Helping people read Facebook’s accounts

Richard Murphy has complained that the Facebook UK accounts for 2015 are opaque and hard to understand (see his blog at

I, on the other hand think that they are quite easy to understand, and have tried to explain this to him in comments on his blog.

Accounting is a complex area, so I’d be grateful for any comments from other people.

The discussion essentially concluded with Mr Murphy complaining that the accounts do not tell us anything about the deferred tax asset: what it is, why it is being recognised, whether there will be any future profits, where they will come from, and so on.

In particular, he challenged me to explain how we can possibly know from the accounts that the company is planning to make more sales in the UK, but not pay tax on them.

In answer I suggested (just before he closed the comments on his blog) that:

“We know they have more of their existing business because the accounts show the increase in the number of engineers.

“We know they have a new reseller business because it says so in the strategic report, on the very first page of the accounts (not counting the contents page).

“We know they expect to make a lot of pre-tax profit out of this, because they say so when they recognise the deferred tax asset.

“We know that they expect not to pay tax on that pre-tax profit, because they say they are expecting relief for the RSUs. That is, the accounting profit they expect to make in the future is sheltered from tax by the dirty great loss they have already disclosed in the accounts.

“And we know that this is a reasonable result, because although they are expecting to make a lot of money, we can see that they have already committed to giving it away to their employees via RSUs. As the value goes to the employees rather than the company, we would expect the employees to be the ones who are taxed on it.”

He maintains that the accounts tell us none of those things, and that I am making things up to fit a pet theory.

On re-reading the accounts, I find:

  • On the increase in number of engineers, the strategic report says “The company has experienced large growth, especially in the area of engineering”.  Note 6 shows that the engineering team has increased from 215 to 415, which seems to corroborate that.
  • On the new reseller business, the strategic report (again) says “From 1 April 2016, the company’s function expanded to include an advertising reseller business in respect of large UK customers.  The company is positioned to continue to expand in the future”.
  • On the expectation of profits, Note 15 says “The deferred tax asset has been recognised on the basis it is probable there will be sufficient future taxable profits against which the deductible temporary differences can be utilised”.
  • On the expected relief for the RSU deductions:  just before the above, Note 15 says “the deferred tax asset mainly relates to unvested employee RSUs”.  So Note 15 is very much saying that the company will get a tax deduction when the RSUs vest, and this will be used up against future profits.

Now to me, the above constitutes the accounts saying, in very clear language, exactly what I thought they said.

I don’t think I’m even extrapolating from numbers and drawing conclusions: the accounts (to me) seem to say things in plain English.

I’m worried I might have lost my sense of perspective.  Am I just too used to tax accounting?  Am I reading obscure jargon and thinking it’s common parlance?

When I read things like “expanded to include a new reseller business”, is it only my corporate tax training and experience that allows me to deduce that the company has expanded to include a new business?

Or are the accounts actually quite easy to read?


Further response to David Quentin on tax avoidance

Apologies for the late posting of this: I’m catering at a scout camp over the bank holiday weekend, and preparing for that has taken more of my spare time recently than I anticipated.  I am also likely to be rather incommunicado (in said field) for the next week or so: further apologies for the resulting delay in replying to any comments.

This post has been put together in fits and starts, so yet more apologies if it doesn’t quite hang together.

Sorry about apologising so much, too 🙂

My fundamental point is that Quentin’s model creates false positives, and to eliminate them he makes concessions which then create false negatives.

False negatives

Following on from my previous post, David Quentin (and Iain Campbell) pointed out to me that I was not taking into account what Quentin said in his paragraph 33:

“It should be emphasised that we are talking here about tax risk that has been deliberately created qua tax risk, and not tax risk which has arisen as a result of deliberate but non-tax-motivated behaviour. If you do something in pursuit of your commercial objectives and it gives rise to tax risk, you are not in the “avoidance” zone. You are over on the left of the curve in the zone where you want tax advice to eliminate tax risk, not create it.”

He followed this up on his blog by saying, as a response to my previous post:

“If the tax adviser told it to do something different (e.g. some sort of structured work-around) because that would increase the certainty of being able to claim capital allowances, this would be an upwards movement in “tax advice risk space” (as described in paragraph 12 in my paper) and would not constitute tax avoidance”.

