George Osborne: “Workers of the world, unite!”

Remember shares for rights?

I’ll let Osborne jog your memory for you. Here’s an extract from his 2012 Conference Speech:

This idea is particularly suited to new businesses starting up; and small and medium sized firms.
It’s a voluntary three way deal.
You the company: give your employees shares in the business.
You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership.
And what will the Government do?
We’ll charge no capital gains tax at all on the profit you make on your shares.
Zero percent capital gains tax for these new employee-owners.
Get shares and become owners of the company you work for.
Owners, workers, and the taxman, all in it together.
Workers of the world unite.

And the deal would be sweetened by tax breaks. The first £2,000 of shares would be free of income tax. And the first £50,000 of shares free of capital gains tax.

It felt, even at the time, rather ugly. Should we be allowing employers to strip fundamental protections from their employees? Here’s the view of Lord (Gus) O’Donnell, speaking in the House of Lords:


You might think it even worse than that. We weren’t just permitting it. We were, through the tax system, incentivising it. To extend Gus O’Donnell’s metaphor, the rest of us, who fund these reliefs through their tax bills, were encouraging and subsidising the slave trade.

And the amount, and likely beneficiaries, of that subsidy was alarming too. As Paul Johnson of the IFS warned at the time:

it has all the hallmarks of another avoidance opportunity.

And although the cost was said to be fiscal washers:


The OBR highlighted that this was only because Treasury was looking at it only over a five year time scale (an oft-resorted to piece of trickery as I noted here). Beyond that timescale, the cost would quickly rise towards £1 billion per annum (real money, even in Treasury terms: by way of illustration about what was expected to be raised by the Mansion Tax):


But nevertheless we shouldn’t worry because:


Now, I raise this because of a chance remark from a friend at a very grand firm indeed who said that he was spending all of his time constructing shares for rights schemes for private equity and MBO clients. But none, he said, for ‘normal’ people.

Let me explain the swizz, and why it’s so valuable.

Forget about the income tax break. £2,000 might be meaningfully valuable to regular folks. But they’re not (as we shall see) the people for whom Shares for Rights was designed for. And it’s not what the OBR was worried about.

There are two other features that enable – you might almost think encourage – the real swizz.

First, the capital gains tax limit isn’t a cap on the amount of relief. It doesn’t give you the first £50,000 of gains tax free (saving you a mere £14,000 in tax). It’s a cap on the value of the shares when you get them.

Second, the shares don’t need to be ‘normal’ shares. They can be so-called ‘sweet equity’: very special shares for the very special people – the ‘value adders’ at the top.

Now. Assume you’re in private equity and you buy a company for £1m. What value might HMRC attribute to special shares which gave you a right to all of the sale proceeds above £1.25m in five years time? Not very much in a world where the Government can borrow over a five year term at an interest rate of only marginally above 1%. Less than £50,000?

Of course, the invariable logic of private equity deals is that you think you’ll be able to obtain high capital growth. Without that belief you don’t transact. If you’re wrong, then of course the capital gains tax break is worth nothing. But if you’re right?

Assume that in five years time you sell the company on for £1.8m. You’ve now got a capital gains tax break on £550,000 worth £154,000.

I’ve simplified my example – but not relevantly so. Here are some other ones from the law firm Bird & Bird. They conclude, tellingly, by asking: “Is this too good to be true?” (I’ll spare you the suspense. The answer is ‘No’. Or what passes for it if you’re a lawyer).

But don’t just take my word (and Bird & Bird’s) that it’s best used by senior management in private equity deals. Look here. Or here. Or here. Or here. Or… well, you get the picture.

Indeed, of course, as Magic Circle firm Linklaters observed, it was never even designed to be used by lower paid employees.


So much for workers of the world uniting. (Although there is a sort of uniting: together the rest of us have to make up the lost tax.)

Oh, and how’s that monitoring going by the way?

