Tag Archives: corporation tax

Tax transparency and the left’s financial illiteracy

When stories regarding tax hit the news, it frequently frustrates me at the lack of clarity with which they are reported. The recent example of Google paying £130m has illustrated this quite well. What I find frustrating is the reaction and commentary from the political left when it comes to matters of tax; in particular corporation tax.

My frustration stems from the fact that by profession, I’m a chartered accountant. I’ve taken exams in taxation and though it’s not the area of finance I work in everyday, I do have a good knowledge and understanding of it. In particular, I can tell when others don’t know what they’re talking about.

The ideology of the right wing parties such as the Conservatives and UKIP is for a low tax society. That’s their stated aim. The caricature that is then made of the more left wing parties is that they are in favour of high taxes. This is generally a false caricature, as the aim of the political left is rather for fair taxation that properly funds public services. Though to put it that way risks putting the cart before the horse. So let me put it this way:

The left aims to have properly funded public services that are fit for purpose, that support the vulnerable and those who have fallen on hard times. In order to fund this, there is then required an appropriate level of taxation and it is the job of a left wing government to determine the fairest way of spreading the cost.

But what is fair? It’s an intuitive notion that pretty much everyone gets, so long as they’ve got a reasonable moral compass. Yet taxation is inherently a quantifiable thing. So we have to try to quantify fairness. And this is where, in my view, the left fails to make a suitable case.

All too often, the discussion veers onto a company’s revenue and we get comments like “Industry analysts estimate true UK sales of the six at £14.2billion. Yet they paid £41.3million in UK corporation tax – just 0.3 per cent.” [source: The Mirror]

Trying to make such a link simply isn’t how corporation tax works. Corporation tax is based on profits, not revenue. I sometimes wonder if journalists reporting on finance matters understand the difference. It is especially unhelpful when phrases like “how much money they made” are used. What does “made” mean? It’s unclear, and where there is a lack of clarity, there is room for misunderstanding.

Corporation tax is quite unlike income tax that the average employee is subject to, as in that latter case, the tax is based on the gross income. It is understandable, then, that mistakes can be made if the two are perceived to be equivalent. Indeed, perhaps it might be fairer if an element of corporation tax were based on revenue, but that’s not the way the law stands at the moment.

The thing is, there are hints in the public domain that some companies are paying less tax than one might reasonable suspect they should. But such suspicions do not constitute evidence. There are a number of reasons why a company that has a large amount of revenue may pay very little tax. The obvious reason being that it’s not particularly very well run and that their costs are almost as much as their revenues, meaning they have very little profits on which they may be taxed. But we don’t know that for sure.

Why not? Well, this gets to the nub of the issue. Transparency. The amount of information disclosed in a company’s annual accounts is not the same as the amount of information as needed by HMRC in their corporate tax return. Worse still is the fact that the disclosures in a company’s accounts include other accounting adjustments that have nothing to do with the corporate tax for the year and which only serve to obfuscate the matter. What are these adjustments?

They’re referred to as “deferred tax” and are an accounting adjustment, not directly related to the tax incurred by the company that year. Deferred tax arises because of the disparity between the accounting rules and the tax rules. In tax, one may have transactions which do not result in a change in this year’s tax but which may either allow you to pay less tax in the future or oblige you to pay more tax in the future. Under the accounting rules, the fact that this is in the future is irrelevant, and the adjustments goes through this this year’s income statement.

So if you read a set of financial statements and see the line entitled “Tax (charge)/credit” on the face of their income statement then the number next to it is likely to be meaningless.

If you want to see the amount that was actually paid, then you have to look at the cash flow statement. But then again, the amount of tax paid in a given year will not necessarily be related to that year, as they’re likely to be paying off the liabilities from the previous year.

I’ll stop shortly. The point is that to read a tax figure off the face of the income statement is naive, and to link it to the revenue number is just plain stupid.

