair of the Public Accounts Committee has commented on SSE being awarded the Fair Tax Mark. She said:

I welcome SSE’s commitment to being open and honest about its tax affairs. Too often companies hide behind commercial confidentiality to disguise their activities, claiming that transparency about their tax affairs would damage their competitiveness. I don’t buy that, and the public don’t buy that.

SSE clearly feels it has nothing to fear – and potentially a lot to gain – from responding to public demands for greater openness. There is no excuse for other companies not to do the same, and make this new standard in transparency the norm, not the exception.

This kind of information will enable we the public not only to see how much tax SSE is paying, but to make a meaningful assessment of whether this constitutes a fair and appropriate amount of tax relative to the profits it is making in the countries where it operates.

The key issue is, I think, in the middle paragraph. It’s now for others to follow in SSE’s path and become Fair Tax Mark accredited.

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SSE breaks the Fair Tax Mark into the FTSE 100

Mon, 10/20/2014 - 06:54

SSE plc – the Perth based energy company that has almost 9 million UK customers –was announced as the first FTSE 100 company to have been awarded the Fair Tax Mark today. That’s a bit of a landmark for tax justice campaigners.

After more than a decade of campaigning for change with regard to tax, tax havens, corporate reporting of tax and pressure being brought to bear on governments to create change in all these issues the time had to come when things needed to change on the ground and corporate behaviour had to begin to change to match the reality of people’s expectations. One company does not make a revolution, but after the announcement in September that FTSE 350 company Go Ahead Group plc had been awarded the Fair Tax Mark, SSE’s joining the group of companies pioneering this Mark does represent a real step forward in corporate awareness of the importance of tax to people in this country.

SSE did not get the Mark without some effort. What the Fair Tax Mark expects from companies is reporting on tax issues that goes way beyond current Stock Exchange, company law and regulatory requirements. This is not token gesture stuff either.

So, for example, law requires that a company explain its overall corporation tax rate but as all journalists and other users of accounts know, a multitude of sins can be hidden behind that figure. What SSE is now explaining is its current tax rate, and then separately its deferred tax rate. That’s important, because it’s the current tax rate that reflects what will be paid to government and so is the figure most people are interested in. Mix current and deferred tax (which may be paid one day, but without saying when) together, as law currently permits, and no one has a real clue why a company is, or is not, settling its expected tax bill. For SSE this story is important: it’s paying more tax than most people might expect. It’s getting that on the record.

But in the area of deferred tax it’s also saying something that most companies come nowhere near explaining, which is what part of its deferred tax bill might be due in the foreseeable future. This is pretty important information for investors as well as stakeholders.

And, from a tax campaigner’s perspective it’s notable that SSE talks about why it has used an Isle of Man company – but then also makes clear that the company in question is wholly taxed in the UK. This is accountability at a level almost unknown on such issues.

As too is the fact that SSE is reporting its results on a country-by-country reporting basis – which in its case means splitting them between the UK and Ireland in a way that it has not done before. This pioneers reporting on this basis in the FTSE 100 in a way that matches the recent demand of the OECD for the production of this type of data for tax purposes, but which the G20 did not have the courage to demand be placed on public record, where this type of accountability is essential if companies are to really be held to account for their actions.

Accountability is right at the core of this. SSE has adopted a new tax policy as a result of this process of being awarded the Fair Tax Mark, and in doing so makes clear that it will not undertake artificial tax planning and nor will it use tax havens to save tax.

In the process SSE has done three things. First it has shown that this type of reporting is possible. Many have said it is not, and having a FTSE 100 company prove otherwise is vital.

Second, it has made clear that it realises tax is important to its customers – and that their opinion matters on this issue. That shows how far tax has moved up the policy agenda. It’s now making real waves and is enough to have commercial significance. There is clear indication here that in their opinion SSE thinks that tax justice pays.

And third, SSE have thrown down a gauntlet to other companies by effectively suggesting that they should follow in their path and also put their tax affairs on public record in this way.

