Tag Archives: 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”.

The squeezed middle?

Used under creative commons license. Image by 'Images of Money'

Used under creative commons license. Image by ‘Images of Money’

Wednesday sees George Osborne deliver his latest budget speech. Some of it he announced on Andrew Marr’s Sunday morning show, other parts may well have been leaked by the time you get round to reading this (I’m writing this on Monday night).

In his appearance on the Marr show, aside from being fed his lines by the host who had earlier in the show demonstrated a clear and distinct partiality with regards to the Scottish referendum on independence from the rest of the UK, and aside from the fact that there was no serious or penetrating scrutiny given applied to the Conservative party policy, making the Marr Show little more than an extended party political broadcast for the Conservative party; aside from all that, I was struck by something Osborne said as part of his prepared speech.

Whilst speaking of personal taxation, Osborne spoke of the increase in the personal allowance that has taken place since the coalition came into power in 2010.

Before coming to that point though, I would like to note two things: One, the rapid increase of the personal allowance was a Liberal Democrat policy, not a Conservative one. It was a feature of the coalition agreement that the Lib Dems insisted upon. It was one of the few areas where the Lib Dems led and the Conservatives followed.

Secondly, I would add that it is probably the best thing the coalition government have done. I am in favour of lifting the lowest paid out of personal taxation. Ideally, the personal allowance should be at a level whereby no one is taxed whose net pay would not be enough to reasonably live off. The measuring of how much that is a complex matter and one that I shall not address in this blog post.

But the point that struck me was that Osborne was proud that it was reducing the amount of tax paid by the middle-to-high earners. Without getting too personal here, I will say that in my current job, on my current salary, a small part of my tax is paid at the 40% rate. This is an important point. The media will often talk about those who pay the 40p rate (i.e. 40p in the pound, but I prefer percentages for clarity) but they fail to mention that only the uppermost part of someone’s salary is paid at that rate. There is still a significant chunk that is paid at 20%.

As someone who is counted as a middle-to-high earner, am I pleased that the amount of tax I pay is being reduced? No.

Nomatter what your political persuasion, one should face up to the economic fact that we have both a large debt and a large deficit, both of which need reducing. The two essential ways of doing this are to increase revenues or to cut costs. The current government’s plan has, for the last few years, been to cut both revenues and costs, but to cut costs at a much faster rate, through their austerity plan.

Many more voices than just mine will testify to the great damage that the austerity programme has done, with people losing their livelihoods and even their lives as a result of it. In other countries, such as Greece, it has been taken to a more extreme level but has merely resulted in mass unemployment and has failed to live up to its promises.

So while some cuts are necessary (and here I would rather cut spending on Trident and other weapons of mass destruction rather than removing the safety net of social security which is relied upon by many in their hour of need) the more obvious and sensible measure is to increase revenue. Anyone who has studied economics at any level will be familiar with the idea of elasticity of demand. That is, the more you charge for product, the less demand will be. But how much demand falls off in proportion to how prices increase is measured by its ‘elasticity’. Luxury goods have a high elasticity, whereas necessities have low elasticity. Take train tickets for example. Many use trains to get to work. If the price gets bumped up by 5% we don’t get the choice to not go to work. We are forced to swallow it, increasing the revenues of the train companies.

When it comes to tax, part of modern right-wing ideology is that tax is highly elastic. They love to tell us that increasing taxes will deter rich people from coming to country (hey, that’s one way to curb immigration!) or force people to leave. In France, when they raised taxes, a few high profile people did choose to leave the country. But did it cause a reduction in revenue that crippled the country as the austerity measures did to Greece? No.

The truth is taxation is inelastic. This gives rise to the possibility that, as train companies have exploited commuters, governments could exploit all its citizens by unfair taxation. But what is fair? Surely it is in answering this question that differences between left and right become apparent, especially when we consider what our priorities are. Right-wingers such as George Osborne see fairness in prioritising that people keep as much of their gross pay packet as possible. Left-wingers such as me prioritise ensuring the dignity and the livelihoods of the poorest and most vulnerable in society.

