king_pellinor | Recent Entries

Right, this one really annoys me.

According to the media, "transfer pricing" is the name of a sophisticated accounting technique used to avoid tax. For example, Margaret Hodge has been accused by one Priti Patel, who I understand is some sort of MP, of not being without reproach vis a vis tax dodging, and in an open letter on the subject Patel says Hodge's company Stemcor "admits to using 'transfer pricing' ".

To me, who's actually dealt with the stuff, transfer pricing is just an aspect of book-keeping: like stock-taking, invoicing, or accruals.

This takes me back to the rant about MP's not having a clue about that whereof they speak, but hey ho.

Let me run through the etymology of "transfer pricing" in this context.
( Read more... )

So, to summarise: "transfer pricing" is all about getting the tax figures right. It's no more an abuse than "invoicing" is. It annoys people like HMRC, because whenever a compromise figure gets agreed both sides will thnk they've been done. Tax managers in industry hate it, because HMRC keep asking for more documents so they can challenge the figures even though they're ignoring the ones you sent them months ago. CEOs hate it, because they want a nice solid cashflow forecast but the Tax people are always saying we might have to pay more cash out but they can't be sure how much for five years.

And journalists and politicians love it, because they don't know what it is and neither does the public, so they can get all outraged for a while until they find a new bandwagon.

The transcript of the PAC hearing is on-line: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/uc716-ii/uc71601.htm

I've only skim-read it, as I could feel my blood-pressure rising as I did. Let me summarise it:

MPs don't ask questions so that the other person can give the answer: they ask the question so the MP can interrupt and fill in the answer they think ought to be given. Anything the interviewee sees fit to say should rightly be ignored as irrelevant.

MPs can't grasp the concept of a limited liability company as a person in its own right. As far as they're concerned any global group is a single entity, and thee are no circumstances under which any individual company can have obligations to any other.

The HMRC view of business seems to have infilitrated Parliamentary thinking: the only reason to do anything is to avoid UK tax.

No country outside the UK has any right to decide their own laws or taxes. Charging less than the UK does is illegal, somehow - the UK is trying to be competitive in its tax rates, which is entirely reasonable, but being more competitive than the UK is just immoral.

Profits should be taxed where the activity that gives rise to it takes place, but only if that place is the UK. If you live in the UK and sell to a someone in France, obviously you should pay tax on the sale in the UK because that's where the sale takes place. Conversely, if someone in France sells to you in the UK then obviously you should pay tax on the sale in the UK because that's where the sale takes place.

This is largely because paying for something is tax avoidance: a wholesaler should sell goods for the price it paid for them, and throw all the overheads in for nothing. If you spend years building up a brand name, you should let other people pretend to be you for nothing. Franchises are only ever run as charities.

The world is divided into the UK and Offshore. People only do business Offshore to avoid UK tax. Being Irish or Swiss should be a criminal offence, as the only reason to be born outside the UK is to avoid UK tax.

The fact that rules exist to govern behaviour, and that virtually everyone complies with them, is proof that those rules need to be invented to regulate the huge number of people who blatantly defy them.

It really annoys me that anything that anyone ever does which reduces their tax is described by journalists, campaigners and politicians as a "loophole".

To me, a loophole is an unintended gap that you're not meant to be able to get through. But things I've seen described as loopholes include:

- Paying a royalty to an overseas company
- Claiming capital allowances
- Paying for raw materials
- Doing business in another country

All these are perfectly normal things to do. The only one which isn't just part of doing business is capital allowances, and that's a deliberate policy from the Treasury (it simply fixes the rate at which you get tax relief for buying your equipment, instead of letting you chose how quickly to write it off).

The "loophole" which really annoys me is to do with small companies. In 2002 Gordon Brown, as Chancellor, announced that to encourage small businesses the first £10,000 of a company's profits would be taxed at 0%, though the relief would be gradually withdrawn so there'd be no benefit if the profits reached £50,000. Everyone immediately pointed out that loads of small businesses would incorporate to take advantage of this, but the Treasury said, yes, yes, we know, thats fine.

A couple of years later, the same Gordon Brown got rid of the 0% band completely on the grounds that he'd found that thousands of small businesses were incorporating deliberately in order to exploit this loophole. He called it a loophole in the Budget speech.

If he'd said that it was costing more than he'd expected so the relief was being withdrawn, that would have been fair enough. But he didn't even admit that he'd introduced the nil rate: the way it was spun was that he'd noticed this problem and decided to fix it.

