So what do I think they are trying to say? I think the message is that we are wasting resources chasing benefit fraud when we should be spending effort chasing tax evaders.
Sadly I see a lot of problems with this graph, and that comparison.
For a start, even if you assume the figures are right, the comparison is of apples and oranges. The resources spent chasing benefit fraud are not the same resources spent considering tax avoidance issues or chasing tax evasion. They are separate groups of people with separate roles. So why compare them - it is not like we can "steer the countries resources" from one to the other in any meaningful way. Ultimately things like benefit fraud are worth chasing if the amount saved by doing so is more than the cost of the people doing the chasing, simple equation! Things like changing laws to reduce tax avoidance is a matter for parliament - a group of people that do not spend any time chasing benefit fraudsters. So again, not a sensible comparison in any way at all.
But there are other issues, like what is the point of "benefits unclaimed" in this at all? It is green for some reason, perhaps because it should be below the line - the country and tax system do not "lose" as a result of benefits unclaimed. In fact they gain, seemingly a lot. If this is about where it is worth spending resources so as to improve the taxes collected (which seems to be the point of comparing with tax evasion), then it seems to be suggesting we spend some effort making benefits more complex and harder to claim (some would say that is exactly what is happening).
Then we have the big issue (which seems more controversial) of the amounts included in the tax evasion column. The heading is "tax evasion" but the columns say "avoided and evaded and uncollected". Well that is three very different issues. Uncollected is incompetence in HMRC that needs addressing. Evaded is illegal and needs work by HMRC to collect and/or prosecute. Avoided tax is legal and does not need any work by HMRC or the people that chase benefit fraud - it is a matter for the likes of parliament to consider changes to the laws on tax. We have no idea which of those there are represented or to what extent in those columns.
Also, to a large extent, estimating the amount of tax avoided is just silly. It is trying to work out what could have been paid if people had chosen to structure their business and tax affairs in a less sensible way. But why assume anyone would do that and how stupid do you have to assume they will be? As that will impact the figure. Do you go as far as assuming they won't but some duty free scotch next time they travel and include that tax in the figure?
And what avoidance do you include - there seems, from the Facebook debate, to be different types of tax avoidance, and some (like investing in an ISA, or buying duty free scotch) which are "OK" and some (like having an off shore company in a low tax country) which are apparently not OK. So which are included in the "avoided" figure? All? Some? Only those "morally wrong" somehow.
It is interesting how those that say there are some tax avoidance ideas that are "wrong" seem to pick those which are unavailable to themselves. Someone on PAYE is happy with the paying in to an ISA, paying in to a pension, or even buying a bottle of scotch, but not with running an off shore company. It seems the "moral" choice here is "anything I could not do" (usually because doing so is simply too expensive).
One rather odd point came up, with an area of tax avoidance that is just in the "cannot do that myself" category for most people... My company does a lot of R&D, and we make an R&D tax claim. All correct and legal. It means we get a nicely reduced corporation tax bill. I know one company that pays no corporation tax as they do a lot of R&D, but still makes a healthy profit.
One person felt this was "reasonable" because we were doing the R&D anyway. Indeed, he specifically asked if we do R&D in order to reduce our tax bill. It seems he would consider it "unreasonable" if we had chosen to do the R&D simply to save on tax.
Now that really does seem odd, as the whole point of the R&D tax savings is to encourage companies to do more R&D. The tax system is set up on the assumption that businesses will change what they do so as to reduce tax - that they will invest more in R&D so as to be able to make this tax claim.
Yet that very action is seen by some as "unreasonable".
I struggle to see how the tax system, or anyone, can assume companies will somehow not create off shore companies, and so on, if legal to do so, but will assume that companies will invest more in R&D if it saves tax. Both done to save tax in a legal way.
Indeed company directors are meant to act in the interests of the members of the company (shareholders) and so have an obligation to do what is in their best interests, legally.
But basically, the graph is a pile of shit, and makes no meaningful comparison of anything.
On some level I agree - but I think the matter is perhaps a little more complicated than you're trying to let it be.
ReplyDeleteIn my eyes there are three types of not-paying-tax: evading (where it's clearly illegal and you know you're not supposed to do it), avoiding (where it's clearly legal and you're supposed or allowed to do it), and avoid-evading. I would define the last one as something that perhaps meets the letter of the law, but not the spirit. So for example if there is some very specific tax break that is made, along the lines of R&D with corporation tax, then using that for "R&D" that's not really "R&D" for your own company, but more like services/ideas/designs to sell onto other people.
That may be a bad example, but I would argue that it's the kind of thing that makes people annoyed.