For me, as stated once, but to reiterate the point, tax becomes unfair when the net income after tax is not enough to live on. If you have more than enough to live on, then you have enough to be taxed upon. Note that even if there was a flat rate of 40% (which is much higher than the actual effective rate of tax paid by those whose pay comes into the 40% band) then any individual would still keep more than half of their pay packet.

We also need to consider the seasonality of life. For some of my life I was in state education and not earning a salary, not paying taxes. At other times I have been unemployed and had to claim job seekers’ allowance in order to pay for my rent and food. At times like these, I was net taker from the state. At present, I am a net contributor. If I were to take a simplistic, conservative approach, and demand that I only pay tax for the services I use, then I would pay much less tax than I do now. But what about those who are currently in a season of being net takers? The young, the elderly, the unemployed, the disabled? It is to support them that we need a section of the population to pay more tax than the cost of the services the latter use. It is a recognition of this that makes me despise the term ‘the squeezed middle’. I am not squeezed enough.

To turn a phrase around a little bit, I would say: First, to each according to their need. To fund that, from each according to their ability. This is where I think our priorities should lie. The idea of tax for tax’s sake is as wrong as it is to try to separate the payment of taxes from the provision of centrally provided services.

So please George, let’s get priorities straight. For those who are out of the tax system, let’s ensure that there is a living wage paid to those in work, and a firm support net for those who aren’t. For those who are paid in excess of they need to live on, please tax us more. We can afford it.

Putting my money where my mouth is

The 6th of April marked the start of a new tax year. At this time, there were a number of changes to the rates and bands in income tax and national insurance. Other changes to the social security system began on the 1st, with the government coming in for much criticism, in my opinion rightly so. One of the consequences that was much vaunted was Iain Duncan Smith declaring on radio 4 that he could live on £53 per week. I don’t think I could. During my time of being unemployed last year, I received £142 per fortnight. This was to cover all expenses: rent, council tax, food, utilities and travel to and from interviews. Some people told me that I ought to have been able to claim more, but this was flatly contradicted when I asked staff at the Job Centre Plus. Anyway, there was a public demand for Iain Duncan Smith to stay true to his word and demonstrate that he could live up to his claim. This was later dismissed by him as a “stunt”. Yet over 19 times as many people have signed that petition as voted for him at the last general election (at the time of writing, the figure stands at 438,210 compared to his election vote of 22,743). I wonder if his election was a stunt too.

It struck me that since he was being asked to put his money where his mouth was, it would only be right to be willing to do so myself. I ran some figures through the BBC budget calculator and worked out that in the 2013-14 tax year I will be about £179 better off. The thing is, though, I don’t think I should be better off. If I didn’t contribute to a defined contribution pension scheme or didn’t gift aid any donations then I would be a higher rate tax payer. As such, I know that means I am a hell of a lot better off than most people in this country.

The economy does have a problem with a large deficit and efforts should be made to reduce it. However, I disagree with the way the coalition government has gone about doing this. Instead of asking those who are most able to pay, the onus has been on those who have the fewest choices: the poor, the disabled and the unemployed. There is a paranoia among those on the political right that if you apply the sensible notion of “from each according to their ability, to each according to their need” then this will result in those who pay the highest marginal rate of tax choosing to leave the country, thereby denying the economy of their spending power and robbing the treasury of potential tax revenues. So those are paid excessively more than they need to live on have been given a tax break. But remember, even at the highest marginal rate (i.e. the rate you pay for every ‘extra’ £1 on your earnings), their effective rate (total income tax & national insurance paid divided by total gross income) is far lower. For example, though I am a higher rate tax payer, I only pay 42% (40% income tax and 2% NI) on the top few pounds of my earnings. My effective rate is 26.5%.