Not so good. I couldn’t find a figure – although one is given for other types of employee share schemes. And I did find an HMRC document entitled: “Tax allowances and reliefs in force 2013-14 or 2014-15: cost not know” which contains a reference to, yep:

Gains on disposals of exempt employee shareholder shares

So whilst it could be the £1bn predicted by the OBR. It could be more. Much more. It could be the whole amount being saved in 2016-17 by cutting tax credits.

Despite what Treasury promised, we Just. Don’t. Know.

The Tax Gap, Updated

This morning saw the release of new Tax Gap figures for 2013/14. Here are some highlights.

In cash terms the Tax Gap remained static at £34bn but in (the more meaningful) percentage terms it fell from 6.6% to 6.4%.Capture

What can we ascertain from these figures about HMRC’s performance if we dig a little deeper? (This question reflecting, as I observed here, that the Tax Gap is better understood as a performance metric than an anti-austerian’s El Dorado?)

This chart probably sums it up best.


For me, the stand-out trends are these.

First, we are beginning – for the really radical measures will take effect only in the tax year 2014-15 – to see the fruits of the Coalition’s success in tackling personal tax avoidance. One can also see this trend (more starkly still) in the slump in the disclosure to HMRC of tax avoidance schemes (for those interested, I have discussed that slump here).

Second, we also see (in relation to excise duties) the effects of the very substantial cuts to HMRC’s FTE staff (more on this below) in the excise gap figures. The Summer Budget appears to have recognised the deleterious effects of these cuts:


(although the cynic in me notes that no figure was there given as to what that additional resource would look like).

But perhaps the most interesting question is what the future will look like. For we are, it seems to me at least, at an inflection point.

As I noted here, HMRC has sustained very substantial cuts in budget and staffing numbers since 2005-6:


My perception is that the progress – despite these cuts – in closing the tax gap reflects a number of different trends.

First, (see here and here) the Conservative Party is presently culturally better equipped to tackle avoidance and evasion than is Labour. The problems of avoidance and evasion are complex and will not be solved by a purity of moral purpose alone. Likely it is that my colleagues on the left will react to this assertion with outrage. But it is common ground across the left spectrum: see this, for example, which I co-wrote with Richard Murphy. And under Cobyn the problem has become worse not better as I noted here:


My intention is that Labour should react, not with outrage, but by recognising the issue and moving to address it.

Second, a consequence of their expertise is that the Conservatives have been able to alleviate the effects of cutting resource through some radical legislative steps: the General Anti Avoidance Rule, Follower Notices, Accelerated Payment Notices, Direct Recovery of Tax Debts to name but a few. There is much more to do – as the Conservatives rightly recognise – in particular around offshore evasion by wealthy individuals which, in consequence of campaigning work done largely on the Left (to which I have been a modest contributor), has risen up the political agenda.

But legislative steps are an imperfect solution. They are imperfect because they cannot address the resource heavy areas of smuggling, the shadow economy and so on. Technological advances – see this piece from the Telegraph on HMRC CONNECT – can assist but we also need investigators.

Perhaps more profoundly, they are imperfect because they create imbalances in the system. Over time they will erode – indeed, they are already eroding – the reputation HMRC has previously enjoyed for fair dealing. I hear this frequently from business leaders – and it is borne out by my personal experience too. If this situation goes unalleviated – and my conversations with senior HMRC staff suggest it will accelerate rather than diminish – it will cause serious harm to HMRC’s ability to collect tax and to the investment climate. This is a very real concern.

However, third, in the short and medium term, I expect these figures to improve. The tax avoidance figures next year will show the effects of the adoption in the Finance Act 2014 of a slew of radical legislative measures – and there is more to come from further legislation in subsequent Acts. And at some stage soon – although the current data records no such trend – we will see some modest benefits from a growing focus on evasion. Modest, because unless someone is brave enough really to tackle the shadow economy, our scope for improvement is limited.

Some tentative thoughts on a sugar tax

It’s a tough business trying to structure a sin tax.