The Fair Tax Mark was created to indicate those companies brave enough to take the step of really engaging with being transparent on tax. That’s an essential part of tax justice. It’s welcome to see that it’s now arrived in the FTSE 100, and SSE are to be applauded on their courage in taking this step – and on the story they have to tell.

Now, who is next?

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Cameron’s immigration controls are a joke because he won’t control UK companies

Sun, 10/19/2014 - 19:53

David Cameron is apparently going to control immigration by denying UK national insurance numbers to some immigrants.

Whatever the legalities of the proposal (and I suspect it is a long way from meeting any required standard of European legality) the plan is straightforwardly naive because any UK immigrant may quite legally get hold of a UK company for under £100 with no questions required to be asked as to their identity or what they intend to use the company for.

Then the UK immigrant can use their newly acquired company to sell their services as a contractor to just about anyone with few or no questions asked, and if they are trying to be legal they can then withdraw all the rewards of their efforts by way of dividend fro the company,  for which no NI number is required.

Of course, if they are not trying to be legal then they might know that many hundreds of thousands of companies (at least 400,000 a year) fail to comply with their legal obligation to file accounts and tax returns – or any other return required by law. This fact is now so widely known it provides the perfect opportunity for abuse. If the immigrant wishes to simply take their money and run right now there will be almost nothing to stop them because neither HMRC or Companies House almost ever do anything to chase these companies.

And as a result what David Cameron has proposed is absolutely absurd precisely because he is so wedded to cutting what he calls the burden of red tape on business that he has created the perfect opportunity for anyone to abuse what he wants to do on immigration, even if it were legal.

He really ought to learn that if you want to use the law as a weapon you do have to both uphold it and be seen to do so, and we are a million miles from doing that with UK company and tax law right now.

For more information on this read my report from earlier this year on this issue.

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Fair taxes are key to a fair share for all

Sun, 10/19/2014 - 07:22

This is a guest blog from Meesha Nehru of the Global Alliance for Tax Justice, which I am pleased to support. Estimates are those of the GATJ:

Growing inequality within and among countries has become a defining issue of our age.

Every week brings another damning report about the harmful consequences of this pervasive problem.

Recently, Credit Suisse reported  that one per cent of the world’s population possesses nearly half of its wealth.  The combined assets of more than 3.5 billion people don’t equal what is owned by that elite group.  And that’s not the whole story.  Most estimates of inequality discount money and assets hidden away in secretive offshore locations.

It is the time-worn story of the rich getting ever richer while the poor become even poorer. his is a global crisis with a devastating impact. Inequality is denying populations across the developed and developing world access to the services required to meet their basic needs. This is troubling news not just for human rights now, but also for our collective future. Without adequate financing, we cannot achieve our long-term development goals or begin to face issues such as climate change.

But it doesn’t have to be this way. The Global Alliance for Tax Justice  works for a world where prosperity is fairly shared. Tax is a powerful tool to achieve that goal. But for people to receive their fair share, everybody has to pay their fair share. This is not happening. Mainly rich individuals and multinational corporations are refusing to contribute to the society that made them wealthy in the first place. They exploit legal loopholes and avoid paying billions in tax.

Each year Africa loses at least $60 billion in revenue because of the current system. That is more than it receives in aid. Yet more is lost in North and Latin America, Europe and Asia.

Just think of the schools that could be built, the healthcare provided and the opportunities that could be generated if democratic governments had access to this cash.

Representing a coming together of people and organisations all over the world, the Global Alliance for Tax Justice aims to end once and for all the damage being caused by such extreme inequality.

We work to:

End financial secrecy

There are some $21-32 trillion in financial assets hidden in offshore secrecy jurisdictions or tax havens as they are more commonly known. As it is hard for governments to trace the ownership of this wealth, it goes largely untaxed, hugely increasing inequality within and between countries. At the same time, current accounting rules allow large corporations to get away with hiding where their true profits are made, meaning any tax avoidance can occur unnoticed. Whilst a movement towards greater transparency has begun, there is still much work to do to shine a light on how money really moves and where it is stashed.