I cannot agree with this: I feel that if a tax advantage is not clearly due, and a taxpayer takes steps with the sole purpose of making as sure as possible that the tax advantage is actually obtained, then this would frequently be regarded as avoidance.

In fact, the phrase “structured work-around” could be used as a fairly close definition of “avoidance” in most non-tax contexts (I avoid problems with accounts and tax software by working around them in Excel, for example).

Taking Google’s situation of selling from Ireland to the UK (rather than selling in the UK) as an example: if the aim is to ensure that for tax purposes sales are recorded in Ireland rather than the UK, and Google issues instructions to its staff as to how they should act to ensure that they keep the sales in the desired place, then issuing those instructions (which may have no, or even adverse, economic impacts) looks to me rather like an avoidance step – but it would not be under Quentin’s analysis. So here we have a false negative.

One could simply say that being careful to minimise the tax risk you create is still creating risk, so overall there is a downward movement and hence avoidance. But I think that the way the model walks through the tax risk space means looking at individual steps, not at the big picture; and I think that outside observers would tend to do so.

False positives

I also think that Quentin is seeing too much of a clear divide between doing “something in pursuit of your commercial objectives [which] gives rise to tax risk” on the one hand and a company doing something “because its tax adviser told it to” on the other. It’s true that in many cases clients do go ahead merrily with their original plans and we then try to make sure the tax is as certain as possible (documentation! Please, somebody think of the documentation!), but ideally one does rather hope that commercial actions do change as a result of what tax advisors say. Tax being a deal-breaker is not uncommon, and tax affecting the form of a transaction is (fairly) routine. I’m frequently asked whether a client should buy or lease a car personally or through their company, for example – people are perfectly prepared to change the economic form based only on tax factors (usually without specifying the car – which I regard as a somewhat crucial variable in the equation – but hey ho).

OK, that is probably a poor example given that as the eventual tax treatment is fairly certain (assuming mileage records are rigorously kept) I doubt it would count as avoidance under Quentin’s model (or many others), but the general point stands: it is often hard to disentangle behaviour which is “tax-motivated” from that which is not.

The borehole example may be better: one point of capital allowances (see the annual investment allowance in particular) is to induce businesses to make investments they otherwise wouldn’t make. So if the business is umming and ahhing about whether to bore the hole, deciding to do so because the advisor has told it that allowances will make it worthwhile sounds like the sort of step Quentin does include in his model:

– It is done due to the taking of tax advice; and
– It creates a tax risk

Quentin would then take it out of “avoidance” territory because it’s done in the pursuit of commercial objectives, although the fact that it would not have been done in the absence of the tax advice might appear to bring it in.

So Quentin has to say that if the action taken by the taxpayer has a significant non-tax impact then it’s not within his model, even if it does have a tax motivation. That is, you are within the model if you have a tax motive but can be taken out by a non-tax one. That would take the car and borehole examples completely out of the avoidance question. But this seems to be simply returning to the “no economic substance” test, and renders Quentin’s risk test irrelevant – or at least, as suggested above, overly narrow and leading to false negatives. It also needs a definition of “significant non-tax impact”, if leasing a car personally rather than through the company is significant but locating your European headquarters in a particular jurisdiction is potentially negligible.

Or, looking at the same example another way: if you would put the borehole in anyway, then you have a choice: you can claim allowances, or you can not. If you claim them because your advisor says you have a shot at getting them, although the position is not clear, that would seem to be something done which is very clearly tax-motivated and creates a risk (of interest and potentially penalties, as well as the tax underpaid), and which cannot have a commercial purpose in itself because the borehole is already sunk.  The claim seems to be avoidance in Quentin’s model, even if the sinking of the borehole is not.

Similarly with undertaking R&D because the tax credit makes it worthwhile: this seems to count as avoidance, if it’s not clear that the credit will be available, and is another potential false positive.

Now I am actually OK with calling this avoidance: in my mental model of avoidance (see below), any step you take to reduce your tax bill is avoidance, whether you use an ISA or Cup Trust; the difference for me is whether the avoidance is acceptable or not, which is an entirely different question. But Quentin seems to regard all avoidance as unacceptable, or at least undesirable (apologies if I am misreading here).


So overall I think that Quentin’s model is interesting, and should certainly be taken into account when looking at avoidance; but it seems not to count some cases of avoidance as such, and it would seem to class some normal tax planning as avoidance, and so it doesn’t seem to be complete. It is too narrow in one dimension (looking only at cases with little economic impact), and too broad in another (covering all cases where there is some risk).