Amazon and all the other companies who are headquartered in different countries than those where they conduct the most of their business is what some would call this kind of avoid-evading. It's legal perhaps to the letter of the law, but I very much doubt it's compliant with the spirit of the law.
Unfortunately, the various authorities that are responsible for collecting taxes and investigating fraud/evasion have had their budgets cut or limited to the extent that they are now focusing almost entirely on the 'small fry' cases where, unlike the above, a technical violation of the law has occurred, but it has had no practical impact and there was no intention or malice. It's because of the focus of the mainstream media and 'accountability' of Parliament/watchdogs that this atmosphere of statistical soundbites, rather than true results, being important. (BTW, those views are not mine but those of some I know who work in such organisations/departments).
I believe the idea of focusing entirely or mainly on the small fry while actively ignoring cases where a lot more is to be recovered, makes no sense. Most tax collection/investigation agencies and departments bring far more income to the government than they cost.
There's no such thing as "avoid-evading". It's either legal, or it's not, and there's courts of law to decide that. This is as ridiculous an idea as a "moral" or "fair" amount of tax to pay. The law cannot decide what is "fair", because everyone's view on that is different.
DeleteThe reason the tax authorities don't extract the billions shown in this graph that are supposedly "lost" from Amazon et al is because what they are doing is entirely legal, so it could never be recovered. If the politicians don't like that they need to stop squawking and change the law.
This has implications though - even Amazon has wafer thin margins and higher tax rates means, ultimately, higher prices for consumers - and that would be because governments think they can spend people's (and companies') money better than they can themselves...
A fair amount of this tax avoidance/evasion is clearly abusive schemes where transactions are solely carried out to take advantage of unexpected results of exemptions rather than for any legitimate business purpose. This is particularly the case with some of the transfer pricing schemes where through various brand licensing scheme profits are deemed to have been accrued in a jurisdiction where the tax rate is low, but little/none of the business activity took place there (see Double Irish with a Dutch sandwich).
ReplyDeleteSuch schemes damage businesses who are using these exemptions legitimately, like making a new shiny thing that exports well. Legitimate business activities are being rather unfairly dobbed as tax evaders when they're just doing business like their articles say they should.
If there is a moral test it probably should be, "Is the company doing this to further either their own business interests or employee/community welfare, or are they performing an artificial financial manoeuvre solely to minimise tax"? However I think moral tests are dubious, the government should amend the companies act to give directors a duty to balance fair dealing with the state against that to their shareholders. Without some generalised duty in law you're just playing whack-a-mole as someone will always come up with a new dodge.
Indeed but even that test has issues. R&D tax refunds are there specifically to encourage R&D that would not other be done if not for specifically reducing tax! So that behaviour is expected and desired in some cases!
DeleteIt is also worth remembering that tax comes in many forms - there is tax on where you do business (mostly VAT), tax on where you have premises (business rates), tax on where you employ people (employers NI), and tax on where you pay dividends, and then tax on those that get dividends depending on where they are. Mostly the tax schemes are around the corporation tax, but these companies with off schemes still pay a lot of other taxes, sometimes way more than corporation tax, in the countries where those taxes sensibly apply.
DeleteThe legal thing you could put in place is "is this transaction done between multiple entities in different countries under the control of one entity with the main aim of reducing overall tax liability?"
DeleteIn other words, taking a loss in the UK (20% CT rate) in order to make a profit in the USA (around 40% CT rate) is always OK, as there's no reduction in tax liability.
Taking a loss in one UK firm to make a profit in another UK firm is always OK (we expect that the tax system in the UK can be fixed so that this is only financially worthwhile if there's a social gain like R&D).
A&A taking a loss because you bought lots from Amazon Luxembourg directly is also OK - there's no chain of control between Amazon Luxembourg and A&A, so nothing to directly worry about.
However, this does prevent (e.g.) A&A UK buying from Amazon Luxembourg which buys from Firebrick Ireland, if the transaction was done with the main aim of reducing tax liability - there's a chain of control between Firebrick Ireland (a fictional entity that I'm suggesting Adrian controls) and A&A UK, so the reduction in tax liability is not legal.
For me, it's about having a level playing field - a small business should not have to give the government a far higher proportion of their profits than a large business that is essentially doing the same job.
ReplyDeletei.e. the tax situation for a small coffee shop should not be worse than the tax situation for Costa.
Of course, I have no idea how to close the loopholes that large businesses are exploiting, and that is a matter for parliament (which is made up of people that are paid off by big business, so there is no incentive for them to fix the situation).
The R&D thing is a bit different, since it was added into the tax code specifically to encourage R&D, rather than being an unintended loophole that is being exploited.