Promote progressive national taxation

Within countries, elected governments have a choice about how to collect tax. They tend to choose a mixture of different taxes, some regressive, some progressive. Regressive taxes hit the poorest hardest, significantly reducing their total income relative to the impact it has on wealthier individuals. Examples of these include flat rate taxes or indirect taxes such as VAT. On the other hand, progressive taxes increase on those with more ability to pay, thus helping to share out some of the wealth accumulated at the top so that the whole of society benefits.

Create a fairer global system

In a highly globalised world dominated by large multinational corporations, it is essential to ensure that taxes are paid where the true economic activity occurs. Under current global rules, this is often not the case, and companies are able to shift profits around the globe to places where they will be taxed less. This has a particularly devastating impact on developing countries. To combat the problem, we need to develop a new set of rules and to ensure that all countries’ voices are heard during the process.

The Global Alliance believes that tax justice has to be a central part of any inequality-focused agenda. In 2015, we will be working on this issue via our global campaign to make multinationals pay their fair share. We urge all others working on inequality to sign up, and help us to take forward the discussion of how tax justice can support social justice for all.

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Reflections on the HMRC tax gap

Fri, 10/17/2014 - 06:26

I am aware that there are some who think my criticism of HMRC’s tax gap report was on the heavy side yesterday. In particular, they have suggested that HMRC’s failure to disclose it’s headline data was mis-stated was not misleading and that it’s estimates are not as inaccurate as I am suggesting.

Despite claims to the contrary I listen to criticism when it comes from people whose opinions I value. So having slept on the issue I reflected this morning on whether there was any of the commentary I might change. I have to say there is not.

First, HMRC should make it very clear when it has restated data. That is the essence of transparency and accountability. To not do so is misleading.

Second, HMRC need to radically transform the way they disclose much of their work. To say, deep down in the notes and in a separate report, that much of the tax gap data is made up of ‘illustrative estimates’ for which no explanation is  provided is unacceptable. The suggestion I have made that HMRC are simply making this stuff up is, in the circumstances, quite acceptable. The FT once made exactly the same observation.

Third, to suggest that there is massive behavioural change, such as a significant fall in tax avoidance, on such as a narrow basis as registration for DOTAS schemes is seriously misleading. That is really poor methodology, and a much broader consideration is needed. To pretend that major companies are not tax avoiding because schemes like those used by Google et al do not need to be registered under DOTAS is deliberately misrepresenting the truth when even the Chancellor says this avoidance needs to be tackled.

Fourth, it remains the case that HMRC surveys the tax returns it gets to estimate its tax gap, so missing tax returns it does not get as a source of tax evasion estimates. Unsurprisingly it massively underestimates tax evasion as a result.

And fifth HMRC persists in only doing top down estimates for VAT, where it finds a high rate of evasion loss, and then refuses to consider this can have any impact elsewhere in the tax system when it is very obvious that if income is being evaded for VAT purposes other taxes simply have to be evaded as well. No one on earth suppresses income on their VAT return and then declares it on their tax return – but HMRC continue to suggest they do, which undermines all their credibility on this issue.

So, I am afraid to say that yesterday’s release was fundamentally flawed and after this length of time HMRC have had the time needed to acknowledge the fact and won’t.  And that’s not just irresponsibility on their part it is irresponsibility with a consequence because this country is suffering badly as a result of HMRC’s failure to collect tax owing to it. And for that I cannot forgive them because I believe that is a conscious political choice and one that is creating misery for millions in this country.

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The fundamentals of the real pension contract we’re all a part of

Fri, 10/17/2014 - 06:00

I was talking to a friend yesterday about fundamental economic reforms and the subject of pensions came into debate. That friend was concerned that in the event of fundamental economic reform pension contracts might fail. I explained that in my opinion that failure of pension contracts was inevitable in any case because, as I explained in a publication called  ‘Making Pensions Work‘, they have ignored the fundamental pension contract that should exist within any society:

This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.

As I then argued of private pensions:

This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.