It seems to work better as a potential hallmark of avoidance, but one which is neither necessary nor sufficient.

Perhaps to improve the model the tax risk space needs to be three-dimensional, to include economic impact? Travelling down and right on Quentin’s graph is objectionable if you stay in those two dimensions; but if you also posit a z-axis of increasing economic impact, is travelling south-east acceptable so long as you go uphill while doing it? If so, does the steepness of the slope matter?


I think the better model of avoidance is to look at a two-step process:

1) Define avoidance as the situation where the tax bill has been reduced as a consequence of an action taken by the taxpayer (this is very broad);
2) Classify avoidance as acceptable (ISAs, R&D) or otherwise (BEPS, IR35)

In this scheme, the question of whether an action taken serves only to reduce tax and increase tax risk, as set out by Quentin, would be taken into account when looking at part 2: was the avoidance undertaken for acceptable reasons?

The sort of transaction Quentin is targeting reduces the tax bill with no concomitant economic impact but just an increase in tax risk, so one cannot say the tax consequence is justified; this is unacceptable avoidance (or perhaps “abuse”, depending on how egregious it is).

The borehole example, on the other hand: investing in plant gives one allowances, which reduces the tax bill, so tax has been avoided; this is done in a way which does not simply increase tax risk but has economic effects, the tax consequences of which are clearly in accordance with Parliament’s intentions; so this is perfectly acceptable avoidance (or “planning”, perhaps).

Response to David Quentin on tax avoidance

EDIT:  The piece below doesn’t properly take into account a couple of paragraphs in the article I’m commenting on, so misses the point slightly.  I’ll do a follow-up shortly to address that.

I read David Quentin’s article on tax avoidance (Risk Mining the Public Exchequer, with interest, but although some of the thoughts are interesting I disagree with the conclusions he draws, the definition of avoidance he comes up with, and his suggested approach to solving the tax avoidance problem.

My disagreement is best done set out by example. Let us take a common uncertain filing position: capital allowances. For a convenient example, I take a query which was recently published in Taxation magazine: a farming company wants to put a borehole and associated water extraction equipment on land it farms, which is owned by the shareholders; can it claim capital allowances?

The advisors clearly consider this to be uncertain, or they wouldn’t have written to Taxation. There are a few areas of uncertainty – is the borehole plant? Is the associated equipment debarred by List B of CAA 2001? Does the fact that the land (and by extension anything added to it) belongs to the landlords mean that the company can’t claim?

So there are number of possible filing positions. They could:

– Claim nothing

– Claim part of it

– Claim it all

Now my first reaction to reading the query was that a full claim would almost certainly be appropriate and rather than being technically unsound would only fail if HMRC got stubborn and the client didn’t want to take them to Tribunal; but I wouldn’t say it was clear-cut. The published replies seem to agree with that stance.

However, claiming nothing is clearly the position of maximum certainty. Claiming part or all gives us a risk that HMRC will challenge the claim, and we are not sure whether we will succeed against such a challenge.

Using Quentin’s methodology, then, we cannot decrease the tax bill without decreasing certainty, so the inflexion point is right at the Y-axis. Alternatively, if we include other capital allowances claims we might say that we have gone as far as we can to the right on the graph already – the position of the Y-axis is somewhat variable, as it depends on how much you know about tax before taking advice rather than anything objective.

Anyway, the inflexion point comes when and if we decide to claim capital allowances on the borehole and associated equipment, rather than not claiming. At that point, we are starting to avoid tax.

If we follow Quentin’s flowchart, the quality of that avoidance depends on whether allowances are actually due, and whether HMRC challenges the claim. If the allowances are actually due, then there is “effective avoidance”; if they are not, then either there is “ineffective avoidance” or the taxpayer pockets cash to which it is not entitled (due to lax enforcement by HMRC).

If we adopt Quentin’s views, then, the prudent approach would be to claim no allowances, in case they are not due.

