Tax

There’s lots of comment this morning that those about to receive demands for back tax because of PAYE processing errors can claim relief because of official error under an extra statutory concession.

See this from the Guardian for explanation. It’s good and has the links to model letters of complaint.

But – a word of warning. I doubt it will work. You have to have provided the information for this to apply in my opinion – and people don’t advise HMRC themselves of changing jobs or of benefits – employers do.

So I think that these errors will, unless the person submitted a tax return, be outside the extra statutory concession.

But this may not be the end of this. This issue is going to move into politics now. It may be expedient for the government to write these debts off or phase them over five years (my preferred route) rather than chase them all. But if it does then it has, as I’ve just suggested, got to reform the management and culture of HMRC at the same time – which means kicking out its private sector culture, spending more, putting quality at the top of the agenda and engaging more people to deliver the service people demand.

It could not possibly write off the dent without doing the reform as well. That would be throwing good money after bad, as the saying goes.

I have defended HMRC’s right to collect the tax owing to it as a result of the error on its part in processing PAYE data.

But let’s put this matter very firmly in context. As the Guardian has reported:

On Friday the Revenue admitted it had made mistakes in collecting tax through the Paye system from nearly 6 million taxpayers. Around 4.3 million have paid too much and are due a refund, worth £1.8bn, while 1.4 million had underpaid a total £2bn and will have to pay an average of £1,428 each in further tax.

The £1.8 billion will, I am sure, be paid. Not all the £2 billion will be recovered.

In combination these errors (and there may be more to find as yet and the vast majority will not net off, so adding the two figures together is a legitimate thing to do to assess the total scale of the problem) come to £3.8 billion.

In 2007/08 and 2008/09 – the most likely years for which tax will be recovered, the following summarises the cost of running HMRC, based on its own accounts:

Year

2008-09

2007-08

£m

£m

Staff costs

2740.7

2787.6

Admin costs

1943.1

1835.1

Income generated

(742.1)

(661.6)

Net cost

3941.7

3961.1

The errors now identified do, therefore, represent near enough the entire cost of running HMRC for a year.

The cost of potentially irrecoverable underpayments represents the cost of running HMRC for more than six months.

The absurdity of imposing staff cuts and reorganisation on HMRC that left it in such chaos that errors totalling the entire cost of running it for a year were not addressed is apparent.

Who is to blame? Well Gordon Brown, obviously.

But let’s also be clear. This chaos started when HMRC began to drag in private sector managers to run the department with absurd ideas of turning it into a giant factory churning out, as it transpired, incorrect paperwork.

I blame a culture that said HMRC could be removed from the places where the people who were paying the tax were – treating tax payers like objects in other words by closing local tax offices and denying people the opportunity to ask the questions they needed of trained staff who were dealing with their affairs in the locality where they lived.

So I blame the culture David Varney introduced when he arrived at HMRC from O2.

I blame non-execs from places like Barclays Bank who have clearly not asked the right questions and demanded the right solutions.

I blame the career civil servants who bought into the corporate efficiency clap-trap they were sold by the likes of Varney and their business non-execs.

And I blame an under resourced House of Commons where select committees do not have the resources to undertake the research to make sure they ask the right questions.

What’s needed now to prevent this? Tax people in charge of HMRC for a start.

An end to the staff dismissal programme.

A new emphasis on taxing people from offices in the communities where they live.

A new culture of getting things right – not doing things on the cheap. Tax is not the same as a budget supermarket operation.

A commitment to tax justice.

A commitment to tax compliance.

And all this will cost less than the mess HMRC has made.

Much less.

Which is the price of bringing private sector failure into the public sector – which is the real lesson here.

It’s boring to come back to the subject of comments again, but it seems I must.

It was claimed by someone yesterday that my moderation policy means that all the interesting discussion on what I write takes place on other sites. I checked one such site that was named – to discover that the same ten or so names that appear time and again here appear there – as they do on Comment is Free and on their own right wing libertarian blogs.

