Today, at Davos, in a frothy speech, David Cameron, our not-so-skinny mug of a Prime Minister unsubtly took a tall-size pop at Starbucks for creaming off profits to lower tax-regimes as a tax avoidance measure.

See, David, I can make crap coffee related puns, too!

Cameron expressed a wish to make challenging tax avoidance a pillar of Britain’s G8 presidency. He stated “Individuals and businesses must pay their fair share”.

This soundbite is meaningless popularism, reflecting perceived public pressure on companies and richer people to pay mare tax. Cameron is not making this speech because he for even one minute thinks that large corporates should pay more; he’s making the speech because some focus group has told him to.

If Cameron really wanted companies to pay more tax, he would take his best mate Osborne, the dunce in charge of economics and simply tell him to raise the corporation tax rate. But in fact, George is doing the exact opposite, arguably to support his pals in The City.

So what is going on here, really?

Cameron is responding to apparent public anger with large companies like Goldman Sachs, which pressured the bank to pay bonuses earlier than necessary, thus increasing the tax rate* on that income. (Pressure which was resisted by other financial companies, such as Aon.)

This public anger was demonstrated in December last year when Starbucks were picketed by UK Uncut demanding that they pay more tax. This is despite the fact that earlier in the year, members of Occupy London, a protest group aligned with UK Uncut, had been allegedly sitting in Starbucks near Paternoster Square, drinking their tasty lattes whilst using the coffee giant’s free wifi whilst involved in an anti-capitalist protest outside St Paul’s.

So there is a feeling amongst some members of society, fuelled by the press and action groups, that certain companies should be paying more tax. This feeling of injustice is in response to very poor and over-simplified reporting of tax payments made by some firms.

I am not going to even try to explain the UK tax system here. If you really care, order yourself a copy of Tolleys and get reading.

But I will say why I think these protests and public anger are currently counter-productive and should be redirected.

Let us clear up the terms here.

Tax avoidance is the legal usage of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law.

Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means.

Repeat – avoidance is legal, evasion is illegal.

Yet David Cameron is mirroring public calls to cut down on tax avoidance. He (and UK Uncut et al), want companies to stop paying the correct tax as required under the current rules, and pay a different amount. Protesters on the left want companies tax rates to be decided not by the law, then, but by response to public pressure.

This is not tax justice. This random method of tax rates is what is technically known as mob rule.

And mob rule really doesn’t help anyone.

It will mainly affect those people large enough to be noticed and with a public image to protect. Eg, large retail brands and not small boutique hedge funds, which incidentally, is where many of Cameron’s ex-Eton chums work…

This mob rule doesn’t create any form of consistency, or justice.

Goldman Sachs chief executive Lloyd Blankfein pointed out that this pressure from the public leads to irrational behaviour. “… you are going to criminalise every right-thinking person who organises his or her affairs in a sensible way.” Not just large companies, for that matter, but anyone planning to earn a bit more money, or sell an asset.

It also leads to inconsistent results. Ceteris paribus, a worker at Aon now takes home more than their Goldman Sachs counterpart. And where is the justice in that?

Like Goldman Sachs, Starbucks eventually bowed to public pressure, agreeing to voluntarily pay an extra £20m to HMRC over two years. But this deal is a nonsense. It isn’t £20m extra tax; it is at best temporarily moving the tax burden either from the US to the UK, or from future periods to the next two years. As the ICAEW points out, it in fact makes a mockery of the tax system. Conor Delaney, tax lawyer at Milestone International Tax Partners, said, “You have a fundamental principle that you can only be taxed by clear legislation and yet you have this process where a company is hauled up and publicly embarrassed and blackmailed into volunteering more tax.” 

The result is likely to be counter-productive. The extra revenue generated briefly in the UK may in fact reduce the tax take overall. It may also damage tax treaties with other countries and harm the UK reputation as a safe place to do business.

So these kneejerk, mob-justice reactions by companies protecting their brand create unjust tax situations, irrational behaviour and may have the opposite effect to that desired. But the real, fundamental issue here is none of that. It is that these one-off responses to pickets and demonstrations don’t solve the actual problem.

Tax avoidance is legal. It may be immoral; unpopular, and indeed sometimes, unjust. But it is the application of loopholes that were often created for a perfectly legitimate reason. The solution is not to create one-off protests and mobs to target individual companies in a single accounting period just because some psychotic ex-auditor has rabble roused a gang after he got poor service in a coffee shop in Norwich.

The solution is to picket parliament, not Starbucks. The solution is not in Starbucks writing a cheque out of guilt, but in changing the law so that the tax system works better and more transparently for everyone. The answer is to ensure that when anyone, be they a socialist or a libertarian, tells you lies about how tax works, the tax system is simple enough that you can simply look it up yourself and read, in layman’s terms, enough to call Bullshit!

Starbucks silly voluntary decision highlights the need for a change in the tax law. Real tax experts in many cases feel that the tax law is unfair. Whilst our day job may be to help companies abide by the law and as is required and expected of a board of directors, to increase shareholder value, many of us also agree that the law we are enacting is in fact, an ass. An over-complicated, irrational, unjust ass.

Investor groups, too, feel that if a company is managing its affairs to minimise tax for some staff members, they should just come clean about this. But importantly, firms like Starbucks and Goldman Sachs shouldn’t try to act above the law to preserve their brand, because in the long run, that helps nobody.

Instead, the board members should, like at Google and Amazon, refuse to yield and simply pay the amount that is legal. Because until then, the straw-man of the UK Uncut protests will divert attention, the law will not change and Cameron’s hedge-fund chums will fly below the radar and carry on reaping the rewards.

Tax law is incredibly complex and full of loopholes and loopholes to loopholes and more loopholes on those loopholes. It is written in arcane, complex language. It is long and impenetrable. Whilst it remains that way, the only companies who will be able to really benefit will be those wealthier entities who can afford to employ advisors to identify and act upon those tricks. This creates an unlevel playing field damaging smaller business. It also allows the lies of people with hidden agendas to peddle hard-to-challenge nonsense.

The solution? What many tax experts are calling for is genuine tax simplification. This will allow more people to understand the process and use it fully and correctly. But this idea will not gain traction whilst mobs are smashing windows, occupying churches and damaging high street retail growth.

Of course some so-called tax experts on the left think that the solution is to create ever more burdensome tax law and reporting rules, which will make the whole thing worse for everyone. But then instead of trying to fix the problem, they’re more bothered about selling more of their own books, maintaining their personal brand and in doing so, they’re just bringing our whole profession into disrepute.

So Cameron, if you are serious, and I know you’re not, why don’t you stop doing the bait and switch, and you and your grinning idiot chum Osborne do something sensible; get your lazy feckless arse back from your taxpayer funded jolly to Switzerland, get round a table with some real tax experts and discuss fairness and justice in the tax system for everyone, and not just your Eton chums who are lining up your non-exec roles for when we kick your arses out in 2015?

 

 

 

 

* The current top rate of tax is 50% for incomes over £150,000, which on 6th April 2013 will fall to 45%. This perfectly shows whether the Tories real intention is to ensure that individuals and businesses ‘pay their fair share’.

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