To me, labelling a capital allowances claim which is not absolutely clear-cut as any sort of avoidance is absurd. HMRC challenge all sorts of capital allowance claims: I once had one argue that a water tank was in item 4 of List B (“A dam, reservoir or barrage…”) on the grounds that the dictionary definition of a reservoir was “a place where a liquid is stored” (or something like that), and so any water tank must be in item 4. He withdrew the challenge when I pointed out that even a fountain pen has a reservoir of ink, and his logic would put it in the same capital allowances position as the Hoover Dam or Kielder – but by Quentin’s argument, claiming capital allowances on that water tank was avoidance.

Indeed, given that a petrol tank in a car is a “reservoir”, one could construct an argument that all motor vehicles are “other equipment associated with the… reservoir”, and so any claim for allowances on any vehicle (or fountain pen) is avoidance. There are a host of other capital allowances claims that could be similarly regarded.

So this definition of avoidance gives false positives and is therefore, in my view, flawed.

Can the flaw be fixed?

I think the problem stems from Quentin’s definition of tax risk as being something which is deliberately created by a taxpayer when he puts himself in an uncertain tax position. This, I think, is only a sub-class of tax risk. Taxpayers find themselves in uncertain tax positions all the time, through no action (or inaction) of their own. I think it would be hard to argue that the farming company which has drilled a borehole has deliberately created a tax risk for itself: it think it is fairer to say that the company has created a commercial position, which has come with an associated tax risk that the company wishes were not there. The risk is simply that the tax position will not give credit for the economic cost sustained by the taxpayer: a risk that there will be an unexpected cost, rather than a risk that benefits you might hope to accrue will not.

This leads me to suspect that Quentin’s analysis works only in a narrow subset of cases: those where the taxpayer’s motives are primarily about tax, rather than commercial. If you do something simply to reap the tax benefits then you’re on his graph. Take an individual taking advice on where to invest cash he has in a bank account. Sitting where it is, there is a tax charge on the interest. Putting some in an ISA reduces that tax charge without introducing any form of uncertainty, and is clearly on the horizontal part of the graph. Investing some in a marketed tax planning scheme is going down that slippery slope. But these are things with no economic difference (a cash ISA is not substantially different from a normal savings account). Investing in an EIS company, with all its uncertain tax benefits (your relief is in part dependent on the future actions of the company, which always gives me the willies when clients invest in start-ups), has economic impacts and would not normally be regarded as avoidance.

So Quentin’s argument seems to boil down to economic substance: if you do something with a tax effect but no economic impact, then unless you are sure the Government is happy for you to do it, you are engaged in tax avoidance.

That doesn’t seem to be radically different from previous definitions of avoidance, to be honest.

One way to perhaps salvage the definition would be to replace “maximum certainty” with “reasonable certainty”: if you are fairly sure that you have the right position, then you’re not avoiding tax; if you think you’re probably wrong but are prepared to take a punt, then you are avoiding. This of course gives a problem in defining “reasonable”, and in gauging whether you’re be above or below that point, but I would feel much more comfortable with it. It is of course very much the US approach under FIN48, if you take “more likely than not” to be the definition of “reasonable certainty”, but I imagine that a prudent person might argue that “likely” or “probable” might be more appropriate – or a more aggressive person that “could” is enough.

Thoughts after the Mazars Fair Tax Debate

Last night I attended the Fair Tax Debate at Mazars, which was a very interesting evening.  It was good to see that there was a lot of agreement about tax transparency, and to get more understanding of the workings of the FTM, even if there’s not yet so much consensus about “fairness” itself.  And the Mazars offices seem very nice.

I’m sure the meeting will be written up fully elsewhere (I know Andrew Goodall for one intends to do a piece on it), so I don’t propose to do that (EDIT: so if you want a summary of the meeting, you’re better off waiting for Taxation next week), but here are a few thoughts that occurred to me.  Most come directly from the meeting, but some are developments from it thought up on the ferry home.

“Fair” tax

The consensus in the debate seemed to be that the FTM is all about clarity and transparency, not about “fairness” in the normal sense – even Richard Murphy seemed to be agreeing to that.  So my intended question about why he chose the definition of “Fair” that he did rather became irrelevant: it was clear that this is a labelling issue, rather than looking at what “fair tax” in the normal sense would be.

I do wonder whether there is scope for a mark which does gauge fairness.  I can think of several possible definitions of fairness: the highest would be: you pay “fair tax” if there is nothing about your tax position that HMRC (or any other tax authority) could be expected to quibble with.  So no over-egging of capital allowances claims; pay yourself a market salary and only take surplus profit as dividends; agree APAs and ATCAs (or sit in safe harbours) for all your cross-border transactions; and so on.