I would argue that pay as you go pensions also do so, but at least they recognise one side of the equation correctly, whilst the private pension system fails to do so altogether. Public sector pay as you go pensions recognise that we divert income of those currently in work through the pension system to the old. By expressing the cost of pensions as an expense of those in work it gets half the equation right. What it does not do is recognise the capital value of the assets those in old age created whilst they were in work. That’s what it gets wrong.

What we need to do to get the rest of the pension equation right is to recognise that current pension contributions must be used to create capital value within society to meet the needs of future generations – at the same time as the needs of current pensioners are met from the depletion of the capital stock they left to those currently in work.

This is really not a difficult issue to comprehend: it’s a simple investment cycle. And yet we have got this fundamental wrong and for one very simple reason. We confuse saving with investment.

Saving is putting money in the bank. Or it’s buying and speculating in second had shares issued by companies many years ago and now quoted on a stock exchange. Or its dealing in land and second hand building. And it’s financing speculation which simply seeks a financial return. They’re all saving. That’s fine but for one thing: none of them earn a return. They do not directly, and many of them cannot indirectly, add value to society by creating gainful employment as a result of which they add to the sum lot of human capital or income. They merely reallocate that income and capital that already exists. And that’s not the same thing at all.

So the last thing we need is saving for pensions. That’s a complete mistake. Savings for pensions takes money out of the productive economy and deflates that economy as a consequence. Saving diverts resources from productive activity. It inflates the return to unproductive activity within the financial services sector. It reduces well being. And saving can, by misallocating resources, reduce income and so reduce our capacity to pay pensions. Those are all things we’d best avoid.

What we want is investment in pensions. Investment is very different from saving. Investment creates new assets, tangible or intangible. Some tangible assets we can see and touch, and use in the long term. They include private sector assets such as plant and machinery, offices and IT, transport and agricultural equipment, power plants and recycling equipment. Intangibles can include inventions, copyrights and music. They also include education, training, and social infrastructure. This is spending money for a purpose, to achieve a goal, to increase income and to increase well being and the support structures in society.

Investment and savings are terms often used interchangeably. That’s wrong. Investment does not need saving to happen, it just needs cash. It’s indifferent as to where that cash comes from: it can be from savings and it can be from borrowing and it can be from tax. There is no tie between investment and saving: it’s just one can be used for the other, but need not be.

We can afford pensions for the old in this country, now and in the future. But we can’t if we save for them. Saving removes our chance of meeting the needs of the old. In fact, as ‘Making Pensions Work’ shows, that saving arrangement in the private sector has already failed. The tax subsidy the private sector pension now receives annually has already provided the private pension sector with more cash each year than it has paid out in payments to those in retirement. The result is that the situation has already arisen where every single penny of pension paid in this country is at cost to the state.

The reality is that we can only meet the needs of those already in retirement and those who will retire if we invest for the future, now. And we can only meet those needs if that investment is wisely managed for the benefit of all. And I mean all. That means the state has a duty to direct that investment.

Some of that investment must be in the resources the state sector needs – in dedicated funds showing how state infrastructure is paid for by current taxes the benefit of which is deferred to meet future pension obligations which will arise when the returns on the current investment are generated.

Some of that investment must be in the resources the private sector needs – but as I recommend in ‘Making Pensions Work’ that has to be secured by attaching a condition to the tax releif on pension contributions – a condition that at least 25% of all money invested in pension funds must be used to generate new wealth creating and employment generating activity in the UK. It’s a price of the tax subsidy. And it will ensure we get more than £20 billion of new investment in our economy each year – investment our economy needs to boost it now and get us out of recession.

There is a solution to the pensions crisis. We can afford to live in old age. But so far none of the solutions the government is looking at are heading in the right direction.

And that’s what’s really worrying.

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The very odd nature of HMRC’s restatements of the tax gap

Thu, 10/16/2014 - 14:22

I have often said that I think it wholly inappropriate that HMRC’s board only has non-executive directors who represent the interests of big business. No one else is allowed to be represented.

I recalled this when doing a little more work on HMRC’s restatement of past tax gaps  based on data in their new report out today (which they eventually acknowledge in the latter parts of their report, but not in the headline tables where all good reporting standards would require it).