Let me make my position abundantly clear: libertarianism of the form that these people promote is intended to be and would be abusive of the majority in society. Of that I have no doubt. And please note, this abuse will be  by intent, not as an unfortunate  consequence. In that case, I don’t think these discussions are interesting. Nor, I am quite sure, do most people who read this site. The fact that it seems that ten or so names dominate all the discussion on these issues over many sites suggests that it is a minority activity undertaken outside the mainstream by what I will politely call enthusiasts, who have little or no relationship to the reality of UK political debate.

I am continually encouraged by the engagement of the mainstream of UK and international politics with this site and what I, the Tax Justice Network, the Task Force on Financial Integrity and Economic Development and others have to say.

I do not have time to engage with those who want to engage in irrelevant discussion, often asking me to repeat endlessly what I have already written and which they could find for themselves if they so wished, suggesting their action is deliberately time wasting. So I will be enforcing the moderation policy whenever I think this is happening more rigidly now. Quite simply, I have better things to do. Comment that adds to debate or informs will always be allowed. When it wanders off that line it will be deleted. Please don’t waste time trying to post it in that case. 

The FT notes that Citigroup is at the centre of a dispute among analysts and accounting experts over whether it should set aside funds to cover $50bn of deferred taxes, a move that would reduce its capital buffer and weaken its balance sheet. As it says:

The assets, a product of the accounting principles applied by US tax authorities to companies, are crucial to Citi’s financial health. At the end of the second quarter, deferred tax assets made up more than a third of Citi’s tangible equity – a measure of balance sheet strength.

The US bank has rebuffed calls to reserve for its DTAs – the biggest held by a US company – arguing that it will earn enough money in the future to justify keeping the assets on its books.

Under accounting rules, Citi has to be confident it will earn $99bn in taxable income during the next two decades to avoid making provisions for DTAs. In the 2002-2006 period Citi had annual pre-tax profits of at least $20bn.

However, some argue Citi is being too optimistic given its recent record – its pre-tax losses in 2008 and 2009 topped $60bn – and continued global economic uncertainty.

Deferred tax calculation is at best a black art. In this case Citi says that because it has either losses it can carry forward or the benefit of allowances it has not yet claimed their cash value for tax purposes. As a note to its accounts says:

The most significant source of these timing differences is the loan loss reserve build, which accounts for approximately $15 billion of the net DTA. In general, Citi would need to generate approximately $86 billion of taxable income during the respective carryforward periods to fully realize its U.S. federal, state and local DTAs.

Two generic things to note there first of all. Note that it’s clear future tax revenues from banks are going to be severely limited by the carry forward of tax losses. Second, note the injustice in this: those losses were already state funded.

More specifically, note the required profits: Citi has earned $20 billion in a year, but will it again?

Third, note something stranger still: these assets are stated at their cash value as far as I can tell from the accounts, there appears to be no discounting for the fact they may not be realised for many years to come. How very odd: a bank not noticing the value of money over time.

And finally, an issue not noticed in the report is this note in Citi’s accounts:

Citigroup’s ability to utilize its deferred tax assets (DTAs) to offset future taxable income may be significantly limited if it experiences an “ownership change” under the Internal Revenue Code.

As of December 31, 2009, Citigroup had recognized net DTAs of approximately $46.1 billion, which are included in its tangible common equity. Citigroup’s ability to utilize its DTAs to offset future taxable income may be significantly limited if Citigroup experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code). In general, an ownership change will occur if there is a cumulative change in Citigroup’s ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period.

The common stock issued pursuant to the exchange offers in July 2009, and the common stock and tangible equity units issued in December 2009 as part of Citigroup’s TARP repayment, did not result in an ownership change under the Code. However, these common stock issuances have materially increased the risk that Citigroup will experience an ownership change in the future. On June 9, 2009, the Board of Directors of Citigroup adopted a Tax Benefits Preservation Plan. This Plan is subject to shareholders’ approval at the 2010 Annual Meeting. The purpose of the Plan is to minimize the likelihood of an ownership change occurring for Section 382 purposes. Despite adoption of the Plan, future transactions in Citigroup stock that may not be in its control may cause Citigroup to experience an ownership change and thus limit its ability to utilize its DTAs, as well as cause a reduction in Citigroup’s tangible common equity and stockholders’ equity.

