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UK's largest companies do not pay the tax expected of them

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16th Jan 2006
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Richard Murphy

The UK Gap might now be £9.2 billion a year, enough to cut the UK council tax bills of every chargeable household in the UK by £10 a week or (and more importantly) more than enough to cover the UK's commitment to the Millennium Development Goals, warns long time AccountingWEB contributor Richard Murphy, in a new report.

The report finds an increasing Expectation Gap amongst the UK's 50 largest companies. Key findings of the report are:

1) These 50 companies have paid an average of 5.7% less corporation tax than expected rates from 2000 to 2004;

2) This 'Expectation Gap' increased from 4.2% in 2000 to 7.6% in 2004;

3) Over 5 years, these companies have thus paid £20 billion less tax on their profits than expected rates would suggest appropriate;

4) In 2004-5 alone this estimated 'Expectation Gap' constituted around £4.6 billion in lost tax revenue from these 50 companies (calculating that 60% of the tax was due in the UK);

5) Extrapolating across all UK companies, the report finds that the likely total UK 'Expectation Gap' may be as much as £9.2 billion a year: about 28% of corporation tax receipts in 2004-05. This lost corporation tax revenue is larger than the equivalent 'VAT Gap' (estimated by HM Revenue & Customs at around 16% in 2002);

6) While the UK's VAT Gap appears to be decreasing, its Corporation Gap is increasing.

A full copy of the report can be downloaded from http://www.thetaxgap.com/4682.html or http://www.taxjustice.net

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Richard Murphy
By Richard Murphy
18th Jan 2006 21:19

Development and tax
Alastair

You raise many interesting points, but it is clear that you are a long way from understanding current development thinking. Many, many years ago people thought the way to tackle poverty was to give aid to the poor. And, of course in emergencies that does remain the case. Otherwise your prescription is now seen as harmful practice. The way to help the poor is to change the systems that make them poor. The aim is to make sure that routine aid is unnecessary and the disruption that is causes to local economies can cease. .

An international trade system that stacks the odds against them; a debt system that loaded their country with debt for benefits they did not get and a global finance system that is designed to provide secret places in which corruption can take place under a gentle veneer of respectability are three ways in which the “system” makes the poor poor. The tax system is another.

I am unambiguous about the fact that the tax system should be used to redistribute wealth. It is not doing so as well as it should within the UK. It is doing so even less effectively between nations. How much clearer can I be about my motivations?

I am equally unambiguous about the fact that I do not think that this harms business, to which I remain wedded as the creator of some forms of wealth, just as I think it wholly unsuited to meet other needs within society for which communal action under the umbrella of the state meets need more efficiently because excess capacity cannot be afforded and therefore this essential prerequisite of a market cannot be created. Why am I so sure of this? Because taxes are and should only ever be paid out of surpluses. Businesses command the biggest surpluses available in society and managers wish to keep them under their own control (which is why they do not distribute them to shareholders when in many cases that would appear logical). The greed of management facilitated by the greed of some professionals has created an environment in which serious resource misallocation exists within society which contributes to the dilemma we face of the plenty which exists for most in our society when compared with the abject poverty of the majority of our fellow citizens of the world.

Tax could be used to help correct that. All the major nations of the world agreed that was the case when they signed up to the Millennium Development Goals. When I point out that if the corporation tax expectation gap was closed the UK contribution to these goals could be fulfilled I am not breaking new ground. I am suggesting a way in which politicians of all hues around the world could fulfil a pledge they made.

What is there not to trust about that?

Richard

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By listerramjet
18th Jan 2006 09:04

of course it is socially loaded and political
but then the piece starts of with a statement that is totally subjective and unsubstantiated, and the stuff about global poverty may tug at the heartstrings but is totally unrelated. Look at it another way - if you wanted to tackel global poverty would you start with taxation or would you start with the people affected? Increasing the tax take increases the coffers of the governments who are collecting the tax, and there is no evidence to link this with improvements with the worlds poor.

The analysis of IFRS impacts is interesting but not particularly relevant. We still have a principled based approach to financial reporting, and on balance the key drivers for the reporters are investor relations rather than tax implications (does the tax man really understand annual accounts?).

