I’ve been having some discussions with Richard Murphy about the new version of the Fair Tax Mark and, having clarified what it’s about, I think I’m not entirely happy with it.
My problem is essentially that, to me, it doesn’t do what it says on the tin.
I went in expecting that it would ensure that a company displaying the mark had paid a fair amount of tax, where “fair” means the amount is reasonable given the tax laws of the country.
Instead, it turns out that “fair” means that the amount is clear and one can trace, from publically available sources, why it is not the amount one might expect. In fact, Murphy has confirmed to me that he would give the mark to a company that paid nothing by deliberately avoiding tax, so long as it met the disclosure requirements.
I think that this is not the definition of “fair” that most people would expect, so I doubt I’m alone in straying down the garden path. In my mind, “clear” or “transparent” would seem to fit what Murphy is attempting better than “fair”.
The other aspect I find a bit disappointing is the reliance on publically-available information. I think pushing to increase the amount of information made publically-available is valuable – although of course there may also be a cost to doing it, so there is a cost-benefit analysis to be done – but if I see someone being awarded a mark by an independent body then I would normally expect that body to have done an assessment on the basis of all the relevant information, including some which is not available to me, and using expertise I don’t have.
For example, I wouldn’t expect a restaurant to get 5 stars for hygiene because I am able to have a look into the kitchen to see how many cockroaches there are; I would expect it to mean that someone qualified has had a look at it and confirmed that there aren’t any – and there are no mice, and surfaces are washed down properly, and all the other things I can’t list as examples of food hygiene because, frankly, I’m not qualified to judge it no matter how much access I am given to a kitchen. I just don’t know what the important things are.
Finally, I was a bit confused that the purpose of the mark is meant to be apparent from the criteria. I would prefer that the purpose was clearly set out, with the criteria specifying how the company should be scored compared to that purpose. Oh, and only covering corporation tax is a bit of a disappointment too.
So if the Fair Tax Mark is really more of a Transparent Tax Accounting Mark, this set me to thinking about what I would put in a – well, call it a Fair Share Star…
The Fair Share Star is awarded to a business (incorporated or not) by an independent assessor to certify that the business has paid a reasonable level of tax on its activities.
“Reasonable” means that the tax paid follows the letter and spirit of tax law in the countries in which the business operates.
This is measured by checking that the business has not actively taken steps to reduce its tax liability, except where such steps are explicitly encouraged by Government.
So the absolute level of tax paid is not as relevant as the reason for that level. Paying less tax because of a capital allowances claim is fine; paying less tax because IP has been shifted across to Bermuda is less so.
“Tax” includes income tax, corporation tax, VAT, excise duties, payroll taxes, social security, bank levy, stamp duty, PRT, and so on.
The business’s tax affairs over the last three years are scrutinised by an accredited assessor. Assessors are regularly reviewed, with a random review of businesses they have assessed to ensure that they are sticking to the criteria.
The scrutiny involves a level of review similar to that which would be carried out in a due diligence exercise, and requires that the assessor has access not only to publically-available documents, but to the business’s tax returns, computations, management accounts, HMRC correspondence, internal policies (where relevant) and so on.
The assessor is obliged to keep confidential data confidential, although it may be shown to whoever carries out the accreditation review of the assessor.
Having established a picture of the business’s tax affairs, the assessor then compares it to set criteria.
There are two parts to this, the fixed section and the variable one.
The fixed section is about regulatory requirements: has the company filed all its returns, do its accounts show the proper disclosures, all that stuff. 100% is required to pass this section – if you don’t do the mandatory stuff properly, you’re not getting the mark. If you fail this section but really want the mark, then you can sort yourself out and reapply when you’ve done it.
The second section is about your actual behaviour. The assessor looks at all the differences between the tax you pay and the obvious rate, and ranks them in three levels. I’ve decided to be quite harsh in the criteria, as I think that marking someone out as specially good should require that they have acted particularly well. However, only material differences get a score (level of materiality TBC) – I’m not that harsh.