So on third of the value of Citi’s tangible equity is dependent upon Citi’s equity not being trade – for which reason it is having to restrict trade in its shares.

To say this is an asset of dubious worth is generous: how did KPMG satisfy themselves, I wonder? 

The FT notes that Barclays will today confirm Bob Diamond, head of its fast growing investment bank, as its next chief executive.

I suppose we can say thank heavens it wasn’t Roger Jenkins.

And then note that the last thing banking needs now is someone like Bob Diamond: a man whose perception of banking is about self interest, the engineering of profit, the use of offshore and artificial structures, about tax abuse and and is about as far from the future of banking as a supplier of loan capital as we all need.

Barclays haven’t learned.

And the hint is that his current boss, John Varley, is headed for the ConDem government. Have they learned nothing either?

As many papers report, it’s been discovered that more than 10 million people may be in line for a tax rebate due to errors in the HM Revenue and Customs tax code system whilst nearly 6 million people in the UK have paid the wrong amount of tax in the past two years, with some facing bills of up to £5,000.

It’s claimed that the problems arose because at the end of each year HMRC manually checked that the amounts deducted in tax and national insurance by employers using the PAYE system match up with the information held on their records. Those checks have now been, at least partly, computerised.

There will, of course be howls of protest – not least from those saying they do not want to pay and it’s not their fault they have to. That’s nonsense. You will hear no such protest from those receiving a refund.

The truth is multifold.

The first is you can’t get decent IT on the cheap – and this has been tried for too long.

Second is you can’t run a tax system without enough people – whether you have the right IT or not.

The third is that if people don’t want to submit annual tax returns then they have to accept this risk.

Fourth, cuts now will only exacerbate this problem in the future.

The reality is that this tax is due – and the vast majority of those who owe it know that and have been trying to get away without paying for too long. No one with a company car not paying tax on it is innocent: everyone knows tax is due on them, and this is by far the most common cause of the underpayments. I have little sympathy for them: I do with those who have overpaid – but research has always shown people like tax rebates and would prefer getting them than to risk underpaying.

But the deeper reality is that tax is key to the relationship between a subject and the state in the UK – and running tax on the cheap is, has been and will be a mistake. Tax justice demands we invest in the process of tax collection. We must do so now.

The Tory plan to cut 50 parliamentary constituencies and so 50 MPs comes before the Commons today. Tristram Hunt – a Labour MP – has written in the FT:

A Tory party with any notion of conservatism should be troubled by a bill that places utility above tradition, separates people from place and past, and ruptures the unwritten constitution in order to hold a coalition together. It would certainly have worried Edmund Burke, who mourned the passing of an age of chivalry when “that of sophisters, economists, and calculators, has succeeded”.

And:

On the pretext of reducing the cost of politics, the new plan will cut the Commons down by some 50 seats, to an arbitrary total of 600. In the process, a little of the political fabric of Britain will be lost. The legislation demands that constituencies average out at 75,000 voters. So whereas current boundaries take account of geography, local government, history, and identity – producing seats with an electorate ranging from 65,000 to 85,000 – the new legislation puts place or loyalty aside

Take the Isle of Wight, represented since the Great Reform Act of 1832 by a single MP, but soon to be dismantled into a crazy series of seats criss-crossing the Solent. County boundaries will be straddled too. So far only west country MP Jacob Rees-Mogg has cottoned on that this might not constitute a conservative approach. “Will the minister bear in mind the fact that people have historic loyalties to the traditional counties of England, not to administrative regions?” he recently pleaded of his front-bench. “Will the people of Somerset be allowed their historic county, not some monstrous, vague, administrative nonsense?” Fat chance.