Tax competition does apply to the larger national, international and global corporations, but this is a complex field and corporation tax is not the only tax driver, and there are non tax drivers to take into account when analysing the actions of large corporations.

Dennis, I guess you can see that I remain to be convinced, and that I distrust the motives of the people behind this.

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By listerramjet
17th Jan 2006 16:17

hi andrew
funnily enough alastair is well aware of the meaning of global poverty, although he believes that poverty is something that people face rather than globes and he is not so naive as to think that increasing tax take will in some way solve the problems of corruption facing many of the poorer countries of the world; and also he thinks that others are mixing this up with the current debate of avoidance versus evasion in a way that is disingenuous.

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Dennis Howlett
By dahowlett
17th Jan 2006 17:18

You need to hear what Richard says
Alastair - my initial thought was not dissimilar to yours but then I went away and did some research around this. And then Richard and I had as conversation about the issues underpinning the gap he has identified.

One of the key points is that deferred tax is a massive contributor. But when he endeavoured to analyse company accounts, Richard came across all manner of problem and especially in connection with the application of IFRS 17.

Another issue is 'tax competition' which might be contributing to distortions not just in reporting but in the setting of dividend policy (got your attention?)

Richard says he plans on applying a qualitative approach to his findings. That will be interesting. Expect to see things that will spark significant debate.

As to the connection between tax and poverty - I hesitate as I'm keenly aware this is a socially loaded and political issue. My gut instinct tells me there are links. And they're not tenuous.

While we may be capitalists at heart, I believe we have a certain social responsibility beyond the odd donation to our pet charity. It's not a popular view but then I'm fortunate to be free to express that opinion.

Many of the world's most impoverished don't have that freedom and so have no voice.

It is one of the reasons I support the brave work of Paris based Journalists Without Borders.

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By listerramjet
17th Jan 2006 11:00

this is nonsense
This is not a gap at all, and saying it long and loud does not make it so. The Chancellor sets out his tax rules each year to achieve a required level of tax receipts, and that he might miss this is more properly ascribed to the complexity of his system.

The current debate (allbeit that it is somewhat one sided) is stirred by the current Chancellor's obsession with increasing tax revenues without increasing tax rates, to meet political objectives.

It is naive in the extreme to expect that an increased tax take in the UK (or anywhere else for that matter) would in any way affect global poverty, whatever that might be.

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Andrew Goodall
By Andrew Goodall
17th Jan 2006 13:30

Developing countries
Just in case Alastair is really not sure what is meant by global poverty ... 2.5 billion people still live on less than $2 a day. And recent reports from the Tax Justice Network and Christian Aid have clearly demonstrated a link between international evasion, avoidance and tax competition and the difficulties faced by developing countries that need to establish a tax base to fund investment in essential infrastructure and services.

Christian Aid estimated that "poorer countries are losing $500 US billion (£270 billion) a year in revenues to prosperous international tax dodgers".

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Andrew Goodall
By Andrew Goodall
17th Jan 2006 10:04

Tax competition and global poverty
This report raises some very important issues including the need for greater transparency in accounting for the tax liabilities of larger businesses.

It suggests that most deferred tax relates to excessive capital allowances given to encourage investment in plant and machinery, ie. allowances that will exceed any reasonable charge for depreciation in the accounts.

It also finds that the UK system of tax relief for interest paid on borrowings allows many companies' UK profits to be taxed "well below" the headline rate.

Most importantly, it provides further evidence of the link between tax competition and global poverty:

"The Tax Justice Network believes that those companies have a duty to pay all the tax that might be reasonably expected of them, and that government has a duty to work to close the Expectation Gap.

"If these actions were undertaken in combination then:

the UK could make a strong, world-leading contribution to funding the Millennium Development Goals;
the Poverty gap would be reduced;
UK taxpayers would have their Expectation Gap reduced, which would encourage their own compliance with taxation regulation."


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Dennis Howlett
By dahowlett
17th Jan 2006 10:52

Detailed outline of issues
Richard kindly agreed to record a conversation with myself yesterday - the issues that emerge are much deeper than the bare reporting of facts. A synopsis of the conversation and a download link to the recording can be found here.

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