I think anyone who meets that sort of standard can reasonably say they pay their fair share without anyone disputing it.  It’s probably much further than most people would want to go, but perhaps (in the light of Heather Self’s comments about a standard being devalued if everyone can get it) such a stringent test would be appropriate.

From talking to a few people about it, though, there seems to be little appetite for such a mark: either because it’s hard to balance the height of the standard in such a way as to make it achievable without being excessively prudent about tax, or because you’d have to do quite a thorough audit of the company’s tax position and this is impractical.

Assessment process

The question I did ask was about how the assessment process works.  I’ve been a bit confused by this, as Murphy has told me (in responses to comments on his blog) that it consists of reading the tax policy and scanning a few sets of accounts, so takes hardly any time at all; and also that it is much more in-depth than a tax due diligence exercise would be, even though it only covers corporation tax and ignores VAT, PAYE, NI etc.

It transpires that the assessment itself consists of a relatively brief review, but what takes the time is the discussion with management about tax policy, how it could be improved, what they’d need to do to up their game and so on.  It’s not the test that you’re really paying for, it’s the help in making sure you improve your tax situation so as to be in a position to pass it.  That clears up a lot of my confusion.

I’m still slightly confused by the business model, though.  The FTM costs a couple of hundred quid for a small company, up to £4k for a large one; but the issues would seem to be largely the same across that whole client base.  Yes, a larger company will have more detail in its accounts, but that seems less relevant if the time is spend discussing policy and behaviour; and one might expect that a larger comany would be more sophisticated and require less help.  Can one talk more quickly to a small businessman than to a large one?  I’m not sure how this works.

Also, the effort would seem to be required mostly in year one: once you’re up to speed, then checking that you’re still there would seem to be a lot quicker – after all, you’ve now written a good tax policy – but the fee stays the same.  This is presumably where third-party assessors would come in, of course, who could agree a different fee structure in year 2.

Publically-available information

Murphy said, as he has said a number of times, that one reason the FTM is about transparency is that it is only possible to look at publically-available information, and so it is important that this information is transparent; further, it is not possible to come to any form of subjective assessment of the fairness of a company’s tax affairs based on that information.  I agree with him almost entirely, except that I am very much confused about what it is that bars the FTM from looking at a company’s private information.

I spend most days looking at unpublished information about companies, which they are happy to provide.  In fact, I am just arranging to go and have a look at a load of unpublished and highly confidential tax information belonging to a company I don’t even act for, to carry out a due diligence exercise for the purchaser.

So there is no barrier at all to a company providing a reviewer with unpublished information, and I can easily (and frequently do) give an opinion on the tax position: the sort of tax risk you might identify in a DD exercise is exactly the sort of thing that might cause one to consider the company’s tax position unfair (although it does work both ways: spotting unclaimed allowances is always a bonus).  A letter of engagement here, a hold harmless letter there, and Bob’s your uncle.  And, as with the FTM at the moment, updating the report in year 2 onwards would be much simpler than the initial assessment.

For public consumption, you could then put a detailed reconciliation of the tax position either in your accounts or on your website (or maybe on the FTM site?), so anyone can check how much your tax charge is, how much you’re paying, and the detailed reasons why (if at all) these differ from the headline rate, along with commentary from the reviewer as to whether each  difference meets the published criteria for fairness.

So I can very easily see a mechanism for reviewing a company’s tax with a view to endorsing the fairness of its tax position.  Which makes me think that maybe it could, and maybe should, exist (but see above).  Costing is an issue, of course, but that doesn’t affect whether the job is achievable in principle.

Purpose of the FTM

Following on from that: the FTM is not really about judging the fairness of a company’s tax position, just about its transparency.  Why not strip out the remaining vestiges of fairness from it, call it a set of transparency standards, and then campaign to get these made mandatory as part of financial reporting?  You don’t need to separately assess people to see if they can be awarded a mark if they have to meet the criteria as a matter of company law, and this would force the issue onto all companies rather than just those for whom obtaining the FTM is good publicity.

Then you having gotten yourself a good transparent foundation you can set up a Fair Tax Mark as a badge showing that the tax the holder pays is fair and that they are being particularly good corporate citizens, without having to deluge people with masses of data.