Because your purpose is somewhat confused. Although we readily think of alcohol and tobacco we might also include amongst sins discouraged by taxation flying, quarrying, landfill and no doubt others too. Usually we tax exclusively to raise revenue but not so with sin taxes. Speaking of air passenger duty John Healy, in 2003 Economic Secretary to the Treasury, said in a written answer:

Air passenger duty was introduced in 1994 as a measure whose principal purpose was to raise revenue from the aviation industry but with the anticipation that there would be environmental benefits through its effect on air traffic volumes.

Are you trying to maximise revenue? Or dissuade commission of the sin? And if dissuade, how much? A little bit, presumably, because if you really wanted to dissuade, you’d ban it.

It’s tempting to say these considerations plague the design of sin taxes. But that would suggest, falsely, an elevated status for design. You either fudge it – no, you usually fudge it – or you take intellectual dignity from looking to raise a particular sum of money to spend on countervailing measures. Take this example from the 2001 Budget:


And they can be regressive, sin taxes. Can, because assertions that they invariably are (see, for example, from the Adam Smith Institute):


should be treated with some caution. It all depends on how they’re structured.

The proportion of your disposable income consumed by tobacco duty, for example, falls sharply as your income rises. But with alcohol, not so much (source: ONS).


Indeed, the percentage of our expenditure – as opposed to our disposable income – we expend on alcohol duty is absolutely static as we rise up the income scale (see Table 3(c)).

These points emerge even more powerfully if you look in cash terms (see Table 14).


So the rich smoke less, but drink more, than the poor. I know I do – and I’m pleased I’m not alone.

You’d want to be careful drawing conclusions from this data. But you might tentatively draw a few.

(1) It’s not taxes that discourage the better off from smoking. Although the disincentivising effect of tobacco duty declines as you rise through the income deciles still the rich smoke less. This lower propensity to smoke must derive from something else.

(2) People drink more as they can afford to (Oscar Wilde was wrong: work isn’t the curse of the drinking classes at all). And this suggests that alcohol duty does suppress consumption at its present level – and would suppress consumption more if raised.

(3) If you were inclined to conclude that the rich smoke less because they’re better educated as to the dangers of smoking you’d then have to answer the question why they drink more. This might drive you to conclude that social fashions play a part too.

Are there any implications for a sugar tax? Some tentative ones.

(1) You might start by noting that alcohol and tobacco have no (legal at any rate) substitute goods. The decision you face is to consume or not to consume. But increasing the price of sugary foods and drinks might more readily cause consumers – especially price sensitive ones – to switch to alternatives.

(2) The data on correlations between obesity and income is more complicated than you might think. Whilst for women obesity seems clearly to be correlated with low income the picture is less clear for men. But where there is a relationship, a sugar tax will be regressive – if it’s set at a level where the poor will pay it. The higher the level at which you set it, the more likely the price sensitive consumer will switch to products not covered by the tax. A sugar tax could easily be like alcohol duty – barely regressive at all.

(3) The mixed picture around alcohol and tobacco duties suggest that factors other than affordability are important too. Changing social mores may well rank high amongst them. Perhaps you would earmark revenues – as with the aggregates levy – to fund measures to achieve that change. And to offset the effect on the poor of price rises on sugary foods – by encouraging thrifty and health eating.

On Targeted Anti-Avoidance Rules

[Readers’ Note: I wouldn’t normally publish a piece (reproduced from the Tax Journal, 15 October 2015) written for the technical reader on this blog. But it touches on an important and broader policy issue. If it assists the non-technical reader, a “Targeted Anti-Avoidance Rule” is a (now very common) statutory rule that (relevantly) says a transaction will attract a favourable tax consequence (or fail to attract an unfavourable one) only where achieving a tax saving is not one of the main object or one of the main objects of that transaction.]

