Tuesday, 13 November 2012

Are Osborne and Little Dodging Tax?

Éoin Clarke is asking questions about the family firm, Osborne and Little Group Limited, that George Osborne has an interest in.  Reading his post (and especially a reply to a comment) suggests that Éoin is not just  asking question but “just asking questions”: his questions aren't questions but accusations.  These accusations boil down to Osborne and Little making a large Gross Profit, from which you would expect Corporation Tax to be paid, but “the accountants” have set to work artificially depressing the profits so that very little is paid.

My comments don't appear on Éoin's blog, so I'll have to comment here. 
Gross Profit
First off, in looking Gross Profit, Éoin is choosing the wrong measure.  Companies pay tax based on profit, not on Gross Profit and Gross Profit is no guide to Profit.
Profit is Turnover less expenditure. Gross Profit is Turnover less a part of that expenditure; the expenditure that directly varies with Turnover.  Gross Profit is Profit ignoring overheads.   You can’t tell how much Profit a company makes, or should make, by looking just at Gross Profit.  I you try then you’re trying to judge Profit by looking at Profit ignoring overheads:  you've just missed out half the equation.
Compare it with coming up with an estimate of Betelgeuse’s gravitational pull on the Earth just by considering Betelgeuse’s mass.  Without consideration of Betelgeuse’s distance from the Earth you haven’t got a “rough” estimate, or “some idea”, or a lower limit on what to expect, you've got a load of bollocks. 

Are “the accountants” artificially depressing the profits?
Éoin implies that they are:
if you examine each of the three years you will see that after gross profit is calculated the accountants proceed to deduct all of that sum in various liabilities including "miscellaneous" liabilities of £1.7 million+ for 2011 and a total of £5 million for the 3 year period.”
This is nonsense.  “Liabilities”, miscellaneous or otherwise, are debts: you owe people.  Borrow money, don’t spend it all and you owe more than you spent.  Repay some of a loan used to fund expenditure and you owe far less than you spent.  Make profits, and losses, transfers and repayments and your liabilities bear no relation to your expenditure.  Debts are not expenditure and expenditure not debts
Whilst the statement that £1.7m was deducted from profit in 2011 is nonsense the claim that a total of £5m was deducted over three years is nonsense on stilts. 
A “liability” is something you owe at a certain point in time, rather like you are a certain height at a certain point in time.  Take your mortgage and how much you owe on it right now.  Take how much you owed a year ago, and the year before that, and so on.  Add up all these numbers.  Now, did you buy your house for that amount?  If you’re tempted to say “yes”, consider your height at six years of age, seven years of age, eight years of age and so on.  Add those numbers together, look me in the eye and tell me that you’re as tall as a house.

How Companies Avoid Tax
Ok, we know that Osborne and Little aren't making up liabilities to deduct from income because that makes about as much sense as accusing them of storing incandescence in jealousy.  But are Osborne and Little otherwise avoiding tax?
We can assume that companies want to make money.  It’s easy making a loss, but then you've, well, made a loss.  If you want to avoid tax by posting losses you want to actually make profits but make it look as if you’re losing money.  This, outside of fraud, is extraordinarily difficult.  And so companies do not tend to even attempt it.
A far, far easier way to for a multi-national company to reduce tax is to report all the profit they make fairly but to vary where they say they made their profits.  Say you make £100m, all over the globe, of which around £50m is made in the UK and £1m or so in a tax haven.  You’re going to be paying 24% on the £50m and the square root of nothing on £1m.  But you realise that, as you’re a multi-national, all your subsidiary companies are dealing with each other all the time.  And they charge each other for it.  So why not look at those intercompany invoices?  Maybe the subsidiary in the tax haven supplies all the coffee, or the web-site services, or owns the patents to your medicines.  So you bump up the price of the coffee, or the web-site services of or patent royalties by, ooh, £49m and suddenly you’re making £1m in the UK to be taxed at 24% and a nice big £50m to be taxed at the square root of nothing. 

Are Osborne and Little doing this?
 The short answer is “no”.  The slightly longer answer is “no, not even close”. We can tell this by looking at page 18 of the group accounts where there is a reconciliation of the expected taxation on profit (in this case, loss) at the UK rate and the actual tax.  It’s difficult for companies to pretend that expenses that didn't happen did, it’s very easy for tax authorities to do the reverse and, as mentioned, different jurisdictions have different rates of tax.  This statement shows the effects of all these varying little rules and rates.  In there is this entry:
“Foreign tax charged at higher rates”. 
The effect is small, £3,000, but notice the direction. That’s right, far from shipping profits away from the high to low tax jurisdictions, Osborne and Little leave profits in higher tax jurisdictions; decidedly not playing with intercompany charges to shelter profits.
Whislt I was writing this post Éoin commented on the proportion of Pricewaterhousecoopers LLP proifts paid as corporation tax. 
Why have Pricewaterhousecoopers LLP made £665m with a tax charge £23m (3.5%)?
Do you notice the letters "LLP"? It stands for "Limited Liability Partnership".  For taxation purposes a Limited Liability Partnership is a partnership not a corporation.  Partnerships do not pay corporation tax: the profits are divided between the partners and the partners pay income tax on their share of the profits. 
Support my research
Éoin has a "donate" button on his website asking us to "support" his research.  It would be good if he actually did some.  To an accountant, or anyone who knows about taxation, the basic errors, misunderstandings and not-even-being-wrongness are of a standard that rivals even this tweet:
Fair enough, Éoin isn't an accountant.  So ask one Éoin! Next time you have what looks like a great story of tax shenanigans find an accountant, buy her a beer and just check that you're not talking drivel.