Two Cultures
July 9, 2014No, not C P Snow’s “two cultures” (science and humanities) but the two cultures in tax of which I have written before, the tax wizards and the tax muggles.
Yesterday I was at Committee Room 14 of the House of Commons, where Mazars and ARC were hosting a debate, chaired by Margaret Hodge, on tax transparency and the role of the trusted advisor. It was a fascinating debate; put all the tax wizards in one room and ask them to talk to each other and you’ll get a fascinating debate – if you’re a tax wizard yourself. I think I have to stop calling myself a squib and embrace my membership of the wizarding world, because I genuinely found it fascinating.
The muggles? Google “tax” in “news” this morning, and there’s no mention of the wizenagemot but there IS a huge front page story about various celebrities allegedly involved in the Liberty tax scheme.
My point? Mazars are flogging a dead horse: no-one outside the wizarding world is interested in their proposed scheme for a kitemarked “trusted tax adviser” status, sorry and all that. ARC are flogging a different dead horse: no-one outside the wizarding world is interested in their ideas of transparency and pleas for their professional status to be better recognised and rewarded. They are dead horses. They have joined the choir invisible (repeat lines from the Dead Parrot sketch till you get it out of your system.)
Why?
Because there weren’t any tax muggles in the room. Because “tax transparency” isn’t something that tax muggles are interested in, unless it comes with a preliminary explanation of what it means and how it will help them. Because wizard can speak to wizard until Nicholas Flamel dies of old age (Harry Potter joke. I think I backed my metaphor into a corner and beat it to death. I’ll try to stop.)
The interesting bit about the debate was that we kept skirting around the issue: how to involve the muggles. The reason that Margaret Hodge can be, simultaneously, “Tax Prat of the Year” and “Tax Personality of the Year” is precisely that, that she bridges the gap: that she is muggle who has authority over wizards. She infuriates tax professionals by asking questions that don’t make sense in the language of tax, but which resonate deeply with the general public who ALSO don’t speak tax but think there’s something with a fishy aroma somewhere in the tax conversation between professionals.
I don’t have a solution. If we rely on politicians to bridge the gap between tax professionals and the general public, then we need to do more, much more, to brief politicians in what the issues are. There were plenty of offers during the day and on twitter afterwards to set up some kind of seminar, briefing, task force, educational effort for politicians, committees, around finance bills and at other times. They only have to ask. And if they don’t, they might be assertively offered anyway. (Puts up hand to add to the offers)
There were a few quick wins suggested that might usefully be actioned (argh! management-speak is worse than Potterspeak!)
There was, for example, a discussion about comparability. It wouldn’t help “transparency” if companies were simply compelled to publish their tax computations if they were then full of incomprehensible gobbledegook that couldn’t be compared company to company. However the amount of tax paid by a UK company in a given year is – theoretically – available from their published accounts, although Richard Murphy has done some work on extracting it and says it isn’t, if I understood him correctly – I haven’t looked. But HMRC could easily publish a database that would show, say, the tax paid by the top 100 – 1000? -10,000? firms for a given year and also whether they had disclosed use of any DOTAS (avoidance) schemes. They *could* – but they aren’t *allowed* (by taxpayer confidentiality rules, even though the same information is theoretically available elsewhere with sufficient knowledge and expertise to root it out) Quick win? Quick statutory instrument to give them the necessary information gateway? Or a voluntary scheme while that goes through parliament? Some enterprising NGO writes to the top 100 and asks them?
Second, there was an interesting discussion about the kind of tax barrister who gives an opinion on tax schemes, so that a barrister’s opinion that the scheme is viable allows it to be marketed. If it’s then found NOT to work, should there be some kind of sanction for the barrister? Something like the situation which – I thought I heard at the meeting but haven’t looked at – applies in the US where the financial risk is then passed to the barrister? Or should they be sanctioned by the bar council, in the way that a mis-prescribing doctor might face sanction by the medical authorities? I don’t know, but it sounds like an interesting idea: cut off the flow of abusive schemes at source. I look forward to seeing where that goes.
But step back a bit and look at it from the point of view of the Times reader this morning, tutting over the celebs “getting away with” something via a scheme they don’t understand. Would a seminar for politicians, a database of tax paid and schemes entered and a stiff rebuke from the Bar Council make one scintilla of difference to their view of the tax world?
We need to find a way of bringing the tax conversation into the public discourse. As someone said on twitter, we need a Professor Brian Cox of tax avoidance.
tiintax 
If we’re trading laboured metaphors, I’ll return to my oil refinery one – the tax “wizards” have become the engineers and designers building and running the refinery, in accordance with the wishes of “management”. And right now, they’re tending to debate at the equivalent level of saying “You can’t replace a Model J Flange by a Model K with the gost valve because it’s only 10/24 steel, and with the alkylisation levels in there we *all* know what’ll happen if we try that”. And what we need is a bit more “If we did that, it would cause a weakpoint *here* and you’d get a leak.”
There’s definitely a place for everyone in trying to decide what the refinery’s outputs should be, but the details of how to get them do need a more detailed technical understanding. Of course, if noone trusts the engineers to actually design or implement what they’ve been asked for, that’s another stumbling block to overcome.
I’m pretty sure I could come up with a solution to this problem, but first I would need to know how exactly the scheme worked, and as yet no-one that I have come across has explained the workings of the Liberty scheme (or any other) adequately.
The fundamental question surely is this: how can the users of such schemes save more in tax than they actually ‘lose’ through the scheme?
The underlying principle in taxation is that your losses are subtracted from your income and you are then taxed on your net income (income minus losses). So how can the users of these schemes claim to lose money for tax purposes and yet not ACTUALLY lose any of that money at all? Therein lies the paradox. Surely if they actually lost all the money that they claimed then the scheme would be useless as they would always end up losing more money in their investments than they saved in tax? But obviously they don’t. Ultimately it is (probably) about definitions as I point out in a slightly different context here:
http://cantab83.blogspot.co.uk/2013/05/tax-avoidance-2-gsk-loan-trick.html
As for corporate tax avoidance and their definition of profits, I have already explained how this can be countered using the EU CCCTB rule for calculating country-by-country profits.
See
http://cantab83.blogspot.co.uk/2013/06/tax-avoidance-3-transfer-pricing.html
It would be very interested to see a detailed explanation of how these personal tax avoidance schemes work. Only then can we start redesigning the system to ensure that they don’t.