We might, rather loosely, divide reliefs in our tax system into two types: those designed to shape our tax system – by improving progressivity, ensuring the ‘correct’ calculation of profits, and so on – and those through which the Government of the day seeks to encourage certain types of behaviour in order to advance its policy objectives. Come to think of it, there’s a third type too: those through which the Government of yesterday sought to deliver its policy objectives, and which no-one has bothered to remove. But I’ll park that whine for another day.

What I want to focus on here is that second type. Government spends – perhaps more accurately it relinquishes in taxable receipts but the result is the same – north of £100bn on tax expenditures.  And it does this because it hopes, though the provision of those reliefs, to change the way in which people behave. It must do, mustn’t it, because otherwise it’s wasting that money.

Now let’s add another element to the mix: Targeted Anti-Avoidance Rules. What function do they perform in relation to tax expenditures? The answer, clearly, is that they switch the relief on or off according to whether the relief is being accessed for good or bad reasons.

So far so good.

But what happens if the TAAR switch gets stuck at ‘off’? That’s no rhetorical question, as the Lloyds Leasing saga (see [2015] UKFTT 0401 for the latest episode) shows.

I’m not going to set out here the backstory. Stripped to its essentials, Lloyds Leasing arose in the context of capital allowances, a form of tax expenditure designed to encourage capital investment, and involved the question whether the main, or one of the main, objects of capital investment undertaken by the taxpayer was to obtain a capital allowance.

Now, even outside a tax expenditure context, main object tests are not amenable of fine analysis. I can understand how a draftsman might sensibly ask a court to identify the main object of a transaction. But “the main, or one of the main, objects”? How do you make sense of a formulation predicated on a three-tiered causative hierarchy (main object, one of the main objects, and not one of the main objects) and how is a court sensibly to distinguish between the second and third tiers?

That’s a rhetorical question, by the way, and a good thing for you, Dear Reader, because although Judges, having no alternative, strive hard for a semblance of sensible analysis what we end up with, is cakes, icing on cakes, cherries on the icing, and now (thank you, Llloyds Leasing) “headroom… above the icing on the cake”.

But profound though these difficulties are when TAARs are used to regulate liabilities to tax they are as nothing compared to the difficulties when TAARS are used to regulate the availability of tax expenditures.

We have tax expenditures type reliefs because we want to alter the way in which taxpayers behave. This must be so; there is no other reason why Government would incur the expenditure. But if a taxpayer responds to the incentive, and changes her behaviour, how does she then contend that obtaining that relief was not one of her main objects?

This was the question in Lloyds Leasing. Before the Court of Appeal, Jonathan Peacock QC contended, unsurprisingly, that you can’t construe the main object test in such a way as to “emasculate” the availability of the relief. You had to read it in light of the fact that the relief was designed to incentivise action. Speaking, obiter, Rimer LJ doubted this: he said it amounted to “an unwarranted suggestion that the ordinary interpretation and application of the inquiry mandated by [the main object test in] s 123(4) must in some manner be diluted.”

Even approached as a matter of pure linguistic construction, I don’t think this can be right. To denude the question posed by subsection (4) (do you have a tax reduction main object?) of its statutory context (behave in this way and you’ll get a tax reduction) is to misapprehend the interpretative exercise facing a judge. But the point emerges even more forcefully if you judge the quality of that reasoning by the outcome it produces.

And, fortunately for us (although unfortunately for Lloyds Leasing), we are able to do that. Because the matter then went back to the First-tier Tribunal, Mr Peacock QC ran the point again, the FTT roundly rejected it, and we were able to see the outcome it produced.

At [84]-[85] the FTT appeared to regard the fact that the transaction would not have been entered into without capital allowances as somehow antithetical to the availability of those allowances. But the very purpose – the only purpose – of having a tax expenditure relief is to cause people to alter their behaviour. Yet applying the main object test in such a way denies them the relief if they do. And if, you might well ask, they would behave in such a manner absent the tax expenditure, what on earth is the general body of taxpayers doing funding the relief? (Don’t worry. That’s a rhetorical question too.)