Yet I am unconvinced by scaremongering which suppose that the rich will flee the country to avoid taxes. Even if a small minority do, shame on them. By choosing to squeeze those with the least disposable income, the government has tried to fix the problem in the most inappropriate way. While it is a good thing in principle to encourage people into work, there have to be jobs for people to go to. Not only that, but they should be jobs that pay a decent wage. To use an analogy, imagine someone being asked to walk along a tightrope. What’s the best way to keep them safe? I would say it is to help them stay on the rope, not by removing chunks of the safety net. Yet the recent raft of reforms seems to be doing the latter

As my salary is above the national average (see link to the report from the Office for National Statistics above for details on the average being £26,500), I think I ought to be paying a greater proportion of my income in taxation. Yet I still get this £179 ‘bonus’ because of changes in the bands and rates. What should I do with this? Well, it would be hard to ‘donate’ it to the Treasury, so I am here, publicly, pledging to donate this to charity. On top of any other giving I may have, I promise I will set up a standing order for £20 per month (I rounded up) to a new charity I have not previously made a commitment to. What I need is your help.

Firstly, I need your help in choosing which registered charity to donate to. Ideally, I’d like it be one that helps those who are worse affected by the changes to social security that the government has brought in. I would appreciate your nominations from which I may then choose.

Secondly, without anyone else taking up this challenge, this will be a mere act of tokenism on my part. I would like this to become ‘A Thing’ amongst those of us who are socially minded, are paid more than it costs to live and who feel it wrong that they should benefit while those who are worse off suffer. So I would like to encourage you, even issue you a challenge, to undertake a similar commitment.

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.

Should christians accept bonuses?

Background

I had a recent chat with another christian when this question came up as part of the conversation. Anyone who knows me or reads this blog will know that I am distinctively left-leaning. One of the main reasons for this is because I am a christian. I have a lot of difficulty understanding the idea of the “christian right” as I consider it to be an oxymoron.

Subsequently, I have quite strong views when it comes to money. So I wanted to lay out my reasoning for why I think the answer to the question ought to be “no,” though I wanted to understand the counter-argument. As a result, I asked around a little bit, which is laid out below. I have also attempted to play devil’s advocate.

Of course, I am not judging christians who do accept bonuses as part of their remuneration. If you do, all I’d like to do is make you think and question your motivation for accepting it.

Why I think the answer ought to be “no”

The fundamental reason why I would not be happy to accept it is one of motivation. Without giving too much confidential information away, employees in my company are given a choice. They can accept a fixed salary of £x per year, or else they could take a lower salary with a bonus which, when combined is greater than £x. So let’s say someone might be offered a basic pay of £30k, or they might be offered £28k with a £4k bonus. Of course the bonus is tied to their meeting certain conditions. If they meet their targets, they will obtain their bonus; if they get part-way they will be awarded part of their bonus. If they don’t meet the minimum target, they won’t get anything.

To my way of thinking, this creates a danger that we then work, our motivation becomes the creation of personal wealth. Following on from my recent post on worship, this would indicate that we are worshipping money. Of course, we may to rationalise this by claiming that we are accepting the bonus structure in order to pay our rent, fund the train fares, feed the family, etc. What I do not like about this view is that it creates the false impression that we would not be able to make ends meet without the bonus.

I would rather my motivation to work be because I want to do a good job. As I touched on briefly recently, there are many ways we can worship. To me, trying to do a good job at work is a part (though by no means all) of my worship. There is the very famous warning in 1 Timothy, where Paul writes “if we have food and clothing, we will be content with these. But those who want to be rich fall into temptation and are trapped by senseless and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evil, and in their eagerness to be rich some have wandered away from the faith and pierced themselves with many pains.” (1 Tim 6:8-10, NRSV) Often only a part of that is quoted, but I wanted to include the lot.

Having worked in financial services for several years, and subsequently working in the finance side of a different type of business, I am surrounded by those who are obsessed with money. It would be very easy to get sucked into that world, where I’d care about profit and trying to boost my own pay, quite possibly at the expense of others. That’s not someone I’d ever want to become. I want to be someone who is content with what I have.

