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.

 

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.

Fair Tax Mark

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.