I
had not intended to write about the House of Commons Public Accounts
Committee’s (PAC) “investigation” into tax avoidance etc. as
many more august tax writers than I have already had their shot.
However, I have been asking myself how they could have got it all so
badly wrong, and why.
We
know that there are political tax lobbyists out there who have
received funding from unions. There have been various stories in the
newspapers about individuals who have been involved in aggressive tax
avoidance schemes, such as Jimmy Carr. Somehow with the campaigners
driving the politicians there has been a shift towards questioning
why multi-national famous-name companies such as Starbucks and Amazon
do not pay much corporation tax in the UK and assuming there is some evil plot.
The
PAC has had representatives of multi-nationals and of the Big Four
accountants before them to ask questions on this issue, but sadly
they have not come to sensible conclusions because they start from
the premise that the international businesses are dishonestly
avoiding paying their dues to HMRC. Many witnesses have tried to
explain that firstly, the general premise is not provable and in almost
all cases not even likely, and secondly that corporation tax paid is not
a measure of a business's contribution to the economy.
All
the witnesses have been interrupted constantly when answering
questions. The Committee members, and in particular the Chair,
Margaret Hodge, have tried to insist on their own view being accepted
by arguing with the witnesses rather than allowing them to
reply fully. The whole attitude brings to my mind the treatment of
Galileo by the Inquisition in Rome in 1633, when he tried to explain that the
Earth went round (orbited as we would say) the Sun, and not the other
way round. Because the Vatican doctrine said this could not be true,
no one was prepared to look at the evidence presented. So it is with
the PAC and their attitude to supposed tax avoidance by large
companies.
If
in any investigation we assume the result before we investigate, we
will inevitably bias our conclusion, and probably come up with the
wrong one. That is true in tax, in economic matters, and in science.
Please
bear with me, but Robert Millikan, one hundred years ago, biased
his results in measuring the charge of an electron because he had a
wrong value for the viscosity of air. Actually he was not far wrong,
but he tended to discard results which did not support his figures.
The shame is that no doubt for psychological reasons other scientists
following afterwards and getting different results tended to do the
same, discarding results which were “off” rather than properly
challenging Millikan's conclusions and measurement.
Proper
scientific research should involve reproducing any experiment on
which you intend to build under the same conditions, and then
developing your own experiments and investigations from there to make
sure there is a consistency. That is intellectual rigour, something
to which the PAC does not adhere.
We
understand that the PAC members are not briefed. They do not have
people to help them with their questions. Yet it is apparent that
they do not do much research themselves. That was very obvious with
the recent questioning of witnesses about the nature of Duchy of
Cornwall, its income and tax status. There is quite a lot one can
find out about the Duchy in two minutes with Google (I put that to
the test), yet it seemed the PAC members had not got that far. They
asked their questions apparently from a starting point of total
ignorance, but at the same time their interrogation had that implicit
bias that someone must be dodging tax.
I am
not going to get into the complexities of international taxation
beyond saying that Starbucks can pay royalties to their Netherlands
business and claim a tax deduction in the UK. There is international
cooperation on transfer pricing, and no one had been doing anything
wrong. It is perverse that Starbucks have now “volunteered” to
pay corporation tax by deferring claims for allowances to which they
are fully entitled.
What
the PAC does not understand is that fast-growing businesses tend not
to pay much corporation tax. That is true of small businesses which might be my
clients, or very large ones. The American giants such as Starbucks
and Amazon have been familiar for a while and seemed to be
everywhere, but they are now more everywhere than they were even a
couple of years ago.
Why
have they not been paying much corporation tax? Because they have had little or
no taxable profit; because they have been investing all their “spare”
money in opening new premises, buying plant and paying new employees
– yes, new employees. All that investment is tax-deductible, as it should be.
Large
corporates who have no taxable profit liable to corporation tax still
generate substantial amounts to the Exchequer. They pay VAT on their sales
less inputs, they pay business rates, they pay the payroll taxes for
their employees, and they pay import duties.
They
boost employment by taking on workers and by driving income to their
logistics suppliers, the ones who deliver to them and the ones who
deliver their stuff to you and me. The suppliers need to employ more
people too.
So
the small area upon which the PAC concentrates concerning tax on
accounts profits has nothing to do with the real contribution of
large companies employing people not only paying their taxes, but
saving the State from having to pay them benefits if they were
instead unemployed.
Taxation
is according to the law, and should not be based on moral blackmail
or Aunt Sally games run by people who should know better.
Of
course it is not good explaining any of that to Margaret Hodge. She
has made up her mind, and the actual reality does not suit the
grandstanding she is trying to make at the end of her political
career.
Footnote:
In the Wikipedia page about Millikan there is a reference to the
physicist Richard Feynman's book of anecdotes, Surely You are
Joking, Mr. Feynman!. Affilate link at the bottom. I thoroughly
recommend this book, which is great fun. It is a glimpse of the life
of this amazing man. If you do not wish to use an affiliate link in
purchasing, here is a non-affiliate one.