Another passage in my thinking (though I recognise that money is not the primary purpose of this particular discourse) is Romans 4, where Paul writes, “Now to the one who works, wages are not credited as a gift but as an obligation.” (Romans 4:4, NIV) This is as close as I can find to anything about bonuses. I hope you don’t think I’m stretching scripture too much; that’s not my intention.

The devil’s advocate argument (why it might be OK)

You have to recognise that the pay culture we have in modern society would be totally alien to those living in the 18th century, let alone anyone before then. So the people of the bible wouldn’t have known enough to either speak in favour or against company bonuses.

There are various people in the bible who had great wealth and who were not condemned for it. Abraham was a bit of a Richard Branson-type figure of his day, and in terms of a single individual owning a high proportion of the world’s wealth, Solomon was probably one of the richest men in history. Yet neither of them were condemned for their wealth. It was incidental to them. This brings us on to the so-called ‘prosperity gospel.’

Proponents of this view often cite Psalm 37 as a justification for not only claiming that wealth is acceptable, but that it is a sign of reward for faithfulness: “Trust in the LORD, and do good; Dwell in the land, and feed on His faithfulness. Delight yourself also in the LORD, And He shall give you the desires of your heart.” (Psalm 37:3,4, NKJV) I interpret this quite differently. Given the preamble of verse 3, I think what constitutes the “desires of [our] hearts” will be changed so that we no longer will be desiring of wealth, but rather we will be desiring the riches of God. (c.f. Romans 12).

Given the balance of the number of times wealth and money are referred to in the bible, I think that prosperity advocates must have a hard time defending their position. For brevity, I’ve omitted most references I could use to back this up; maybe another day.

Some practical considerations

Of course, not everyone is given a choice to not have a bonus as part of their pay packet. You have to be in a particularly high-end job to be able to change the terms of your employment contract. Given that I have only ever taken jobs whilst unemployed, I never had much bargaining power, so I simply wouldn’t do anything to jeopardise the prospect of employment.

Then you have the choice of what to do with it. I asked on Twitter what people thought about it, though I only got 1 reply which was that it’s OK to accept a bonus, so long as it is donated to charity. More widely, there are a number of good things you could do with additional money, of which giving to charity is but one. However, I think christians always have to keep a tight reign on their motives. For example, if you donate via a Just Giving page (or similar) do you disclose your name and the amount you are donating, or do you go by the principle of “But when you give to the needy, do not let your left hand know what your right hand is doing.” (Matt 6:3)?

Conclusion

For my conscience, I am happier to not take a bonus. I do not think it is inherently wrong to do so. What is important is what you do with it. In this, I probably ought to be honest about my own pay packet. I contribute to a pension scheme which removes from my pay packet 10% of my gross pay. This pushes me down into the “basic rate” tax band. Had I opted not to do this, I would be higher rate tax payer, having a marginal rate of 40% on a small portion of my salary. As it stands, my effective rate (total tax+NI/total pay) is 26.7%. From this, you can tell that I am paid significantly more than the average salary. This is slightly tempered by my train fares of £87.50 a week. Once you take tax into account, this means that if I got a job within walking distance of home, I could take a gross pay cut of just over £6,000 per year and it would have no effect on my take-home pay.

Given that I am such a highly paid job, putting me amongst the top few percent of UK workers, I think that to demand any extra would be selfish and immature. When I work long hours, I don’t complain about a lack of overtime, in spite of pressure to do so. When I think of all the millions in this country alone (let alone the billions elsewhere in the world) who do not have the material riches that I have, it is very humbling. “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.” (Luke 12:48b, NIV) It is a huge responsibility and one that has to be taken seriously. Personally, I find those who have abundant material wealth, and yet who complain about a lack of it, to be repugnant; it’s one of the biggest intolerances I have. Maybe I’m being harsh and lacking grace; I don’t know.

So that’s my choice. What’s your take on the matter?