I was very annoyed. Still am :-)

What if we decide we should tax effort instead of reward, by charging tax on gross income?

Taxing turnover: so say 20% of every sale goes straight to the tax man. Hold on, doesn't that sound awfully like VAT? Which we already have?

OK, so the Starbucks argument seems to be "We think you're not paying enough tax, because if we take your sales and then ignore the tax you pay on them, we find you're not paying tax on them".

Doesn't sound entirely fair to me.

Can we argue that they're not paying enough VAT, because if we take their stamp duty bill as a percentage of VATable sales it comes to a very small number?

I thought I'd do some ranting here about the current media circus about Starbucks, Facebook and so on. If I can flag up some myths and misconceptions about tax here - and complain about things which irritate me - it may save some harangues in person :-)

OK, first thing which irritates me: Satrbuck has had £3bn in sales but paid hardly any corporation tax. It must therefore be avoiding tax unfairly.

What's wrong with this? Well, you get taxed on profit, not sales. Why? Because sales are what you put into the system, not what you get out, and tax (or at least income tax) is based on what you get out of things.

People seem to think that sales is a good number to use, probably because it's an obvious and simple one. And, to be honest, because it's a bigger number than profit so if you're a journalist and want to get a small percentage for effective tax rate then you want as big a number as possible. But it's a stupid number to use as any sort of measure of someone's income, because you have to pay your costs out of it and different businesses have different costs.

If you take two businesses. One sells grommets, which you can buy cheap and sell dear, and it makes £100k profit on £1 million of sales - 10% net margin. The other sells widgets, which you buy cheap but sell cheaply too: it needs £2 million of sales to make £100k of profit, because it only gets 5% margin. The latter's business is twice as big, and according to the Starbucks argument, the bigger your business the more tax you should pay.

Follow the logic through: if we charge tax based on sales, we're basically taxing the thing which allows us to earn the take-home profit. The grommet-seller is selling £10 per £1 of profit, and the widget-seller £20 per £1 of profit - he has to sell twice as much, which suggests he has to work twice as hard for every £1 he takes home. So if he should pay twice the tax because his business is twice as large, the corollary must be that the amount of tax you pay should relate to the amount of work you're putting in (for a given reward).

Can we apply that logic to employment tax? I'm on average earnings, getting £24k a year, so it takes me 2 weeks to earn £1,000. The office cleaner gets £12k a year, so has to work for a month to earn £1,000. If he's putting in twice the effort, surely he should be paying twice the tax?

Only if you tax effort instead of reward. Which we don't. Which is why sales figures are nothing to do with income tax.

Is it just me who's a little fed up that the Parliamentary Accounts Committee seems to have no clue at all about tax, and yet is berating companies for acting pefectly legally and commercially and within the rules?

It's as if some obnoxious oik were to come up when you're playing Bridge and complain that you couldn't possibly have won that trick with the Jack of trumps, because you didn't even have a pair. What do you mean "that's poker"? I've seen people playing cards loads of times, from a distance, and you're doing things I don't understand so you must be cheating.

Current Mood: irritated

Surely there's been some sort of mix-up?

On the off-chance LoA's PC can't be revived economically, we'd be looking to get a new one for her.

She needs to be able to play FPSs and maybe CRPGs. What's the current upper-middle class for games PCs? I have no idea what current graphics cards and processor names mean :-)

For the rest, we'd probably be looking at your basic DVD-RW drive, plenty of RAM, basic ethernet. Onboard sound would be good enough, and the smallest hard drive around should be bigger than the one she hasn't got near filling yet anyway.

Oh, and is there any real advantage to a Professional version of Win7 instead of Home?

I've just been advised that I can get a tax relief in a particular situation. Basically, A is paying £100 over to B; B already holds £100 on A's behalf, due to a previous transaction, but if A simply says to B "keep that cash", there's no tax relief. If however B pays £100 to A and A then immediately pays it back to B, then we can claim tax relief.

That is: there's no commercial difference, but if we make two payments of cash which have no purpose other than to be able to claim tax relief, then we can get it. That seems wrong to me. Any thoughts?

To add a bit of information: B is a charity, A is a donor to the charity, and we're talking about Gift Aid (on a few hundred pounds). Does that make it better?