Although I can't really fault businesses for legally avoiding tax, I think there is merit in shining a light on it: for one thing it makes the situation more visible to the public, which will hopefully put pressure on parliament to fix it. But when "shamed" companies opt to pay more tax, make no mistake - they are doing that as a calculated PR cost, not because they want to take the moral high ground.
Indeed, but that graph does nothing to help. Even the title only talks of evasion not avoidance and it brings in unrelated matters like unclaimed benefits.
DeleteOh, and I think that countries deliberately set up systems with low tax to encourage companies to set up there. I.e. these "loopholes" are just as much a deliberate move by a government to change behaviour as the R&D tax refunds are, just not by the same country making that deliberate move!
DeleteCompetition is generally regarded as a 'good thing' as it benefits the consumer. So why is tax competition held in such bad odour? Because the competition is not then between businesses, with governments cheering them on, but between governments, the losers of whom really don't like it. Hence the interminable squawking by tax campaigners. The end result will be downward pressure on taxation - a good thing as in general, governments don't seem to be particularly good at making wise decisions about how to spend our money.
DeleteI think the key thing is realising who the consumer is and isn't.
DeleteWith competition between companies, the consumer is the person buying the product. Competition drives innovation (which costs the company's shareholders, since the money that they would have got is now going into R&D) and reduces prices (again, reducing the shareholders' profits). So in that case, the consumer wins, the shareholders lose.
With competition between governments, the consumer is the company - they are the ones "buying" the right to exist by paying their taxes. So competition is again good for the consumer (the company) - it reduces taxes and the company (and its shareholders) win. The governments lose (on average) since the "price" (tax) is racing to the bottom.
In a way, we are shareholders of our own government (in theory we benefit from the government's income), so we lose out from this kind of competition.
Then again, we are also consumers of the businesses that are taking advantage of the low taxes, so in theory we should benefit from lower product prices. But I rather suspect that we lose more than we gain.
" governments don't seem to be particularly good at making wise decisions about how to spend our money."
DeleteCompared to what, exactly? There are plenty of examples of corporations running similar services in a far less efficient manner - the various sagas around free schools spring to mind.
There is a base cost for maintaining a society - much of the 'squawking' is directed at companies which operate in the UK (thus benefiting from the nations prosperity), while realising their profits elsewhere (and undermining the basis for the future prosperity of the nation - funding the education system, health service and so on).
The whole silly situation only arises because we have a hugely complex tax 'system' that no human understands leaving loopholes for lawyers and accountants to get creative with and the taxpayer to employ zillions of HMRC staff to play whack-a-mole.
ReplyDeleteChuck the whole lot out and replace it with a transaction tax. Any movement of money gets taxed; simple and fair. Buy a private jet; pay the tax. Lease/Rent a jet; pay the tax. Buy a usb cable from China/EBay; pay the tax. Sell a zillion IPhones; pay the tax. Move money to the Cayman islands; pay the tax. Bring money back from the Cayman Islands; pay the tax.
No income tax, no vat, no capital gains, no inheritance tax, no corporation tax nothing but a transaction tax.
Of course this is not 100% perfect but with the end of folding money on the horizon the ways of avoiding it become insignificant.
If the politicians want to promote certain activities (R&D for example) then just pay grants; don't over complicate an already unfathomable system.
This is unfortunately a recipe for massive inequality, because poor people move money around more than rich people do, because they spend a higher proportion of what they earn (you can only eat so much!). So you are proposing a massively regressive tax with far higher effective tax rates on the poor than on the rich.
DeleteOh, and eliminating inheritance tax? I'd have thought that counted as a movement of money and thus eligible. Also, inheritance tax is society's principal defence against the concentration of resources in a very few families, leading straight back to feudalism. Eliminating it is generally something proposed only by the very rich...
@Nick "a recipe for massive inequality"
DeleteThe UK has had that for the last few years anyway.
@Nick "rich people move more money around than poor people do [...]" (not quite what you wrote, but...)
So maybe give everybody a reasonably generous tax-free allowance. And then collect the transfer tax on the rest, in as simple and 'fair' and cost effective and undodgable way possible. Cut the loopholes, cut most of the exemptions, etc.
Not saying it'll be perfect, but it's hard to see what could be worse than the current situation.
@Russell "If the politicians want to promote certain activities (R&D for example) then just pay grants; don't over complicate an already unfathomable system."
Pretty spot on in my book. In principle it already applies to e.g. agriculture, but the UK implementation seems a bit confused. Done right, all these tax lawyers and tax dodging experts could perhaps use their skills more productively (ie for the benefit of the UK in general, not exclusively for the benefit of the richest 0.1% or so).
@RevK and others
"company directors are meant to act in the interests of the members of the company (shareholders) and so have an obligation to do what is in their best interests, legally."