Book Review: Treasure Islands by Nicholas Shaxson

I became interested in this book after reading an endorsement from it by the writer and columnist, George Monbiot, who I have some time for, even if I don’t agree with him in all things. The subtitle of the book, Tax Havens And The Men Who Stole The World, gives a better impression of what the book is about. This also impinges on my own area of professional expertise: accountancy. I have often been struck by how poorly tax related issues are reported in the news, particularly issues of tax avoidance and evasion. So while most people are aware that the former is legal and the latter is not, the “common knowledge” of such matters goes no further than this. Even amongst people who are more politically aware, I still hear and read comments such as “companies try to avoid capital gains tax by….” which demonstrate an ignorance that companies are not liable for capital gains tax. It is purely a tax levied on individuals. Or similarly, the term non-domiciled (non-dom, for short) as a shorthand for people who don’t pay income tax, when the truth is that a person’s domicility is irrelevant as far as income tax is related; as that is entirely dependent on their residency status.

Anyway, I digress. My hope was that Shaxson would be more financially literate than the vast majority of most journalists. In the first chapter, I seemed set for disappointment, due to a lack of clarity in his terminology and a very clumsy attempted sleight of hand in order to make an erroneous point of rhetoric. The particular point in question was on page 12 when he mentions some companies “did nearly $750m of business in Britain but paid only $235,000 in tax…” Now the phrase “did x amount of business” is not particularly precise or helpful, though in more careful wording, one might say that $750m is the revenue. However, his implication is that this inherently unfair. But what he doesn’t state until the following chapter is that tax is based on profit, not revenue.

From this shaky start, the book massively improves. Shaxson’s main thrust is that a tax haven is about secrecy and being able to hide income behind layers of silence. He then goes about giving a history of how these structures have arisen. He begins with a look at probably the most famous tax haven in the world: Switzerland. The notion of this being a tax haven is not so much the fact that they have generally low taxes (which is still true) but more to do with the code of banking in that country and the laws surrounding it. For Shaxson, the term he uses constantly is secrecy, although the term confidentiality may equally be used. The difference is merely the connotations each word has, depending on your political leanings.

Given my introduction above as a recommendation from George Monbiot, there is little room for doubt as to Shaxson’s own left-of-centre leanings. His broad approach is to give the historical story of how tax havens have come into being along with the key lobbyist who have sought their existence and protection as a proxy for the protection of their own wealth.

The book is quite wide-ranging in its scope, though I found the most interesting sections to be those on the Caymen Islands, Jersey and the City of London. Ironically, it was while I was reading the chapter on the square mile that I was on a tube train on the Northern Line going from London Bridge, through Bank and Moorgate, up to Old Street, thus traversing the City and passing almost (if not actually) directly underneath the Bank of England. It gave a wonderful sense of irony, and though a few people glanced at the cover with interest (I do not have a Kindle, nor do I wish to own one). It reminded me that I would still like, at some point, to sit outside 1 Canada Square whilst reading a copy of Das Kapital.

As mentioned earlier, Shaxson does write about some topics that I know quite a bit about, having worked in those areas for some years. Specifically, he talks about accountants, auditors, LLPs and the International Accounting Standards Board (IASB). It is here that he woefully falls short of anything resembling understanding, which leads me to question the integrity of the rest of the book, where I rely on his word to provide an accurate picture.

Audit

To be specific, he refers to auditors as “the private police force of capitalism” and “audits are the main tool through which societies know about, and regulate, the world’s biggest corporations.” This is pushing a widespread misconception that leads to much misunderstanding and unnecessary vilification. An auditor is not a regulator. Their job is only to provide an opinion on whether or not the financial statements give a “true and fair view” of the company’s position at the period end and the activities during the period being audited.

When I worked as an auditor, one of the jobs I was given was to make notes on the 2006 Companies Act, and present it to one of the partners. This was immediately after it was published, so no one really outside of Parliament had had a chance to read it in full. At the time it was (and I think it still is) the largest single piece of legislation ever passed by the UK Parliament. The role and duties of an auditor are very clearly laid out in the Act, though they take up a tiny amount of space, as deference is effectively given to those who make the accounting standards. For publically listed groups of companies (which make up less than 1% of the total number of companies in the UK) these standards are set by the aforementioned IASB. The standards are known as the International Financial Reporting Standards (IFRS).