Independence of the FTM

Murphy said a number of times that the FTM is independent of him, and he would love it if he were no longer involved.  However:

–       he came up with the idea

–       he drafted the criteria

–       he’s drafting the large-company criteria

–       he reviews all the assessments (neither he nor David Quentin suggested that anyone else on the FTM team proper, as opposed to the advisory panel, has any tax experience)

–       Quentin had to refer a question about how the FTM might take account of the tax affairs of a company’s proprietors to him…

…and so forth.  It does look as though Murphy is the core of the FTM and plays all the key roles.  Replacing him would seem to be a fundamental shift for the FTM.


Finally: the FTM criteria say that having an EBT is proof of avoidance behaviour which ipso facto denies a company the FTM.  I object to this strongly.  I have a client with an EBT, which exists to facilitate the holding of shares by employees by providing a mechanism for transferring those shares.  The company has claimed no deduction for any contributions (it has lent money, but this is of course not deductible) – all the EBT does is incentivise staff and allow them to realise the value they have helped create in the company when they leave.  I really cannot see why this should be automatically branded as avoidance, with no room for appeal.


Annual Investment Allowances – transitional rules made easy

People keep complaining to me how complicated the AIA transitional rules are – not least because they work differently when the allowance goes down (£100k to £25k) and when it goes up (£25k to £250k).

I think they’re not all that complicated, but the way they’re presented in the legislation and guidance is fiddly.  If you look at them slightly differently, things become a lot easier.

The easy way

The way I think of it is to ignore the actual rules, and say:

1) When the allowance goes down, it stops at the date of change and is replaced by a new lower allowance.  Expenditure before the date of change can use either of these allowances; afterwards, just the lower one.

2) When the allowance goes up, it continues and is supplemented by an additional allowance.  Expenditure after the date of change can use either of these allowances; beforehand, just the lower one.

Application to existing rates

  1. On 31 March 2012 the £100kpa allowance stopped.
  2. On 1 April 2012 a new £25kpa allowance started.
  3. On 1 January 2013, the £25kpa allowance was supplemented with an additional £225kpa (sic) allowance.

These three allowances – the £100kpa, £25kpa, and £225kpa – are regarded as entirely separate lumps.

All you need to do is look at the date of any bit of expenditure, and ask yourself which of the three possible allowances were available at that date.  Then you can choose which allowance you use (if there are two available) against any particular bit of plant.


To take a company with a 28 February 2013 year end:

  1. In the month to 31 March 2012, it has 1 month’s worth of the £100k allowance (£8,333)
  2. In the 11 months from 1 April to 28 February 2013, it has 11 month’s worth of the £25kpa allowance (£22,917)
  3. In the 2 months from 1 January to 28 February 2013, it also has 2 month’s worth of the £225kpa allowance (£37,500).

Expenditure before 31 March 2012 can use allowances 1 and/or 2.

Expenditure between then and 31 December can only use allowance 2, and only to the extent that it hasn’t been used already.

Expenditure after 31 December can use allowances 2 and/or 3 (again to the extent that allowance 2 hasn’t already been used).

Simples 🙂

New rules

If the £500k allowance uses the same transitional rules as the £250k allowance, then there should be no problem.

If not, I shall throw my hands up in horror like the rest of you 🙂


EDIT: checking the TIIN, it looks as though the transitional rules will be the same and so the above should apply.

Unitary Tax – status update

I’m conscious that I’ve let this lie for a couple of months, but although I haven’t been posting about it I have been working on Unitary Tax quite a bit.

My original intention was to put together a simple toy model of Unitary Tax to play around with various concepts.  I have such a model, but it’s too simple to do anything useful at this stage and there are such a lot of questions to be asked and answered that I’ve diverted myself into looking at those first.  They all seem to interconnect, so it’s hard to make progress on say the Sales factor without also looking at Assets and how that affects Permanent Establishment, and so on.

I’ve also been sidetracked into reading up what other people have been saying about UT and Fomulary Apportionment.  What I’ve concluded is that I need to pull all this together into a single set of principles before I can start sullying it with numbers.  So I’m drafting up a paper which will hopefully give me a coherent theoretical framework, and then I can return to the numbers.

It will probably take a while.  Not least because people are writing more papers while I’m reading the existing ones – this tortoise will take some catching… 🙂

The Fair Share Star

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!