The point is made again at [87]-[88]. The FTT found that the fact that Lloyds Leasing sought tax advice to ensure that the capital allowances would be available and “structur[ed] the transactions in such a way that (as it thought) they would indeed be available” was somehow inimical to its entitlement to those allowances. But Government has defined the types of behaviour it wishes to encourage and has encouraged people to bring their behaviour within that definition by providing tax reliefs to those that do. Having so behaved, why should they not get the relief?

I could go on.

The problem with this approach is, of course, and even leaving aside the fact that it strips intellectual and moral dignity from witnesses asked to affect before the FTT an indifference to the very tax relief the draftsman used to encourage them, is that it fixes the tax relief switch permanently to the off position. One consequence of this will be a reduction in the cost attached to tax expenditures – but if they are to switched off, that’s properly a decision for the legislator not for the courts.

And that’s the rub: by reasoning thus the courts strip from Parliament a critical tool for shaping behaviour.

The Credit Crunch? Labour’s fault, says Shadow Treasury Minister

Tax expertise runs thin in the Labour Party at the best of times. The Party almost coped under Ed Miliband. But the staffers he brought in have all moved on. And the relationships John Wrathmell (Miliband’s widely admired Head of Economic Policy) worked so hard to develop – have withered or died. Even Richard Murphy – who seemed to many likely to occupy a place at the heart of the Opposition – has no role and appears disenchanted with the project. To my knowledge there is now no one – at all – in the Shadow Team expert in the revenue raising side of Government finances.

So when I learned that Rob Marris, MP for Wolverhampton South West, was to take the tax brief as Shadow Financial Secretary to the Treasury, I was interested to see how he performed.

The Committee stage of the Summer Budget Finance Bill concluded on Thursday. During discussions David Gauke (Marris’ opposite number) pointed out that the position Marris was taking was different to that Ed Balls had previously taken. He then added gently:

I am not sure that Ed Balls is a particular hero of the hon. Member for Wolverhampton South West.

Not gently enough. Marris needed no further invitation:


Yep. You read that right. Labour was responsible for the credit crunch. To which Gauke responded – well, wouldn’t you have? – with:

Again, I think we can find some consensus.

I suppose it’s too much to expect that Marris might also have mentioned (of many examples) this Cameron speech from 2006:


which showed that Labour and Ed Balls was on the right side – not right enough, but even so – of the debate around appropriate levels of regulation.

But then, if the real enemy is Labour’s record in Government, why would you?

The Savings from Tax Credits

Is it right to say that closing the deficit requires that we tackle tax credits, a measure which on any view will hit the poorest hardest?

Here’s the section in the Summer Budget Red Book which identified the savings from – freezing, limiting entitlement to, increasing the taper rate of and reducing income thresholds for – tax credits.


If you add up the final column (which shows the savings for 2020-21) excluding the benefit cap (a separate measure) you reach a figure of £9.735bn. Obviously that number takes in also some measures not connected with tax credits but as the savings are not dis-aggregated between these different measures I’ll assume against myself that everything under these headings relates to tax credits.

How else might that £9.735bn be funded?

Here are some other measures. These are also taken from the same Summer Budget (and again the last column relates to 2020-21). Where necessary, I’ve added a little narrative.


The Conservatives pledged in their Manifesto to increase the personal allowance to £12,500. Were they to do that the IFS estimated (see page 14) the cost in 2020-21 to be £4bn. Let’s assume they deliver on this Manifesto pledge.

Of this Manifesto Pledge, the IFS observed (although the emphasis is mine):

In part because so many people do not pay income tax, and in part because the biggest gainers are two-earner couples where both can benefit from the higher allowance, increases in the personal allowance benefit those in the middle and upper-middle parts of the income distribution the most.


Again, the Conservatives pledged in their Manifesto to increase the higher rate threshold to £50,000. Were they to do that the IFS estimated (see page 15) the cost in 2020-21 to be £1.9bn. Let’s assume they deliver on this Manifesto pledge. (And it’s worth noting that this yearthe higher rate of income tax will be paid only by the 5 million highest earners in the country: see table 2.5 for 2015-16).


