Richard Murphy has launched a new campaign, the Fair Tax Mark, which rates UK retailers on tax and transparency measures.
I have some concerns about the methodology – it only looks at corporation tax, it assumes wrong-doing unless strong evidence to the contrary is presented, it takes no account of materiality, and it ignores (or misunderstands) deferred tax.
But putting them to one side for the moment, a bigger issue I have is that it seems to have a mismatch between what it wants to tackle and what it’s actually doing.
Ben Saunders has made a number of criticisms which I think are very pertinent, to which Murphy has responded in a long blog post on the Fair Tax site. Picking a few interesting quotes from Murphy out of that posting, I find a worrying trend:
“We are not seeking to record behaviour within the system as it is. We are seeking to assess behaviour against the standards that we think would apply.”
This seems odd: companies are surely constrained by the system as it is. Saying they are acting unfairly because they follow the law that applies to them rather than the law that Fair Tax would like seems a bit harsh. The fairness of the tax they pay would seem to be a reference to the system as much as to the company.
“Remember what our definition of fair tax is: it is paying the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. “
This definition of “right” seems to entirely ignore any reliefs that Parliament might wish to give. I appreciate the broad thrust of the Fair Tax argument, but it does seem to be incomplete.
“We think tax deferred for forty years is something we have to ignore when assessing fair tax. Saunder’s comments simply do not make sense when the system can and does deliver such anomalies that we successfully highlight.”
Such deferred tax arises largely from the acceleration of reliefs. So again, Fair Tax seems to mean ignoring Parliament’s intentions.
“If we assume, as we have to, that accounts reflect economic performance but that on average that income is under taxed, as rising deferred tax balances would imply, then by our criteria we do not have a fair tax system”
“…if we followed Saunder’s suggestions we would get the maths wrong and so not show real distortions that exist in the tax system”
This seems to state quite strongly that part of the point is indeed to challenge the tax system, not the companies’ place in it. This goes further than ignoring Parliament’s intention: it’s describing reliefs as “distortions”. Consistently investing in plant and machinery gives a rising deferred tax balance, so your income is “undertaxed”.
This quite ignore any permanent differences like R&D tax credits (which are probably not too significant for retailers, to be fair) and the substantial shareholdings exemption (which could well be) where Parliament has explicitly decided to reduce companies’ tax bills.
So overall the Fair Tax methodology, although it purports to rate companies, is actually using them as example of why the system as a whole is unfair.
That seems very odd: in the case of capital allowances, for example, it seems to mean that you can do exactly what Parliament wants you to do, and yet be acting “unfairly”. That’s not a definition of “unfair” I can easily endorse.
And to publicly mark companies down for it seems to a) be a bit mean, and b) conceal the real message.