Wednesday, 24 July 2013

Margaret Hodge and the British Inquisition

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.

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