I came up with this table which compares the latest versions for the years noted with the first versions as originally published for the years noted:

I just couldn’t help but note that it seems that its only corporation tax that comes out really well from the restatements. Now why would that be, I wonder?

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Tearing HMRC’s tax gap estimates to shreds

Thu, 10/16/2014 - 13:47

I take it as read that HMRC’s tax gap data is nonsense: I have explained why that has to be the case many times, most recently here. But, that said it is still curious to look at its anomalies as some are telling. Take this table for example that I have prepared, simply comparing the make up of the last two reports as originally published:

 

Does anyone really think it likely that tax avoidance and tax evasion have declined by the scales indicated? Is it really in any way plausible for example that tax avoidance declined by 23% in a year? Or come to that, that tax evasion would have decreased by 20% at a time when the number of self employed people was increasing by hundreds of thousands a year – and they are the people most likely to be doing this? The numbers lack any credibility at all, and so does the back up data where HMRC says this:

Apparently, despite the massive increase in self employment which was happening towards to end of the period this data covers and the massive decline in the number of tax officials the rate of tax compliance is rapidly improving. To be candid, there is not a hope that this is true. But to find out what chance there is we have to look at how the data is created. HMRC disclose this:

Illustrative estimates means, for all practical purposes ‘we made it up’. Let’s be blunt about it. That relates to the vast majority of the data on the hidden economy therefore. It is, quite ludicrously, a guess. If you don’t believe me in their methodology document the best they say on this point is:

Making it up, in other words. And they have the cheek to challenge my reasoned analysis.

But then let’s also look at ‘random enquiries’ as that sounds a lot more robust. Again in the methodology document they report the basis for these estimates:

Note the collapse in sample sizes – halving in many cases over this period. Who says cuts have not had an impact?

But it’s also important to note the proportionate numbers. In 2004-05 there were 4.64 million self employed people. In 2011-12 that was 5.49 million.  The chance of being targeted fell from 0.140% to 0.047% a 66% decline over the period. What is the chance that more recent data is reliable in that case?

The same is true of companies. In 2004-05 there were 2,014,000 companies at the start of the year. In 2011-12 there were 2,686,000. The chance of an enquiry was almost static at 0.02% (one in 4,936 in 2004-05 to one in 4,732 in 2011-12). That’s so small it’s ridiculous.

Do I in that case believe these findings? Sorry – I don’t. They may be illustrative estimates, to be kind to them, but they are very bad ones indeed. To pass them off as reliable statistics is  fanciful at best.

HMRC should be hanging their heads in shame at the data and how poorly they reflect on its capacity to collect tax.

But finally let me deal with tax avoidance.  Here the methodology says:

 

So let’s be clear: avoidance is now defined as ‘disclosed under DOTAS’. This frankly beggars belief. What it says is that if people get round DOTAS – because for example some well known companies undertake their tax avoidance outside the UK – then HMRC turn a blind eye to that avoidance altogether when estimating the tax gap It’s very hard to comprehend an approach as unintelligent as this. But it does produce very nice statistics for HMRC. No wonder they are pleased with themselves.

I’ve said it before, and I will say it again – that if HMRC are this bad the whole organisation needs clearing out – starting, quite emphatically at the top.

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HMRC keep restating the tax gap – and that’s dishonesty on their part

Thu, 10/16/2014 - 10:01

I thought it worth posting some comparable data on the tax gap.

This is how HMRC is saying today that it has moved over time:

 

And this is how they say it is made up today:

 

Note the bottom right figure of £34 billion agrees with the table above.

Now lets look at earlier tables as first published for 2007/08 and 2008/09 (I have these on this blog: HMRC now hide the originals):

And

So, note that the 2007/08 total was £40 billion and that for 2008/09 was £42 billion.

But now those figures have been restated. Now they are £38 billion and £36 billion respectively, even reversing the trend in the data.

This is supposedly due to changed methodologies. Now I have no problem with improving methodology, we all do that. But to restate and to not make clear the degree to which you have done it is just lying about the state of understanding at the time the work was originally done and that I consider wholly unacceptable – as it is in accounting practice for precisely that reason. But HMRc think they can get away with it.