Further information: the person advising me to make payments purely to be able to access tax relief is HMRC. What they're really saying is that we could qualify for Gift Aid but they're going to disqualify it unless we send the money round in a circle. The substance of the matter is irrelevant: you only look at the legal form. This is not how they tend to argue in tax avoidance cases, naturally ;-)

More on the tax dodging front. Now Google's getting flak for only paying £6m tax on revenues of £395m, which is 1.5% against a headline tax rate of 24%.

Only, the headline rate is based on profit, not revenue. So that numbers is about as useful as a chocolate teapot. £6m tax implies profit of £25m at 24% - although of course 24% is the current rate, not the one that applied to the year in question; and it's not clear if that's tax paid, or the tax charge in the accounts (which would include deferred tax - basically, the impact of the differences between accounts profit and taxable profit, most of which tend to defer the payment of tax as an incentive to start doing business) so we now seem to have an icecream teacosy.

But let's get our handy gooey and play with those numbers anyway - £25m profit on turnover of £395m is what, 6%? A moderately decent margin - a bit slim for a modern high-tech company, perhaps. But then, what does Google actually *do* in the UK? The odd data centre or something? All the value of the company comes from intellectual property, and I don't think that gets developed here. Data hosting is pretty low risk, so you wouldn't really expect a very high margin.

So, er, sounds like Google's playing fair, based on those numbers.

Now what I'd be interested in is the transfer pricing situation. What does the revenue represent? I suspect that it's just a commission on advertising sales. So maybe the thing to do is question whether the revenue figures are at arm's length - but that sort of enquiry takes HMRC years to finish and no-one publishes the results anyway. I'd be amazed if Google haven't been quite aggressive about their internal pricing, but then I'd also be amazed (having been there and talked to them about similar companies, that is) if HMRC aren't pushing back quite hard so the final position should be reasonable.

So, at the moment once again all we we have is a number labelled "Tax" in a vague way, which is much smaller than another number picked at random, and this makes Tax Avoidance. *Sigh *

I've just been upgraded at work to use a Citrix terminal. The advantage is that I can use all my programs from any computer anywhere, and it's all so much faster because rather than use my own PC to run local programs, I now dial in to the server which runs them for me :-)

Except... I only ever use Outlook, Internet Explorer and Word/Excel. And my PC could run those all perfectly well, and I had web access to Outlook anyway. So my home PC allowed me to do anything I'd ever want in any case.

And because it's now the server running the desktop for me, it runs it with the same settings as it uses for everyone, which means clumsy large icons and a strange blue-grey desktop. Oh, and it's locked things down - I can't even move bookmarks around in IE any more, even if I can find them because for some reason they've locked away the ability to show the menu bar permanently. I have to summon it with the alt key every time I want it, or else have the Favourites Bar permanently taking up half the desktop.

So: remote access I don't need, a speed boost of nil, all my customised layouts gone, and forced to use programs with mittens on, effectively.

Hurrah, I love progress!

PS: I did sneakily ask what would happen if I ignored Citrix and just used the programs I already have, which work better. The IT chap looked shifty, and said that nothing would break. He then said they'd probably be wiped sometime soon so I couldn't :-(

Or I could just use my own laptop and dial in through the firms' wi-fi to get to Outlook Web Access - I have my own Word and Excel, so could do the job better on my own hardware... :-)

Guido Fawkes this time:

http://order-order.com/2012/07/23/david-gaukes-wife-is-tax-avoidance-lawyer/

Hold on a minute, she works for Lexis Nexis. They publish law reports and so on - so she's not actually advising anyone at all. Her profile says she used to advise on restructurings and other transactions, nearly all of which will consist of simply trying to work out how to avoid doing something silly, and the rest of which will be explaining to the client why they should keep things nice and simple. It's very easy to generate a tax charge that even HMRC would admit shouldn't be there (not that this would stop them taking the money), if you're not careful.

Is Fawkes just assuming that anyone involved in tax law is all about the avoidance? If so his world view is very... simplistic :-D

Actually, my respect for Gauke has now gone up marginally. If he has someone from Lexis Nexis around then he should have a bit more awareness of what a mess tax law is than I'd given him credit for :-)

Various sources are reporting that people like Coca-Cola and Macdonalds are responding to pressure and are waiving their right to tax breaks for the Olympics. So all the masses of profits they'll be making will now be generating tax for the UK Exchequer - what a victory for moral pressure on big business! Hurrah for grass-roots activism!!

Only... they never qualified for the tax breaks in the first place. The point of the exemptions was that if you come to the UK only to compete in the Olympics, or as a journalist to cover them (or if you're a company sending people to do such things), then you won't have to pay UK tax on your income - it removes a barrier to people coming. And as the UK wouldn't have collected the tax if it weren't for the Olympics, as you wouldn't have come, the UK isn't losing out.