My advice to anyone who wishes to campaign for fairer tax (and there are some beginnings to this, though I’m far from convinced by it yet) is first of all to learn how to read a set of financial statements. Know the difference between P&L and cash flow, strip out any deferred tax and recognise that you are unlikely to be provided with all the information you need to be able to make an accurate judgement as to whether a company is paying a fair amount of tax. If they are an international group of companies, it gets more complicated, given different tax systems in different countries and again, there isn’t enough information in a set of financial statements to clearly see how much profits arise in which countries and what reliefs may be available in those countries.

So by all means, campaign for greater transparency and keep asking awkward questions. But if you assert that a company has avoided X amount of tax then don’t expect to be seen as a reasonable, financially literate person. Any legitimacy to your argument will be washed away as your credibility goes down the drain.

A Wednesday thought – a case for corporate profits on the left

In the last week, the election campaign has focused on which of the two main parties are the better prospect for “business”. I use the term in quotation marks because it is such a broad term with many aspects, that anyone can almost mean anything by it.

The focus has been on a small number of Conservative-cheering chief executives come out and in a shock move that took everyone by surprise criticising Labour. In some cases the attacks on Labour were more vicarious as the criticisms were more directed against Ed Miliband.

Needing to save political face, Ed Balls was sent off to the Newsnight studio where he made a bit of a mess of things. Now while there is a very good case for saying that today’s Labour party is far too far to the political right, they remain further to the left than the Tories, even if that has as much meaning as saying that a place is further south than Greenland.

So here’s my attempt at making a case, from a left wing perspective, for why companies should be making profits.

The core of the case has to be that for a civilised, progressive country that looks after its young, its elderly, its sick, its disabled, its unemployed, its homeless or any other vulnerable group, there has to be a guaranteed provision for them. By being a guarantee, this means that the charity of the wealthy cannot be relied upon. For too long there has been a meta-narrative of the “deserving poor” when what is needed is social justice that, like legal justice, is blind to any impediments or prejudice.

Such a guarantee is a costly thing and it needs to be funded. This is where companies can make their contribution. By making profits, which are then taxed fairly, sufficient funding can made for every necessary public service. The main obstacle to this is neoliberal trickle-down ideology that insists, contrary to evidence, that the private sector, subject to market forces, is best placed for the provision of services. Once this false idol can be slain, then the tricky job of balancing the books comes first with a forecast of what central costs will be in the coming years. Then one can determine how much tax needs to be raised (though given the huge cost of the bank bail outs, an over recovery is needed) in order to recoup the costs.

But if companies are not paying sufficient tax then we will continue to run a budget deficit, funded by ever increasing debt. Such has been the case for the last 6 years.

Therefore, one of the major contributors to the public purse has to be corporation tax. The two main obstacles to this are tax avoidance and not having sufficient (un-avoided) pre-tax profits from which tax may be paid. So there are two prongs to using corporations to help fund public services, but they are not mutually exclusive.

This why many on the political left have made such a big deal out of tax avoidance. From the current corporate mindset, though, tax is seen merely as an expense that should be minimised. In this regard, what is needed is a change in the mindset, so that tax is seen not as a burden but as a contribution to the society in which the corporation is based.

The factor that the left is less noisy about is the fact that in order to be able to pay tax, companies must be allowed to make pre-tax profits. The difficulty that this brings for the left is that the cause of profits is generally attributed to some combination of over-charging customers or exploiting workers. If one accepts this premise, then it cannot be morally right for any company to make profits but the consequence then is that there’s insufficient funding for public services. If one is to then make a moral case for profit-making activities then the two-fold premise of profit creation must be brought into question. In other words, can a company pay its employees a reasonable wage, charge its customers a fair price for its goods or services and still turn a profit?

If the answer to this is ‘no’, then reducing loopholes that allow for tax avoidance is meaningless since, if all loopholes are closed, we would only seek to then go on and eliminate the existence of profits that could be taxed in the first place.

Therefore, I contend that profits are necessary. Whether they are regarded as a necessary evil is certainly a point that could be further debated. And, of course, what constitutes a reasonable size of profit could also be debated, hopefully in relation to the size of revenue of the business but without falling into the financially naive trap of trying to make a point of rhetoric based on “Co X had £Y of revenue but only paid £z in corporation tax”.