Candidly, that’s just not good enough from an authority where honesty, transparency and consistency are the required standards for conduct.

On this basis today’s published data is just a straightforward misrepresentation of the truth. Call it a lie if you like.

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HMRC’s new tax gap report: another work of fiction that ignores tax evaders

Thu, 10/16/2014 - 09:19

HMRC have issued their tax gap report for 2014, which relates to the tax year 2012/13.

Predictably the figure is ludicrously low. They say it is £34 billion, made up as follows:

My estimate of the same tax gap is £119.4 billion.

To give some idea of the differences in estimates this is the causation according to HMRC:

Their estimate of tax evasion in 2012/13 is £4.1 billion.

Mine is £45.6 billion for unrecorded trading alone, and from evasion as a whole is about £80 billion.

Now it is likely that neither of us is right, of course: these figures are estimates. But the gap in this one estimate alone is enough to explain much of our difference of opinion so it is important to explain how it arises. That’s simple. HMRC only look for errors within the tax returns that they get to come up with their estimates. That ignores the fact that tax evaders choose not to submit tax returns. This glaringly obvious point appears to be wholly unknown to the HMRC publicity machine, although I know its staff are acutely aware of it.

Now this would not be problem if there were just a few tax returns not submitted each year, but looking at companies alone my work has shown that HMRC chose not to ask for corporation tax returns in 2011/12 (for which I have most recent reliable data) from up to 800,000 companies and failed to collect tax returns from another 270,000 from which they did request returns whilst of those submitting returns about half a million said they had no income even though data on PAYE and VAT registrations suggests that is a serious understatement and as a result the fact that only 900,000 or so of the 2.6 million companies in operation during that year actually paid tax is as much due to HMRC negligence in requesting tax return data, and failing to pursue those who do not, as it is to anything else. But of course none of these deficiencies come up in the HMRC stats that assume that all these missing companies are honest non-taxpayers who are fully compliant with their obligations despite the fact that hundreds of thousands of those companies ignore them.

In the meantime, this data is best considered a work of fiction.

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Why deflation matters

Thu, 10/16/2014 - 06:46

UK inflation has fallen to 1.2%, as measured by the consumer prices index (CPI), which is the government’s preferred measure. The retail prices index measure of inflation is, admittedly, higher at 2.3%. Either way, these are exceptionally low figures. But does this fall matter? I was a question I was asked on Twitter, yesterday.

The answer is that it matters, a lot. Deflation is pretty disastrous for an economy for two fundamental reasons. The first is that investment spending can grind to a halt when deflation occurs. The reason is obvious: if you expect something to be cheaper soon you may defer buying it. If that becomes habitual money suddenly stops flowing into the economy. And given that we’re already in a pretty marginal economic situation where growth is having no real impact on the well -being of most people, withdrawing money from the economy is the last thing we need. So, let’s be blunt, deflation removes any prospect of any form of growth in the economy – sustainable or otherwise. Human nature and the desire for a ‘bargain’ guarantees that.

Then there’s the second problem. This is if anything more serious for anyone who owes money (and most households in the UK do). Deflation increases the value of that debt. It actually increases the real amount that has to be paid. This has the effect of taking yet ore money out of the economy – because it increases the cost of loan repayment which has the economic impact of increasing savings, and more savings are the last thing we need right now when the economy is short of spending.

There are two further impacts of this increasing cost of existing loans. The first is that this increases the risk of loan defaults – and that could create another banking crisis.

And if the value of loans goes up inequality increases because those to whom the money is owed see the value of what they will be repaid increase. And since loans are taken out, pretty much by definition, by the have nots and are repaid to the haves (and yes I am allowing in saying that for the fact that loans are created by banks) then inequality will inevitably rise, which is bad for the economy because those with wealth do not spend all their income, almost by definition, because that is how they became wealthy in the first place.

Deflation does then have no real advantages at all. Thankfully it can be easily addressed. Simply having the government invest significantly more to boost economic activity solves the problem whilst creating wealth and long term assets of value. When interest rates are also very low – as they are – the cost is virtually negligible as well in real terms, which makes ignoring this option something akin to economic madness.

