I’ve been having a bit of a play with the central calculation of the Fair Tax Mark which determines whether a company pays a fair rate of tax. I call it the Fair Tax Mark Random Number Generator (FTMRNG).
Despite Richard Murphy’s protests that it may only cost a company one FTM mark at most, it can quite easily turn a five into a zero, or a zero into a five.
Any small profits are disproportionately affected by tax adjustments. And any rate in recent years disproportionately affects the weighted rate.
So here we have a company whose tax adjustments even out over six years. In this period they actually pay £5m more than the tax that you would expect them to.
Whilst this is a contrived example, it is not massively contrived and the method should be able to deal with such hypothetical situations.
In fact, that’s how you can test these sort of methods. It’s called ‘destruction testing’.
In comparison to the “expectation” which the FTMRNG infers, the company pays more tax than expected. I would expect it to get a score of five.
And yet the FTMRNG gives the company a score of zero because their weighted difference is 9% less than expected.
What’s the destruction test result?