This measure hardly requires explanation. But HMRC’s latest inheritance tax release shows that (in 2012-13 the latest year for which the figure is given) Inheritance Tax was paid by only 17,917 estates.


At 20%, we have the lowest rate of corporation tax in the G20, alongside Russia and Turkey. The case for decreasing it to 18% is not easy to see. More on this for those interested here.

Add those sums together and you arrive at £9.3bn – within fiscal spitting distance of the £9.735bn figure above.

If you’re a stickler, I’ll take you back to the 2014 Autumn Statement (the final column here relates to 2019-20 but, again, ignore this difference).


As I showed here, the benefits of this measure go disproportionately to buy to let landlords.

And voila. You’re over the top.

Of course there’s an ideological decision being made as to how the deficit should be closed.

A Short Monograph in favour of the Taxation of Dead Cats


Copyright: Boris Johnson, 2013.


Here are some dead cats frequently cast onto your dining table by misbehaving businesses.

We comply with the law in all jurisdictions in which we operate. Unpacked, this merely means: “because it’s lawful, we do it.” Tax avoidance – even in its most egregious forms – is lawful. If it isn’t lawful, it doesn’t avoid tax. But that doesn’t mean it’s not morally questionable. If I avoid tax, I increase the burden on those who pay theirs. If I am a business and I avoid tax I can undermine those businesses who don’t avoid it. And the allegation that behaviour is not moral is not answered by the response: “it’s lawful”. If you don’t believe me, try it on the spouse you’ve been unfaithful to.

Look at all the other taxes we pay. Yep. You pay them because the law obliges you to. The lipstick applied to this pig is the technical terminology of TTC or Total Tax Contribution. It is absolutely true that businesses are wealth generators and make a critical contribution to our society. Out of economic self interest (it’s called the profit motive, Ladies and Gentleman), they employ staff who also pay tax, generate economic activity for other business who also pay tax, and so on. They also pay other taxes. But none of this stuff – important though it is – gives them a free moral pass when it comes to the moral imperative to pay their share of this tax too.

If MPs don’t like it they should change the law. This ignores the limited scope that our domestic Parliament, bound by a web of international tax treaties and EU law, has unilaterally to improve the law. Think Global Climate Change Summits with whistles. And whatever you’ve read, no Government is a fan of tax avoidance. It reduces its ability to achieve its real political goals: for this Government, for example, perhaps reducing the headline rate of income tax. On a whim (we’re strange creatures us tax lawyers) I traced back as far as a 1959 Manifesto political parties promising to “change the tax system to deal with the tax-dodgers”. Every Government ever has tried: the fact that none of them has succeeded might tell you something.


But why do I say we should tax these Dead Cats? And how should we tax them?

They add to the moral failing of tax avoidance a further moral failing of attempting to dissemble the first moral failing away. So when you see it, call it out. Tax it reputationally. #DeadCat


I don’t want to kid you.

Not all behaviour that avoids tax has a moral dimension. No one sensible could say that moral obloquy attaches to someone who avoids capital gains tax by buying shares through an ISA. Nor is there any principal – legal or moral – that obliges us to transact in ways that maximise the tax we have to pay. And there are many, many cases where it’s difficult to work out whether what we’re doing is consistent with what Parliament could have intended.

But none of this has as its consequence that – as some assert – there is no moral component to taxation. There is.


There is more work to be done in this field.

Recent Government initiatives have looked beyond the hard yards of purely legal solutions to these issues. They have sought to focus on the wide open spaces – identified by a number of thinkers in the field, including me – of risk management: both reputational risks for businesses and financial risks for Government. How can Government raise the reputational risks for businesses that engage in ‘bad’ tax behaviour? How can it keep at Gas Mark 9 the temperature under tax avoiders? How can it increase the pre-tax cost attached to behaviours that focus on improving post-tax returns? And how can it reduce the risks to public finances?

