CinnabarRed's tax thread

[CinnabarRed]

This may be an act of supreme arrogance on my part - if so, I apologise profusely! But it seems that a lot of people have got questions about tax policy and the morality of taxation, which is my professional field.

So this thread is your chance to ask me any questions you have in this general area. I promise to explain what I know, be honest and clear when I don't know the answer, and distinguish between facts (for which I will provide a reference) and my opinion.

So over to you! I'll be back in the morning to answer any questions posted tonight.

PS: I won't be providing taxation advice to anyone!

Firstly, thank you CinnabarRed for your extremely interesting and enlightening comments.
Secondly, I wonder what your view is on the following:
Will there ever come a point at which the consumer-driven sector of the economy grinds to a halt, because saturation a point has been reached?
I am thinking along the lines of the massive over-production (and subsequent stock-piling) encouraged by the EU agricultural policy 30 to 40 years ago. There is a point at which people cannot "consume" any more.
I'd be interested in thoughts/opinions on that.

Ooh, interesting question. I haven't thought about that before.

So, off the top of my head, no I think there will always be a need for production and consumption at some level. Things break (crockery and glasswear), or wear out (sofas) or get consumed by use (paper, ink), or aren't suitable for a new purpose you would otherwise put them to (clothes for DS won't be suitable for new baby DD).

It may not be at the level it is now. Apart from anything else, as we consume the World's resources at ever increasing rates, it becomes more and more likely that at some point our quality of life will start to get worse rather than improve.

So much we manufacture depends on oil, for a start. According to Material World on Radio 4, more than 200 different categories of product use oil in the manufacturing process (quite aside from the energy needed for manufacture).

Does that seem reasonable?

No, I agree the current level of cuts is too deep, too fast.

But when targeting cuts I wouldn't cut pensions, frankly. The state pension is paltry as it is.

Over-remunaration is tricky. Everyone gets paid what the market will bear. That's why footballers earn so much more than TV stars, for example. There are so few people with Frank Lampard's skills; there are several hundred who can do pretty much what Frank Skinner can do.

I think I'm going to write a separate post about why companies and individuals go offshore when I get a spare moment. There are all kinds of reasons, and all kinds of different types of offshore. Some definitely promote secrecy, but some don't.

"Everyone gets paid what the market will bear. "

That's kind of simplistic, isn't it?

There's an argument that investment bankers are not being paid what the market can bear, but are charging monopoly rents.

The market doesn't appear to be bearing their overpayment very well, and yet still they manage to extract this money despite poor performance.

'Will there ever come a point at which the consumer-driven sector of the economy grinds to a halt, because saturation a point has been reached?'

I am about at that point now. I have everything I need (and an EU stockpile of not yet worn footwear) and most of the things I want, so in reality, I need to buy food, pay the bills, and petrol, and that's it, apart from clothes for the ever growing teenager. It's a good point to raise though.

The last year for which I have a detailed breakdown of expenditure is 08/09. In that year, state pensions were £62.7bn. All other benefits combined were £67.3bn, so state pensions amounted to less than half of the benefits bill.

Total government spending across all departments was £620.7bn. So state pensions account to around 10% of all spending.

Personally, I'd prefer to cut quite a lot of other stuff before I started to reduce state pensions.

On bank salaries, let's start by separating out retail banking operations and investment banking operations. I don't think anyone thinks that retail banking staff in high street branches are overpaid? They earn around average wage. If you want to put your savings into a bank that doesn't overpay its employees then look for one without an investment banking division. How about the Co-operative Bank, that might not have investment banking?

Some investment bankers do earn megabucks (although their support staff don't, of course). Spidookly, you would be right to say that public opinion doesn't accept their salaries, but the general public isn't "the market" for employing investment bankers. That would be the other investment banks, private equity and hedge funds. Those are about the only other organisations that pay elite salaries. In my view, banker salaries will stay sky high for as long as the activities of the investment bankers earn more in profits than the investment banks pay out in salaries.

Now, you could certainly argue that the investment banks didn't make profits during the recession. (In fact, a handful did - Barclays Capital, for example.) In a free market, a number would have gone bust. The problem was that the investment banks are typically still owned by retail banks, and the retail banks couldn't be allowed to fail. There would have been complete meltdown if NatWest, say, had gone under.

I would force the banks to separate the ownership of the investment banking divisions from the retail divisions. It would make the retail parts more secure, and would mean that the investment parts would be forced to bear the risks that they take (rather than the taxpayers).

"Spidookly, you would be right to say that public opinion doesn't accept their salaries, but the general public isn't "the market" for employing investment bankers."