Some potential measures to improve welfare & unemployment

As you are probably aware, I have been unemployed for the majority the last 6 months. This has given me, amongst other things, some time to watch the goings on at the party conferences in late September through to early October. As a left-wing christian, I fully support the idea that society should look after it’s more vulnerable members, whether they be children, the elderly, the jobless or the disabled. When I post views such as these on Twitter, I often get responses from trolls (or maybe genuine conservative apologists) who sometimes suggest I ought to come up with a perfect welfare system, fully costed, in 140 characters. So in this post, I plan to explore some ideas of how improvements could be made. I am not, by myself, a full government department which ought to be looking at these things, so any figures I use are reasoned estimates.

My first point to note is that job seekers’ allowance (JSA) is not enough to live on. It covers food costs and, when considered on a daily cost basis, utility bills. But it doesn’t cover all the cost of rent or travel to and from interviews. Also, costs of living vary around the country. So it is nonsensical to even ask for ‘a number’ that would suffice for JSA. I have seen no evidence of any costing behind the £71 per week that it currently is.

Instead, I would propose a reimbursement of living costs. That is, make claiming JSA more akin to claiming expenses from an employer. Lay down rules about what can and can’t be reasonably claimed and reimburse when evidence is presented for those claims. For example, for my rent I could present my lease contract, for my travel I could present train tickets and emails confirming dates and locations of interviews, for food I could present a till receipt from Asda.

The second point is about reducing unemployment. I have been to interviews and lost out to people who are moving from one job to another. All this time they are working, gaining experience and making themselves more attractive to potential employers. So it’s a virtuous circle for some, but a vicious circle for others. The longer I spend unemployed, the worse it looks on my CV and the less attractive I am to employers.

So I would I would propose an incentive to companies to encourage them to employ those who are currently unemployed. How would I do this? A tax break. At present, the expense of hiring someone and paying their salary reduces a company’s profits which lowers their tax bill a bit. i.e. if you hire someone on a salary of £30k and have a £5k recruitment fee, in that year you will get a tax benefit of £35k multiplied by the rate at which that company pays corporation tax (which depends on how big their profits are). I would propose that the amount that is tax deductible by increased if that person has been unemployed, the evidence for which would be a P45 from the Department for Work & Pensions (DWP). So as an example, let’s say the multiplication factor is ‘W’. This would be effective for any recruitment costs and the first year’s salary. After that, no additional tax break could be claimed.

At present, for employing someone at a total cost of £35k, the company has a tax deductible amount of £35k. But if they employ someone who has been unemployed for a month, then their tax deductible amount would be W x £35k. The difference is of course, £(W-1) x 35k. If the company pays corporation tax at 24%, then they get an additional tax benefit of £(W-1) x35k x 24% = £(W-1) x 8.4k.

How would this be funded? It would be self-funding as the newly employed person would no longer be claiming JSA and would be paying income tax and national insurance. Assuming there are no complications in their tax affairs, a person on a salary of £30k would pay roughly £4,379 in income tax and £2,689 in national insurance. There would also be a contribution for the employer’s NIC of £3,107. This make a total contribution back to the treasury of £10,175. So by employing someone, even if they were unproductive, that’s what they would contribute. But if they’re no longer unemployed, they wouldn’t need to claim JSA. A year’s worth of that costs 52 x £71 = £3,692.

So let’s work out what W would be to break even.

(W-1) x 8,400 = 10,175 + 3,692
W – 1 = (13,867/8,400)
W = 2.651

So we could in fact give a tax break to companies by allowing a tax deductible amount that is exactly double the actual cost and the net cost to the treasury would be less than the revenues raised.

Of course, this is one example, with many other variations possible, such is the complexity of life. I’ve done some testing for other W figures based on other salaries and they tend to be about 2.3-2.8.

This is not an incentive to create employment, merely a way to encourage companies to take on those who are currently unemployed. It’s not a panacea, but I think it’s a small improvement on what we have now.

I hope I’ve shown that this is an idea worth pursuing. So those are some of my ideas. What measures do you think would help improve the benefits system and reduce unemployment? Please be constructive.