Financial Reporting Standards

Now I do not agree with 100% of the IFRS standards. When I was studying them, there did appear to be some level of obfuscation, where the standards are derived from a set of principles laid out in what is known as The Framework. What we end up though are standards like IFRS 9, which is a labyrinthine standard relating to exotic financial instruments which are very seldom used in the vast majority of companies. Though it makes sense in a step-by-step logic derived from the Framework, when looked at as a whole, it just seems devoid of common sense. One of the principles is to make financial statements understandable to the ordinary reader, unversed in accountancy and reporting standards. I have tested this on a small scale by giving some accounts to some non-accountants to have a read to see how well they understand them. I must add, that these were from publically available accounts published online by the companies in question, all of which were audited by different firms from the one I worked for, so there is no hint of any potential breach of confidentiality. Shaxson’t beef though is not with the standards that tend to baffle. Instead, he is not happy about segmental reporting, where a company breaks down its figures into the different segments that are used to report to management. He would rather make all companies disclose all cross-border transactions.

Transfer pricing

The basis of this is transfer-pricing, which he misleadingly states is a method by which companies move costs into high tax areas and profits into low tax areas. The reason I call this misleading is that in a short space, the author has misdirected in several different ways, which is quite an impressive feat. The first is in financial literacy. He treats costs and profits as though they are unrelated. It is like saying I’ll move my apples to Germany and my oranges to Switzerland. If you move costs to a higher tax jurisdiction then you do not then move your profits. Your profits are your total income minus your costs; yet Shaxson seems to be unaware of this most simple of equations. The other is to pretend that transfer-pricing is a tax dodge mechanism, when it is the precise opposite. Transfer pricing is the mechanism by which to avoid the unfair transfer of costs for tax minimalisation purposes. These agreements have to be presented to the auditors (who will usually bring a tax specialist onto the team for this purpose) and the agreements are subject to inspection by HMRC, who can prosecute if they think a given company is trying to avoid paying taxes by such methods.

LLPs

The last point which I think needs addressing is that of limited liability partnerships (LLPs). LLPs are portrayed by Shaxson as a tax-dodge vehicle which the big 4 accounting firms (PWC, Deloitte, KPMG and Ernst & Young) pressured the UK government into adopting. What he fails to mention is that the reason they were set up was to recognise the growing corporate nature of professional service firms such accountancy firms and law firms, which had historically been for the most part plain old partnerships. These would be governed by partnership agreements, but the English Law (I cannot speak for Scottish law or that of any other jurisdiction, as I have never studied, nor taken any exams in it) that governs partnerships was not designed for firms that had grown to the size of large corporates, where company law was more apt for this. So the LLPs were set up as a half-way house whereby large swathes of the Companies Act were adopted by the LLPs, whilst allowing them to retain their partnership structure, thus not destroying the heritage and ethos that allowed them to flourish; along with the many mergers that happened along the way to give the weird and wonderful compound names and acronyms that govern the largest firms in the marketplace.

Conclusion

OK, so that was an extremely length aside. But if you’d read this far (or seen the word ‘conclusion’ and skipped straight to it – tut tut to you for your laziness), then you show the level of patience needed to get through Shaxson’s book. As demonstrated above, it is not factually correct in all places, which does undermine slightly the credibility of the rest of the book. That said, I do not think it is entirely erroneous and would recommend it as an introduction to the history of tax havens and how they operate. There are some incredibly powerful testimonies included; most notably for me were those of William Taylor’s battle with the Corporation of London, the secrecy laws that are in place in the Cayman Islands and the subculture that pervades Jersey.

Read it with due scepticism, and learn what you may never have realised was going on right outside (or even inside) your office.