Thankfully, there is more to come.

A further note – on Real Facebook’s Accounts

The release by UK Facebook of its accounts made some media noise. Heather Stewart of the Guardian covered them here, Richard Murphy here, Vanessa Houlder here, Hugo Rifkind here and your present correspondent observed that UK Facebook was unlikely ever to make a, or a material, taxable profit here.

Most – with a couple of honorable exceptions – of the twitter taxperts rallied round UK Facebook. A number of bad points were taken in its defence – and no doubt one or two good ones as well. I would not want to pretend – for it is a long mile from true – that I have any monopoly on insight.

It does surprise me that this is the invariable and knee-jerk reaction to stories asking whether Big Business is misbehaving. Although not quite as much as it surprises me that many taxperts don’t understand that the consequence of their myopia is poor understand of tax issues: journalists don’t feel able to call on experts that they can’t trust to tell the unvarnished truth. This is a real bugbear of mine: I’ve written about it (in two addresses to my colleagues) here and here. As I put it in the first of those two posts:

Here’s a short prescription. Rather than bemoaning the limited understanding of public and media, we should work to improve it. I speak to a lot of journalists – several a day – and I’ve only ever spoken to one who wasn’t interested in the truth.

But we need to be transparent about the premise from which we proceed. When we act in a professional capacity it’s right that we talk our own book. Everyone understands that we sometimes speak as lobbyists. But it’s important to signal when we do. Otherwise we become part of the problem. If we merely stand on the sidelines and criticise, we don’t merely ignore Gandhi’s injunction to ‘Be the change you wish to see in the world.’ We thwart it.


Anyway, on to UK Facebook.

One of two points taken in its defence was that you can tell that there is no funny business in its accounts because if you look at the rate of corporation tax paid by Real Facebook on its global profits that rate is really rather high. If true this is a decent point: why would you shift profits out of the UK and into another jurisdiction where you’d pay as high or an even higher rate of corporation tax?

But is it true? Well, at first glance, it looks true. Annex 2A of this document, prepared by the EU Commission, states that Real Facebook paid 45.5% tax on income in 2013. And if you go to Facebook’s own accounts, at Note 13 you find this (and I should note that the accounts refers to income tax which is what our American cousins call corporation tax. For ease of use for my UK readers I am going to call it US corporation tax) :


And this:


They’re probably too small to read on the bus but what they show is that in 2014, Real Facebook made provision for $1.97bn of US corporation tax, an effective tax rate of 40.1% on worldwide income. In 2013, the equivalent rate was 45.5% (hence the Commission figure) and in 2012 it was a remarkable 89.3%!

This surprised me a little because, as the Note itself records, the statutory rate of US corporation tax is 35%. And few of us tax professionals are paid to increase above the statutory rate the amount of tax our clients pay. So I did a little digging.

Not that much, mind. Further down in the very same note you find this:

Excess tax benefits associated with stock option exercises and other equity awards are credited to stockholders’ equity. The income tax benefits resulting from stock awards that were credited to stockholders’ equity were $1.85 billion, $602 million and $1.03 billion for the years ended December 31, 2014, 2013, and 2012, respectively.

So alongside the US corporation tax paid, Real Facebook also received what are shyly described as “income tax benefits” arising from share options (I’ll talk about share options for shorthand although there will be other share based remuneration too) it had granted, of £1.85bn.

Hang on a second: so is the tax provided for by Real Facebook in 2014 $1.97bn (at an effective tax rate of 40.1%) or $1.97bn minus 1.85bn (at an effective tax rate of 6%)?

To find the answer to that question, you need to dig a little deeper.

At page 42 you find this:

2014 Compared to 2013. Our provision for income taxes in 2014 increased $716 million, or 57%, compared to 2013, primarily due to an increase in income before provision for income taxes. Our effective tax rate differs from the statutory rate due to non-deductible share-based compensation, operations in jurisdictions with tax rates lower than the U.S., and tax research credits. Our effective tax rate decreased primarily due to a change in our geographic mix of pre-tax income.