Level 1: There is no tax advantage, or there is explicit provision by Government for the advantage (such as zero-rating for VAT, capital allowances, NI holidays, R&D tax credits, and so on). In the transfer pricing arena, HMRC have made no (material) adjustments to your transfer prices.
Level 2: There is a tax advantage which is not sanctioned by Government, but the steps taken have economic substance and/or are common practice. Examples would be selling e-books to the UK from Luxembourg to get the low VAT rate, or putting your marketing offices in one country and your sales office in another to ensure that the sales are in the latter not the former. Having your transfer prices adjusted by HMRC, or (if not they’ve not yet been reviewed) special pleading as to why your particular transfer pricing circumstances justify taking a position which is at one extreme end of the range of acceptable values rather than nicely in the middle, would also count as level 2.
Level 3: have been taken to arrange matters such that there is a tax advantage and there is no comparable economic substance; or structures have been struck down as abusive under the GAAR or similar rules. Transfer prices which bear no relation to any range of acceptable values. Evasion.
We look at tax paid, as there is no need to worry about deferred tax and so on. If you have a current tax credit because you have a deferred tax charge, for example, then either that is a perfectly good reason for that DT position which puts the difference in Level 1, or there isn’t so you’re in Level 2 or 3. If you have a big unpaid VAT balance because you’re not due to pay it yet, that’s also Level 1.
If anything’s a 3, you fail. Black Spot.
If you have a mix of 1s and 2s, you get a silver Fair Share Star.
If everything’s a 1, you get a Gold Star.
The gold star is bright and shiny, with little rays coming out of it to show how shiny it is and perhaps a smiley face in the logo somewhere. The silver star is slightly tarnished, and the eyes look a little shifty.
Any evasion identified is of course reported through normal money laundering systems.
Your score is published on the Fair Share website, along with a brief report of what the differences are and why they’re OK or otherwise. You commit to this when you sign up for the review but before it is carried out. If you’re stupid enough to sign up for a review when you’re carrying out blatant Level 3 avoidance, you deserve to be named publically. HMRC can of course read the reviews; any enquiries which result may of course be entirely coincidental.
The obvious way to run this is to get your auditor or accountant accredited as an assessor, so they can grade you when they do the audit. So I think I’ll ban that, as it seems a bit cosy and I’m being harsh.
You need to get the assessment done by a firm that doesn’t audit you, and provides you no accounting or tax advice. You’ll pay them for the privilege, of course, and they can’t assess the same business more than say three years in a row.
The assessors pay a fee to the central authorising body (a not for profit, with personnel drawn from the profession and tax authorities) for their accreditation, which covers the costs of the accreditation reviews. These are done by having a peer review by another assessor of a random assessment you’ve done. If a review shows that the assessor has awarded the wrong mark, the accrediting body steps in to confirm the position.
If the business disputes its assessment it’s welcome to get another assessment done, if the second assessor disagrees with the mark awarded then the accrediting body steps in to arbitrate.
If as a result of either of the above processes it appears that an assessor has awarded the wrong mark (either in the normal way, or when reviewing another’s work) everything that assessor has done in the last year has to be reassessed, with the defaulting assessor paying for the reassessment out of the fees they received for doing the work themselves.
Multinational companies need to get a review done in each jurisdiction they operate in, by an assessor with local tax experience. The reports for all jurisdictions are taken into account by the assessor of the parent, and any material failings of the subsidiaries are visited on the parent. No subsidiary can display a better mark than its parent got, so even if you’re golden in the UK, foreign abuses can mean you get a black spot and can’t show off your UK gold star.
This is only a rough cut, done in about an hour of stream-of-consciousness thinking (with tongue slightly in cheek, to boot), so I expect it to be full of holes (the criteria may need work?) – but it’s the direction I would probably like things to travel in. Assuming such a mark is a good thing to have, of course, and subject to people telling me why it’s a stupid idea…
I’d expect most multinationals to get silver stars, and in fact a major company with a gold star could well get questions from shareholders about where all the money is going. But if (when!) the scheme is an accepted part of daily life, the benefits (and the savings for HMRC) could be enormous!