Fair Tax Mark – model tax reconciliation

Looking at the model tax reconciliation for the Fair Tax Mark, I can’t see any difference from a normal tax rec.

In particular, though, the example has this large figure lumped in as “expenses not deductible for tax purposes”.  Should this not be broken down and some clearer narrative given?

The criterion specifies that 75% of the reconciling items should be broken down to get full points.  75% is a hard thing to calculate when you have figures going in both directions (£2,491 is clearly more than 75% of the £136 difference to be reconciled), but £2,491 out of a tax charge of £20,951 looks fairly significant to me. 

I know it’s not current GAAP to do so – I’ve had a lot of conversations with auditors and accountants who’ve just lumped things together that I’ve suggested shuld be broken down – but isn’t the point of the FTM to go above and beyond that?


Fair Tax Mark – fairness testing

I’ve just been playing with Richard Murphy’s new Fair Tax Mark (no apparent relation of the old one).  I was surprised by how little of it actually relates to tax, and how many points are available simply for complying with company law – I’d have thought that sort of thing should be taken as read, to be honest.   But if one views it as a Tax Transparency Mark it seems to heading along the right sort of lines.

Anyway, the point of this post is that as so many points are essentially sent up with the rations, it occurred to me to try to see how obnoxious one can be and still get 13 points.

It looks as though it would be surprisingly easy: if you want to be cynical about it, you can deliberately miss out on 7 points and still qualify for the mark.  If we assume a company set up with a primary aim of avoiding as much tax as possible, then it will spend 4 points straight away by having a low ETR.  However, it can get 2 of those back again by explaining the low tax rate in detail.  It can then explain that it has a policy of seeking the absolute minimum tax rate, which is enough to preserve 1 point (the policy doesn’t has to be nice, it just has to be clear); if it goes on to say that it will not avoid artificial structures or tax havens, it looks as though 4 points are spent on those factors.

If you’re happy to set out the names, addresses and incomes of directors and beneficial owners, then there seems to be no need to lose any further points: you can score 14/20 and get a comfortable Fair Tax Mark despite avoiding as much tax as you like, so long as you’re up-front about it.  I can see how this is laudable transparency, but it seems odd to call it Fair Tax.

The way the policy marks are lost is possibly a bit loose, too: you lose 2 points for not declaring that you won’t “abuse” tax havens, but if the whole point of a tax haven is to reduce your tax bill then one might argue that this isn’t “abuse”: 2 points back straight away.  I can’t see that you’re actually measured against your policy, anyway, so nothing seems to stop you saying that you won’t abuse tax havens but then doing something can someone else might see as abuse but which you argue is in fact in accordance with your policy.  One could then spend three points to conceal names, addresses and incomes and still get the 13/20 required for the Fair Tax Mark, even if there is no tax being paid on profits which then accrue to anonymous beneficiaries…

I feel the points should be weighted more towards the actual tax being paid; or alternatively, and probably better, there should be some sort of assessment of the reconciling items.  At present, due to the favouring of transparency over fairness, the points you lose because of the fact that you have carefully structured your business to ensure that profits are treated as arising offshore can be more than off-set by boasting about it.  To me a better methodology would be to look at the reconciling items, establish the reason for them, and only allow the points if the reason is acceptable.

I appreciate that this would make the mark more subjective than objective, but it should be possible to set up some assessment criteria so people can understand why a view has been taken – you could mark the reconciling items against the model tax policy, for example. 

At present, “Fair” seems to involve almost no moral element, which is a serious deficiency in my view.

So: Transparency Mark, yes; Fair Tax, not necessarily.

Partnerships – draft legislation

In a break from Unitary Taxation, I’ve been looking at the new Partnerships rules in the draft Finance Bill 2014 and it seems to be a clear case of the unfair imposition of tax.

There are two main bits to the new rules, one covering LLPs and whether members should be treated as self-employed or not, and the other looking at mixed partnerships (where at least one partner is a company, and normally at least one is an individual).

The former isn’t too bad, though I’m wary of the way that the rules it brings in are purely mechanical rather than having room for judgement in them.

The latter seems to be rather unfair, because of the way that the rules it brings in are purely mechanical rather than having room for judgement in them.