That wasn't my point. My point was that there is a market failure when it comes to the way that this kind of remuneration works. No efficient market would allow mere employees to loot companies in the way it happens at the moment.

Shareholder value in banks has plummeted and still the salary packages get bigger and bigger. Why?

That's not a market "bearing" something. That's a corrupt system that is broken and needs to be fixed.

Ah, yes that makes more sense.

But I come to the same conclusion - the market failure is that the investment banks are part of something bigger that is too important to fail (i.e. the retail banking system) so they don't truly bear their own risks.

The retail and investment banks need to be separated.

The retail and investment banks need to be separated. I agree. The bailout was a necessary evil which noone wants to see happen again.

Part of living under a free market is that we have to allow people to take risks and succeed/fail because of them.

But I do think that government control of salaries in the private sector is a step too far. No matter how unpalatable it is for others.

"The bailout was a necessary evil which noone wants to see happen again."

Noone?

Really? It would seem to the casual observer that most of the banks are continuing to run their affairs in the certain knowledge that it WILL happen again.

"But I do think that government control of salaries in the private sector is a step too far."

You don't need government control. Just change the bullshit regulations around remuneration committees stuffed full of similarly overpaid charlatans.

A lot of this money is coming from pension funds, so the public have a legitimate interest in bringing down these wages costs. It's more than just "unpalatable".

Yup, I'm with you here Spidookly. It's interesting to note that the UK has the second highest wage multiple (i.e. the multiple by which the highest paid company director exceeds his/her company's average wage) in the World, behind only the US.

On a completely unrelated topic, I thought you might be interested in the evidence that Dave Hartnett, permanent secretary to the Treasury, gave to the Treasury Select Committee on 16th March in connection with the Vodafone case. DH is the most senior Revenue official in the UK, and used to run HMRC until a year or so ago.

He said: "...I thought I would construct the £6 billion [that some tax campaigners alleged was owed by Vodafone] for you, very quickly - how we think it was constructed and why we think it is simply wrong. The profits to which the £6 billion allegedly relates arose in Luxembourg from activities in Germany and Greece. The calculation is based on gross income, not on profit, so the calculation takes no account of non-taxable amounts -tax losses, overseas tax paid and all the things you would normally set off in getting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt at all to analyse the controlled foreign company legislation and look at exemptions. Our view [i.e. that of HMRC] is that the £6 billion is frankly - I hope this is not an inappropriate word-absurd, and that no serious or reputable practising accountant in this country, be it public sector or private sector, would be able to endorse it."

And here's another quote from Dave: "Small business in the UK makes up about 50% of the tax gap [the difference between the tax that should be collected and the tax that is collected]; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember - maybe if I went away for a couple of hours I could think of something - seeing a case of evasion in very big business in the recent past."

HMRC is investing £900m into their compliance effort and expect to raise £7bn for that investment. Of this, 5% is going to tackle avoidance by big business, 60% to tackle evasion and avoidance by small business, and 35% towards individuals.

Finally, talking about the size of the Tax Gap, Dave Hartness confirmed that HMRC estimate it to be £42bn. When questioned about the £120bn+ figures that some people bandy around, he said: "£120 billion proportionately is where Mexico would be. I don?t think we are Mexico."

I have another questions [cheeky]

Could you respond to Jeffrey Sachs's article in the FT today about how we need to avoid a "race to the bottom" on corporate tax rates.

And also, what is your opinion of the low Irish corporate tax rate? Do you think it is wise for Northern Ireland to attempt to reduce its rate in competition with the south?

Well, I have to say that agree with some of Sachs's article. In particular:

• the increasing divide between the rich and the poor/middle classes
• the imperative for spending cuts while protecting the basic needs of the poor and vulnerable
• his conclusion that companies and individuals are increasingly mobile internationally
• his analysis of current US tax policy.

However, I disagree with his assertion (I can't see any supporting evidence) that corporation tax competition is driving a race to the bottom, caused by rich individuals and multinational companies threatening to leave high tax countries.

First, it's too simplistic to simply look at headline tax rate; you have to look at the base of profits to which the headline tax rate is applied too. I refer to this as the overall tax take, and it's a far fairer method of reviewing how competitive a particular jurisdiction is.

Secondly, it's not that multinational companies are threatening to leave the UK. They are leaving the UK, and in droves. In my view, what has happened over the past decade is that the UK tax base has steadily widened, and contemporaneous decreases in tax rate (from 33% to 30% and then 28%) have not compensated. But undoubtedly companies are putting their money where their mouth is; when such a strong message is being given it would be a foolish government that didn't listen.