As Coca-Cola etc operate in the UK through UK companies, these breaks for non-residents never applied: they're "waiving" a right they never had in the first place. So, er, why all the fuss?

And why are campaigners crowing about it? Could it be that they are in fact tilting at windmills? I do wish people would try to understand things that they campaign about.

I think I'll go and publicise the results of my campaign to stop people hunting tigers in Wiltshire. Might there be an OBE in it for me, if I can show that no tigers have been illegally poached there in the last 10 years?

I've not done a proper update recently, so perhaps I should do a bit of a retrospective of the last few months.
( Work )
( Cars )
( Dancing )
( Fools & Heroes )

What else? Seems to be about it, really :-D

"Taxation" magazine is doing a survey to see if the public's attitude to tax avoidance/evasion/planning is what the Government thinks it is. Can I ask people to have a quick go at it, to inform the debate a bit? It's all anonymous.

http://bit.ly/TaxHowFar

An interesting thing has just come up for delinquent US tax-payers: http://www.irs.gov/businesses/small/international/article/0,,id=256772,00.html

The IRS seems to be following HMRC in trying to encourage compliance by waiving penalties.

I've seen this around a few times in the last few days:

http://3.bp.blogspot.com/-Tpsju1uJiws/T-L_Ebbwh0I/AAAAAAAAAXM/YQ4ffrSSYFw/s1600/Jimmy.gif

Can I say that, yes, I am a bit angry. Or at least I'm rather fed up that once again people are going off on rants about things that they're completely misunderstanding in order to support their own agendas.

As a Chartered Tax Advisor I flatter myself that I can unnderstand the situation a little better than some journalists. Let me review some of the things said here:

( Cut for technical detail )

So what we have on the internet now is saying that deliberately flouting the expressed will of Parliament so as not to pay £1.65m is OK, but having a tax liability which is smaller than an arbitrary imaginary number is evil.

No wonder morale in HMRC is low, if they have to deal with this sort of thing.

And don't get me started on the recent stuff about Vodafone making UK profits and not paying UK tax... remember when they paid billions and billions for 3G licences a few years ago, Mr Journalist...? You don't think they should get some relief for that? The deferred tax charge is right there in the accounts, for crying out loud! Oh, you don't know what deferred tax is? Then maybe you shouldn't be writing articles about tax, eh?

Maybe I should start blogging about football :-D

Looking up the tax implications of a situation for a client, I find myself looking at the case of Farmer & Giles v HMRC, which picks up points from the cases of Mason and Miller and as well as Mr Farmer himself and his executors Messrs Farmer & Giles, has important input from his farm manager Mr Carter.

HMRC were represented by a Mr Twiddy, which seems entirely in keeping :-)

At the May bank holiday I went up to Leicestershire for a Fools and Heroes Fest. Springfest is the second-biggest fest of the year, after Summerfest, and as Summerfest is hard work rather than pure play I've been wanting to go for a while. Unfortunately May Day has been the same weekend for a few years, so I haven't been able to make it; but now I have.

So here's a write-up, mostly for my benefit when I'm re-reading all this stuff in a few years' time.

( TL:DR. Seriously - TL:DR )

It was my 40th birthday on Saturday. Hurrah! :-)

I had some friends round and had a really nice weekend. Hurrah! :-)

I got lots of post. Hurrah! :-)

One bit was from the NHS, saying I now qualify for a free health screening because I'm in the 40-74 age bracket. Huh...arrgh :-(

Well it's nice to see that their efficiency is such that they can time the letter so perfectly, but really, sometimes you can afford to wait a day or two even for good news.. :-)

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king_pellinor

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Notes from a very small island

Recent Entries

Tax ranting #5 - transfer pricing

Tax ranting #4 - MPs have no clue whatsoever

Tax ranting #3 - "loopholes"

Tax ranting #2 - don't ignore sales

Tax ranting #1 - ignore sales figures

Starbucks and Google and so on

Georg Bjarnfredarson is mayor of Reykjavik!!!

AKICOLJ - new PC

Is this unacceptable tax planning?

Google tax dodging

Shiny new technology

More tax silliness

Olympic tax breaks

Late status update

Poll on attitudes to tax

US tax

Uninformed commentary

Have I moved to Camberwick Green?

Springfest 2012

Efficiency of the NHS