The issue

The issue to be addressed is that if you have an individual partner he is taxed on partnership profits at income tax rates of up to 45%, plus NI; a corporate partner is taxed at corporation tax rates of 20%-odd.  So if you divert profits to a company you save tax, and if you divert losses to an individual ditto.

The losses rules are aimed at marketed avoidance schemes where substantial losses are made in year one and allocated to individuals out of proportion to their economic loss.  They include a condition that the arrangements have to be for tax avoidance purposes, whcih seems fair enough.

The profits rules however include no condition about tax avoidance: they simply say that if the corporate member receives profits that HMRC thinks could have been received by an individual had the partnership been set up differently, or that will eventually be received by an individual, then those profits are attributed to that individual (I paraphrase here).  The company can keep a profit share based on the assumption that any cash it invested can earn interest, but anything above that is automatically redirected to the individual.

Problem – losses

The problem is that HMRC have assumed that partnerships simply produce a profit stream, so diverting it from one person to another is a simple matter.  But to take a simple example, if a mixed partnership (one company, one individual) makes a loss of 100 in year 1 and a profit of 100 in year 2 (net result nil), then the company gets a loss of 50 and no profits, and the individual gets a loss of 50 and 100 profits.  The individual has to pay tax on a profit of 50 which doesn’t exist in economic terms, it is purely an artifact of the tax regime.

HMRC’s response is, essentially, that those who try to avoid tax should expect to get burned.  But this isn’t exactly fair nor reasonable.

Take a position (based on an actual case I know of) where we have several companies in partnership, including one which was set up by an individual so that he would have the same limited liability as all the other partners.  It makes a large loss in year one, due to  capital allowances on a large investment coupled with a low level of actual sales (not unusual for the first year of a venture).  In later years it is expected to make comfortable profits.

The new rules will leave all the losses in the company, but all the profits will be attributed to the individual: he is most definitely double-taxed, and the losses are completely wasted.

The obvious solution is to disclaim capital allowances to reduce (but not remove) the wasted losses.  If however the allowances are 100% first year allowances, if we disclaim them we replace 100 of losses carried forward with 8 or 18 of allowances per annum on a reducing balance basis.  If we make 20 of profits per year after the first, then in the ordinary course of things we would expect not to have to pay tax for five years but the partnership rules will give us increasing taxable profits.  They completely negate the enhanced capital allowances that Parliament has said should be available for worthy investments, purely because the individual wanted limited liability like his fellow partners.

That is a fairly fortunate case, in that it is possible to disclaim the losses at risk.  Had the capital allowances been claimed a few years ago that may be out of time – and if the losses are economic losses then there is nothing that can be done.

I note that the House of Lords is looking at this area, and I shall certainly be feeding back on their call for evidence.

Further problem – limited liability

The new rules apply only if a company is a partner in a mixed partnership, or one that HMRC thinks could have been mixed.

This leads to absurdities.  If Mr A and Mr B want to go into business together with their liability limited by shares, they have a few options.  They could form a company to carry on the business, where each owns 50% of the shares, or they could each form their own company and have those companies carry on the business in partnership.  In the former case the profits are clearly subject to corporation tax in the company; in the latter, the new rules would say that they are clearly attributable to the individuals and subject to income tax.  Very different tax results, in an almost identical economic and legal position.  What is the policy reason for this?

Worse: if Mr A has a trading company, and Mr B has a trading company, and they trade independently for several years, their profits are taxed in the companies.  If they then decide to get together and pool their businesses, so the companies are in partnership, do we suddenly have the profits shift over to being attributed to the individuals and taxed as income?  Possibly not, as it should be possible to argue that if the trading comapnies are established then it would not be reasonable to suppose that the individuals would have become members of the partnership.  But this is far from clear, and in any case what is the policy reason for treating this corporate partnership differently from the previous one?

Boiling it down: the draft rules would allow HMRC to lift the corporate veil in some situations, but not in others which are practically identical.

That seems a dramatic step to take, especially when one bears in mind that the best a corporate partner can do, even if it is trying to reduce a tax bill, is normally to defer it.  The Exchequer will get the tax eventually (when the profits are distibuted to the shareholder), so what is the problem?  All the rules seem to do is allow HMRC to take a greater cut of profits which would otherwise be reinvested in the business, which doesn’t seem to be very helpful to a small business sector which is trying to get out of recession.