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.
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.
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.
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.