Please refer to UK Companies Act 2006 section 172 which specifically says company Directors must consider the interests of employees, suppliers, community, environment etc, and not just in a short term context either.
Obviously almost nobody ever bothers with this, and the legal consequences of ignoring it are nil, but this is The Law as it has been in the UK for a few years. And decent people are supposed to obey the law, right?
Nearly done: where in the world are Apple Inc resident for tax purposes? How does that work (for Apple or any other multinational)?
And finally: what's the difference between the 'bad' secrecy as allegedly exemplified by encryption, and the 'good' secrecy required to make many of these tax-dodging schemes (especially cross-border ones) workable?
Nothing to hide, nothing to fear, right? Unless it's the tax affairs of the UK wealthy, obviously.
A level playing field. Is it really too much to ask for?
The Guardian does it best - https://www.theguardian.com/global/2015/oct/11/facebook-paid-4327-corporation-tax-despite-35-million-staff-bonuses - in other words, instead of paying £35m to people who were taxed at a marginal rate above 40%, it should have taken an £7m profit and been taxed at under 30% on that profit...
ReplyDeleteIts my understanding that we're actually spending more detecting benefit fraud than we find. and given 65% of benefit appeals go against the government, the whole system is broken.
ReplyDeleteNow if people had to go to a ESA/PIP style interview in order to get these tax evasion schemes, we might be getting somewhere.
I agree with pretty much everything in Adrian's original post - with one small exception. Tax avoided is not "no work for HMRC" - as Tech Vault points out there are many supposedly legal "Tax avoidance" schemes which are really "Tax evasion but it is so complex we hope that they can't work it out" schemes.
ReplyDeleteHowever HMRC regularly *does* investigate the schemes and not infrequently do work it out and declare the scheme illegal - then come looking for their money (c.f. Jimmy Carr, Wayne Rooney to name but two celebrities who found out the schemes they were sold were not watertight).
As Simon F points out, of course money that does not come to HMRC via income tax may well find its way to the government by another route - economies being closed systems and all that.
The problem is that there is an anti-establishment/wealth backlash at present and I think that this is part of it.
The sad thing is that this backlash has brought us Trump (oh, the irony) and Brexit (AKA how can a Nation shoot itself in the head). It might well have delivered a Le Pen victory in France had it not been for Macron.
As a more general point; people forget that the main goal of Corporation Tax is to encourage companies to take risks that they would not otherwise take, by taxing you on cash profits. The whole idea is to artificially depress the value of cash profits in order to make it economic to do things (like investing in staff) that are otherwise low return - cash is down 20% immediately due to CT, so your investment in staff only needs to generate 80% of the cost as extra revenue to break even.
ReplyDeleteThis is why there are things like R&D tax credits that are greater than 100% relief - if you do something valuable and high-risk, you should be allowed to retain some cash profits untaxed as a reward for taking a risk.
One of the big reasons for corporation tax (and for taxing rich people) is to prevent the hoarding of money. If money is being spent (on staff, on equipment, whatever) it is doing good for the economy; if money is sitting in a bank account (e.g. of a big organisation or a rich family) it is reducing economic liquidity - essentially it reduces the amount of money in circulation.
DeleteThis is also why the BoE controls interest rates - low rates discourage hoarding of money (decreased saving, increased spending). But they have to strike a balance, since high rates discourage borrowing (which decreases spending). To some extent you also need to encourage people to create a moderate safety net for themselves through savings, whilst preventing excessive hoarding of money.
This is also one of the arguments against VAT - VAT penalises people who are helping the economy (spending money) whereas you actually want to penalise people who aren't helping the economy (hoarding money).
All of this is a difficult balancing act and I'm glad I'm not an economist. :)
I think a lot of people miss the basic fundamentals behind taxes and benefits. It is "enforced" circulation of money. If money stays in one place not circulating then we have what is called a recession.
ReplyDeletePeople on benefits are still contributing to the economy, as they need to eat and drink, and whatever they buy is money going back into the economy, generally since benefits are mostly claimed by low income people, they are spent at close to 100%.
Giving 100k people £1 each will do more for the economy than giving one person £100k.
If there was no tax and benefit system, the poor would die off, and we would have a medieval type culture. AAISP would need its own army to protect its assets as an example otherwise it would be raided.
The reasoning for the unclaimed benefits on that graph? I suspect its because there is people who deliberately dont claim benefits because of the stigma created by propaganda and that graph is highlighting that the amount of unclaimed benefits completely towers over the amount lost to fraud and error. Finally to answer your question revk, the amount the government spends in trying to force people off benefits is actually cash negative, basically they are spending more than they are saving.
But I do agree in reference to tax avoidance, tax avoidance shouldnt be part of the tax evasion graph as avoidance is legal.