What might tax transparency bring?

Today I turn to look at the second call in Progress’ Tackle Tax Avoidance Charter:

Open up the tax affairs of large quoted companies, starting with the FTSE 100. We should require companies to be much more transparent about their businesses and profits in the accounts they file with Companies House.

Let’s start by putting the issue in context. According to HMRC, the total ‘tax gap’ for all corporates amounts to some £4.1bn, or 8.8% of the tax gap. This £4.1bn figure includes SMEs as well as larger corporates and the tax gap attributable to the 800 or so largest businesses is only £1.4bn (of which 75% is due to “avoidance”). So the tax gap attributable to avoidance for those 800 businesses is £1.05bn (or about £13m each). That’s not an especially significant amount of money – by way of comparison the tax gap for VAT (the overwhelming majority of which is attributable to household spending) is almost £10bn.

(Important but lengthy side note. One must be cautious when using tax gap figures. They reflect HMRC’s estimates of the tax which is caught by the letter or spirit of the law. But they don’t reflect the tax which many would think should be paid but which is not caught. To take an obvious example, if important intellectual property is held offshore and rented to the UK operation at a market rent, the fact that those arrangements significantly reduce the profits of the UK operation will not be reflected in the tax gap.

There is a perception that there is widespread use of this and similar arrangements such that the tax gap is hugely understated. That perception may very well be right. However, the evidence for this is not clear. Over a ten year period there has been no real decline in corporation tax receipts – a surprising fact if one’s perception of avoidance by large corporates is that it is enabled by the internet age.)

So, using HMRC’s measure of the tax gap, the problem is not substantial in scale. And, although it might be reasonable to expect that increasing transparency would have some effect on corporate behaviour, the strength of this causal relationship is (to the best of my knowledge) unexplored. Anecdotally, there is conflicting evidence on the point: on the one hand, the growing consensus that being a good corporate citizenship involves paying your fair share is (undoubtedly) leading to changes in behaviour; on the other hand, there is an, I think, quite genuine concern on the part of corporates that a falling tide grounds all boats. In other words if they are to be pilloried regardless of whether their behaviour can sensibly be described as tax avoidance they may as well take the financial benefits available to them.

So, where does all of this get us? Some suggestions:

1. Transparency is a side-show. What we really need is a just tax system.

2. Legislation is not the answer. The fruits do not justify it. And – because we cannot legislate beyond our shores – it would not be effective.

3. However, a corporate citizenry kite-mark would be a good idea. It would usefully harness the self-interest that corporates have in being seen to behave properly. However, to achieve corporate take up, the methodology for qualifying must be fair and sensible. In other words, it must be drawn up by representatives of the business community – and not just tax campaigners.