I suspect there is fat chance of opposing this.

But it is profoundly unconservative, and the simple process of cutting MP numbers is profoundly undemocratic at a time when we need to strengthen and not undermine parliament.

But of course – being unconservative and being anti-democrtic are both very neoliberal. And that’s what this lot are. And nothing must get in the way of that.

It’s fascinating to note that Jersey, that bastion of the free movement of capital is so ready to argue to restrict access for labour:

ISLANDERS with five years’ residency should get priority for jobs while unemployment remains high, says former Housing Minister Terry Le Main.

There are currently 1,250 Islanders registered as out of work, and Senator Le Main says that while the number remains high, all job vacancies should be checked and limited to applicants with five years’ residency wherever possible.

The former minister undermines all Jersey’s free trade credentials in one go.

And at the same time destroys any chance of bringing in new employees to kick start an alternative economy.

I guess they’ll just have to stick to my Plan B.

As the Observer notes today:

European Union finance ministers will step up talks on raising extra money from banks this week amid signs that the International Monetary Fund is softening its opposition to a "Robin Hood tax" on financial transactions.

Treasury sources said the chancellor, George Osborne, was prepared to back a financial activities tax on bank profits and pay at the Brussels meeting provided it was universally introduced, but was wary of a broader Robin Hood tax. Campaigners said last night, however, that a leaked IMF report showed growing international backing for a broader tax and urged Osborne to look at the revenue-raising potential of a levy of transactions.

An IMF paper, Taxing Financial Transactions: Issues and Evidence, said securities transactions taxes (STT) existed in many countries with little evidence that they distorted markets. It argued that a small levy on transactions might help to dampen the "herding behaviour" encouraged by computer-program trading. "Unilateral STTs, even if levied on fairly narrow bases, are certainly feasible as witnessed by their use in numerous developed countries. The fact that major financial centers such as the UK, Switzerland, Hong Kong, Singapore, and South Africa levy forms of STTs indicates that such taxes do not automatically drive out financial activity to an unacceptable extent," it said.

The paper added: "The impact on financial markets from a low-rate (less than 5 basis points), broad-based STT would likely be fairly modest, beyond its reduction of very short-term trading."

All of which says three things:

1) Those who have argued on this site and elsewhere that those of us who have argued for these taxes don’t know what we’re talking about are wrong – we clearly do – enough to convince he IMF and others;

2) Those who says these taxes won’t work are wrong.

3) Those who say these taxes will have serious impact outside banking are wrong.

I refer to my arguments in Taxing Banks on incidence. I suspect the IMF is now beginning to buy them – not least because it is becoming increasingly obvious that those who argued against such claims did so because a) the incidence of the change would actually fall ion them and b) their self interest was the sole basis of their argument.

I argued the other day that “there is an alterative” to cuts.

It’s good to see Martin Wolf strongly endorsing Ed Balls for saying so. As Wolf said:

The “Treasury View” of the 1930s is back. If the government could not borrow, there would indeed be no alternative. But it does; so there is. Mr Balls is quite right to say so. He is right, too, to warn of the risks. The economic ”hurricane” he foretells might arrive rather soon.

Balls argued:

two fundamental points: first, time and again, conventional wisdom on macroeconomic policy has proved misguided; and, second, the propositions advanced by the chancellor are wrong: Those are that Labour is entirely responsible for the current mess; that the demand for fiscal consolidation from the markets is overwhelming; that the plan for a deficit reduction will generate sustainable growth; and that those who disagree are “deficit deniers” who would wreck recovery.

Wolf said Balls is right.

I agree.

The Treasury View was wrong in the 1930s.

It is wrong now.

We can, must and as a matter of fact will borrow to pay for the properly directed growth that is the only way out of our current malaise.

The idea that Ed Balls has to be shadow chancellor whichever Miliband wins (and I have a clear preference) is becoming stronger by the day.

He may be chancellor for real sooner than we expect if the hurricane hits.