Is the Guardian deliberately misreporting the tax gap?

You don’t need to have done any journalism professionally to be aware that any question in a headline is usually answered in the negative.

But I’ve seen two articles in the Guardian now which cite the figure of £32bn as the total figure for tax avoidance in 2010/11. This is wrong.

The total tax gap is £32bn, of which £5bn is down to avoidance. HMRC’s report couldn’t be clearer. This should not be a difficult distinction to make, given the number of articles that have been running on tax avoidance recently.

But maybe that is it. A story needs to escalate in order to maintain interest. Quoting the actual figure of £5bn would seem disappointing.

It also seems at odds with the level of avoidance that us being widely reported.

So, what is the truth? Well, from my perspective, I think that the perceived line between routine tax planning and tax avoidance has been moved significantly partly to meet the public demand for these stories. It sells papers.

Only the Starbucks story is of real interest to me, and I feel the issue lies more with internal corporate politics than tax avoidance.

That is I’m surprised at the fact that the UK business was referred to as profitable. A 6% royalty is apparently in line with arms length principles, Subway (I think) being quoted as charging a 8% royalty to franchisees.

If the UK had a lower tax rate than the recipient of Starbucks’ royalties, I wouldn’t be surprised to see Starbucks arguing that it should be a lower rate.

But that is human nature. And the tax system seeks to exploit human nature. Think of green taxes, incentives for research and development, geographically targeted reliefs, taxes on tobacco and alcohol, and so on.

Behavioural change is generally cited as a “good” aspect of tax.

But you don’t turn that effect off just because Parliament only wanted to raise revenue and not alter behaviour.

Unless the law is very prescriptive, there are a number of possible outcomes for tax treatment for many different actions. There are numerous ways that transfer pricing on royalties can be done, giving potentially a wide range of tax adjustments. And these could all be reasonable.

The law is flexible in order for it to be fair, so that some businesses are not disadvantaged unfairly. The argument that small businesses are unduly affected by the law isn’t right in my eyes.

Small businesses are unduly affected by the same thing they are always unduly affected by, economies of scale. The more money can be saved, the more it is worth doing.

But the law provides more scope for smaller businesses to escape transfer pricing rules, and therefore more scope to shift profits to lower tax jurisdictions.

But, even this isn’t unintended by the law. Yes, it is undesirable, but people always push the boundaries you set, so it is inevitable. Pushing boundaries is what made mankind so successful.

The law could demand transfer pricing legislation for all companies. It could also be far more prescriptive, maybe even give set allowable tolerances.

It doesn’t. It exempts small companies from transfer pricing rules and gives larger companies wiggle room so they can find a fair result.

But, this is how the law was intended to apply. None of that is avoidance. It is tax planning.

These are not artificial structures, these are real legal and commercial decisions about how the business works. Money isn’t going in a circle, it is being extracted and paid to the owners of the company.

So the tax gap doesn’t even capture things like royalty payments, except at the extremes, because it isn’t even avoidance.

I understand that for many people this seems like an argument in favour of using an expectation gap as a measurement of avoidance but I disagree because I think that an expectation gap is fundamentally a meaningless measure.

There is always going to be a discretionary element of an expectation gap where people think the law ought to work in different ways.

In calculating it you decide what the effect of the law ought to be, not what it is or even was intended to be.

In my opinion, an expectation gap primarily measures the expectation of the person calculating it.

In a similar way, I view the tax avoidance gap that HMRC calculate as a measure of how good the law is at doing what MPs thought it would do. £5bn is hardly a glowing endorsement.

But because many of these things are tax planning, does that make them ok? Not necessarily, but I think you can’t condemn people for behaving in accordance with the law just because it doesn’t favour you personally.

I think that seeking to get the law amended through democratic means is perfectly sensible. The law needs to evolve as does our society and values.

It is always going to be unfair to pick on people staying within the spirit of the law, simply through ignorance of the letter and intention of the law. This needs to be changed through education, rather than political propaganda.

The first piece of education required in this debate its what we mean by planning, avoidance and evasion. I make no apologies for linking to this piece on the subject and the factsheet which gives definitions.

I also think a bit of honesty is required by the tax profession. Yes, we reduce the amount of tax paid by taxpayers. But we also make the self assessment system function. HMRC have never had the resources to make self assessment work without us. On the whole I think that the tax profession increases compliance and the tax revenues of the UK.

I also think a bit of honesty is required from commentators. I think they need to accept that most people think it is reasonable, and inevitable, that all taxpayers will seek to reduce their tax liabilities within, what they consider, reason

But the bare minimum of honesty is to get objective facts right. There is enough nonsense already published over tax avoidance, that I don’t think we need any more.

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About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
This entry was posted in Ranting, Talking Tax and tagged , , , . Bookmark the permalink.

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