Thirdly, in my professional job (advising governments on tax policy) I'm simply not seeing a race to the bottom. Quite the opposite. Instead considerable pressure is being put on low tax regimes to step into line with the international norm. For sure the most pressure is being put on the tax havens, but Switzerland and Ireland are getting their fair share of grief.

I do have a question in my mind over whether the Chancellor has gone too far back the other way. The reform to CFCs will definitely take some income out of the UK tax net (rightly, in my view) and I'm not entirely convinced that he also needed to reduce the tax rate from 28% to 23% as well. Time will tell.

Regarding Northern Ireland having a lower tax rate to the rest of the UK, I think it's bonkers.

It would only make sense if there was evidence that it would encourage new business from overseas into the UK. I don't think it would; I think it would simply divert profits from the rest of the UK to NI, and so throw money away. My evidence for this is the roughly 40% of Eire's tax take is paid by US parented groups; that's about the same figure as in the UK. Which suggests to my mind that we're already pretty much maxed out at inward investment.

Thanks so much.

"First, it's too simplistic to simply look at headline tax rate; you have to look at the base of profits to which the headline tax rate is applied too."

Isn't this pertinent to the NI/Republic of Ireland thing too - even a lower NI headline rate will not bring rates as low as in RoI because they apply their rate to profits in a different way?

Is this true? How does it work?

Sorry for all the questions. It is so great to be able to ask them :)

Yes, it is true, but not as much as you might think. If you read the Eire tax code it's spookily familiar - and that's because huge chunks are lifted straight out of the UK legislation! So both countries have got similar tax bases.

Ask any questions you like. I'm delighted to be able to respond to some of the myths out there. There are some really important things that do need to be discussed and brought into the open, and it bugs me that the debate sometimes get clouded with non issues.

CinnabarRed, when you say "[multinational companies] are leaving the UK, and in droves", can you point me to the evidence for that? ie something showing net inflow/outflow of multinational companies in the UK? Also, for your argument to hold that this is a strong signal to the government about tax, you'd have to show that the reason that the companies have left the UK is because of tax. That certainly wasn't the case for Pfizer, which left because it's incomparably cheaper to do research in Eastern Europe, India etc due to lower wage bills, costs of land etc etc. Martin Sorrell says it is true for WPP, but I don't know of any proof of this.

slhilly

I'm not aware that ONS, or anyone else for that matter, prepared figures relating to net inflow/outflow of companies into/out of the UK.

There are figures that show inflows/outflows of trade, but they don't distinguish between outflows arising from migration [which is what we're talking about here], UK held companies being sold into foreign ownership [like Cadbury] and UK companies buying overseas companies [which result in net cash outflow from the UK]

What I can give you is a list of all the publicly traded companies which have migrated out of the UK since 2006:

• Freeport
• Experian
• Colt Telecom
• Hiscox
• Shell
• Waterford Wedgwood
• Omega Insurance
• Invesco
• Shire Pharmaceuticals
• Kiln
• Hardy plc
• XP Power
• WPP

There are no examples of companies in the same period which have moved their HQs into the UK.

In addition, I'm aware of many privately held UK companies which have migrated themselves of the UK, and foreign parented companies which have moved their European HQs from the UK to other European countries. Unfortunately I can't give you names or numbers because I only know about them through my professional career and I'm not permitted to breach client confidentiality.

The other thing we'll never know is how many foreign parented companies might have come to the UK if the tax regime were more benign, but instead chose to base themselves somewhere else.

nottirednow - pension payments make up just under half of the welfare bill. So they are roughly equal to payments made to the working age population. I'm happy to agree to disagree on whether pensions are untouchable!

Dell have moved as when we bought ds a computer at Christmas, it came from Lodz in Poland, whereas previously, they'd come from Ireland (ROI as opposed to NI I think).

OK, thx.

I think then that my points still stand:

1. MNCs are not leaving the UK in droves. You listed 14 companies since 2006.
2. It is not clear how many of these decisions have been driven by tax regime considerations. In the case of Shell, I strongly doubt it. It's too large an organisation, with too many other significant factors at play. I could believe it for Shire, however. With the others, who knows.

Scaryteacher, that's globalisation at work but not tax forum shopping. Lodz labour and land is lots cheaper than Ireland.

Every single one sited tax as the motivating factor. And remember that there are around 500 listed companies in the UK who have to reveal details of their HQ moves, out of 2.7million companies registered in the UK at Companies House. Those 14 are the tip of the iceberg.