The only problem is that economic madness has gripped the upper echelons of the UK political classes. So don’t expect action to prevent deflation any time soon.

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The UK company is the favoured tool of organised crime

Thu, 10/16/2014 - 06:23

The Independent has first rate report on money laundering using UK front companies this morning. The report itself is detailed and well worth reading: billions of dollars of criminal money look to have entered the ‘clean money’ system  as a result of the scam used.

From my point of view what is interesting is that the ease of access to UK companies, and the light touch regulation of them by Companies House and HM Revenue & Customs is fundamental to this criminal abuse, which the Independent makes clear is happening in the UK precisely because we choose to have that approach on these issues.

This has been a recurring theme of my work. My latest report on it is here. It’s my belief that money launderers are not the only criminals to benefit: tax evaders in the UK do so too, at a cost to this country of tens of billions a year precisely because millions of companies exist virtually outside the law in the UK.

For the sake of enforcing the law, sending tax returns to all companies, enforcing their submission, improving company registration requirements and (of course) employing the staff to ensure that these regulations are complied with we chose to forego enough income for the government to solve the NHS funding crisis. That, I stress, is a choice by the government because we need not tolerate this crime.

Which opens up another possibility. Should there be a crime of criminal neglect to collect tax due and payable, only applicable to ministers and senior HRC officials responsible for such failures? I am quite sure that this crime is knowingly committed right now. Why should we let those committing it get away with it?

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GFC2 coming our way?

Wed, 10/15/2014 - 15:14

I know it has been said I have called seven of the last three stock exchange downturns and I am, it is true, generally bearish, but this looks like trouble to me:

 

That’s the FTSE 100 for the last five days.

Now take the last twenty years:

 

Note a pattern?

It’s always hat the market tries to get to 7,000, and fails, and then begins to fall back heavily.

Why this time? German recession, weakness elsewhere, failed economic policies, deflation likely meaning a real risk of increasing bad debts, banks about to fail stress tests (I suspect) and a raft of evidence that we have simply done nothing to get rid of the failed thinking of 2007 and there’s every reason to think another financial market crash is just around the corner.

Of course, as a result government borrowing rates are tumbling so that the cost of government investment is minuscule in real terms, meaning that the way out of this crisis is obvious to anyone with eyes wide open.

But we wouldn’t be here if people had possessed that quality over the last five years.

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Selling off the NHS

Wed, 10/15/2014 - 12:59

For more information click here. 

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The EU adopts full tax automatic information exchange – but HMRC need the staff to deal with the data

Wed, 10/15/2014 - 09:14

The following press release was issued by the EU yesterday:

The Council agreed today on a draft directive extending the scope for the mandatory automatic exchange of information between tax administrations, enabling them to better combat tax evasion and to improve the efficiency of tax collection.

The proposal brings interest, dividends and other income, as well as account balances and sales proceeds from financial assets, within the scope of the automatic exchange of information. It thus amends directive 2011/16/EU on administrative cooperation in the field of direct taxation.

“Today we took a major step towards greater transparency marking the end of bank secrecy in tax matters in the European Union”, said Pier Carlo Padoan, minister of economy and finance of Italy and president of the Council. “We decided to implement within the EU the new global standard on automatic exchange of information developed by the OECD and endorsed by the G20. This shows the EU is still at the forefront of the fight against cross-border tax fraud and evasion, for the benefit of all citizens.”

It was only in 2009 that I was told in the UK Treasury that such moves would never happen but now they are, and note the scope. This is not just interest this is dividends and other income, as well as account balances and sales proceeds from financial assets coming within the scope of automatic information exchange.

Now we need this exchange to take place within the UK economy as well. It is absurd that it does not. Then we would see real progress on tackling tax evasion if (and it’s a massive if) HMRC had the staff needed to use this data. That’s why work on this issue has to continue.

But what it does prove is that those of us who contribute positively to debate on tax have made a difference. No wonder some are so worried

 

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