Methodology is key for any recognition of quality.
For example, membership of the Chartered Institute of Taxation, entitling the individual to call themselves a Chartered Tax Adviser, is considered to be the “gold-standard” in professional qualifications in taxation. Its methodology is through a set of examinations which invariably have low pass rates. I think it was only about a third of applicants were accepted when I sat mine.
It is a bloody hard set of exams to pass. And you need to know your stuff to pass them.
In short, it is a rigorous methodology. And that is why people recognise the value in the qualification.
My main concern with the Fair Tax Mark has always been how rigorous its methodology is. What does the Fair Tax Mark objectively tell us about a business displaying it? Just how useful is it?
My first impression of the relaunched Fair Tax Mark is that it looks far too easy to pass without providing any real guarantee that the business is not behaving in “unfair” tax practices.
For starters, the Fair Tax Mark only considers corporation tax and that is really too simplistic.
It is a blinkered approach to taxation that overlooks far too much activity that can constitute avoidance. What about employment remuneration strategies? What about profit extraction to the owners? What about VAT? What about ownership structures for capital gains tax or inheritance tax?
Remember, corporation tax is only the fourth largest contribution to the UK coffers. From the 2012-13 HMRC accounts:
- Income tax – £150.9bn
- National Insurance – £101.7bn
- VAT – £101bn
- Corporation tax – £39.2bn
Corporation tax is less than 10% of total revenues (£475.6bn). All I am suggesting here is that equating “fair corporation tax” with “fair tax” is myopic, whether you are looking at an individual business or the UK as a whole.
Assessing corporation tax is obviously part of assessing “fair tax” but it is nowhere near the entire job.
In conjunction with this, on Mazars’ Tax Transparency blog I made the point that two-thirds of UK businesses are not companies. I think that is incredibly important.
If you are asking people to choose businesses that display the Fair Tax Mark, you are inevitably asking people to discriminate against businesses that do not. It is not readily apparent what legal form a business may operate and by not allowing unincorporated businesses to apply for a Fair Tax Mark, you will always be asking people to discriminate against them.
That seems inherently unfair. Especially when you consider that all those businesses are as fair and transparent as they can possibly be over their corporation tax affairs…
So, that’s what the method doesn’t cover: It doesn’t cover two-thirds of UK businesses and it ignores over 90% of UK taxation.
So what does it actually cover?
Well, the method only considers corporation tax and the focus is very much on the reporting of corporation tax. The rate “analysis” remains ineffective, though they have removed the questionable “mathematical” weighting and averaging.
As I understand it, they now calculate what the rate is over four years correctly, rather than adding the four years’ rates together and dividing by four, which is essentially how they were calculating their ‘average’ rate before.
Incidentally, this is the same mathematical mistake that is made in the estimate of total corporation tax avoidance that the Fair Tax Mark website links to. Averaging rates in this way is meaningless and pretty misleading. I have illustrated this point previously though. See Tax gap corporation tax rate analysis.
The Fair Tax Mark rate analysis just isn’t any analysis at all. It looks like the main effort has gone into hiding its effect by allowing other factors to claw back points. The problem remains, as I highlighted in my feedback, that it doesn’t discriminate between “fair” or “unfair” adjustments. The clawback compensates companies who have been unfairly docked points, but it does nothing to address the issue of companies who have unfairly received them.
Aside from that, the rest is a lot better than the original. One of my reservations in saying any more than this at present is that these criteria are aimed at completely different businesses to the “pilot study”. A better idea of what has actually changed might come out once we’ve seen the criteria relating to multi-nationals.
But, the main failing is still that the criteria predominantly relate to transparency, not whether the company pays a fair amount of tax, which is ultimately what people will think something called the Fair Tax Mark measures.
I’ve asked myself if I would have any problem with this venture if they dropped the pointless rate “analysis” and called it something like the Corporation Tax Transparency Mark. I think I probably wouldn’t.
But, by calling it the Fair Tax Mark, the campaign creates incongruity between what the method does and what the marketing says it does.
It comes across as a cut and shut product. They’ve used the front end they think looks most marketable and then stuck anything behind it to make it look like it is a whole car.
Now, I am being a bit harsh with that metaphor because, unlike a car, the Fair Tax Mark campaign can perform wholesale repairs and improvements whilst their product is being used on the road. So, I am interested to see how they will improve their method or reign in their claims.
Bringing it back to my original question, what does Fair Tax Mark tell us about a business?
Objectively, only three things necessarily follow. The first is that the business operates through a limited company.
The second is that they publish their accounts on their website. Which appears to be the only deal breaker in the method. Nothing else from the method is guaranteed about the company’s behaviour.
The third and final thing is that the business is willing to splash out a fair amount of money for a Fair Tax Mark sticker.
At this stage, the methodology is not rigorous enough to be useful, but I appreciate that this is simply to get a few sales in and get the product off the ground. Looking practically at this, the fact that new people bringing fresh views have been able to make significant improvements is welcome. And adapting to what people think is fair is important, rather than dictating what its owners think is fair.
The willingness to adapt shows that they may get there one day, but currently the Fair Tax Mark says too little about fairness or taxation to be considered a benchmark on either matter.