The bit that’s emboldened in that quote was emboldened by me. Now I am not an expert in US Accounting Practice or the US Tax Code. But my understanding is that under US Accounting Practice (and the same is true here) an employer get an accounting deduction when it grants most common types of share option based remuneration to employees to reflect the fact that its incurred expenditure. But under the US Tax Code it doesn’t get a tax deduction when it grants those options; instead it gets that tax deduction later on when the options are exercised. And the amount of the deduction depends on how much the option is then worth.

This timing mismatch has a number of consequences. But in particular, it means that a business with substantial staff costs which costs it chooses to meet in the form of share options will always show a high rate of US corporation tax.

Example. Assume for the sake of example that in 2014 I have income of 100, staff costs of 90 all of which I meet by granting share options of that value, no other costs and the rate of corporation tax is 35%. I will have accounting profits of 10, taxable profits of 100, I will pay tax of 35 and I will have an effective rate of corporation tax of 350%.

But, of course, in the real world, you can’t ignore that, in the future, when those share options are exercised, you will get a tax benefit.

Assume that the options in Example were all exercised on 1 January 2015 at a price which reflected my expectation of their value at the date in 2014 when I granted them. I’d then receive a tax benefit of 35% of 90 or 31.5. That tax benefit would be attributable to my activities in 2014. And if you matched it to 2014 I would have paid tax on my 2014 activities of 35-31.5+ 3.5 and my effective tax rate would be 3.5 on 10 or 35%.

Of course, in practice it’s a little more complicated than this example implies. In 2014 we would show on our balance sheet an expectation of what tax benefit we expect to get in the future (an item called a deferred tax asset) which we would adjust upwards or downwards depending on how closely actuality delivered on our expectations (perfectly in my example, less so in practice). And the tax benefit we got might not be attributable only to our activities in the year in which we got it (it is in my example) but in earlier years too. But these complexities shouldn’t obscure the fact that the tax benefit derives from our activities and reduces the amount we have to pay to the tax authority.

In 2014, Real Facebook made an upward adjustment to its deferred tax assets attributable to stock options of $1.85bn. That figure is not wholly attributable to Facebook’s activities in 2014. But it does reflect share options granted by Real Facebook to its employees – which is a cost of Real Facebook doing business. And it does reflect a 2014 upwards adjustment to Real Facebook’s expectation of tax benefits arising from the grant of those share options. And you can’t ignore it and pretend it has nothing to with Real Facebook’s real US corporation tax liability. And if you match it to Real Facebook’s actual provision for US corporation tax in 2014 it drives Facebook’s effective tax rate down from (an improbably high) 40.1% to (a less surprising, for us cynics at least) 6%.

And the argument that you can tell that there’s no funny business in UK Facebook’s accounts because of the high rate of corporation tax paid by Real Facebook simply evaporates.


I said there were two arguments advanced by the taxperts in UK Facebook’s defence. The other is the total tax contribution argument. It is that you shouldn’t focus on the corporation tax paid (or more accurately not paid) by UK Facebook because of all of the other taxes that UK Facebook causes to be paid. In my original piece on UK Facebook’s accounts I said of it this:

In any event, clearly, it’s no defence for X, facing an allegation that it doesn’t pay the appropriate amount of corporation tax, to say: ‘well, I’ve done some other things that the law requires of me.’

The commentariat didn’t think there was any of that going on. Here, by way of example, was one response from a commentator:

I can’t imagine anyone would seek to excuse legal non-compliance in one area by saying ‘but they comply with some other law’…

It’s worth pausing to note that I was making a general observation about how tax avoidance is justified. And that justification certainly is advanced. Speaking yesterday of UK Facebook here Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said this:


This is, it seems to me, a diversion. The allegation that someone has avoided corporation tax does not seem to me to be answered by pointing to the fact that they comply with other of their legal obligations.

Some facts about Fixed Odds Betting Terminals

Here are some facts about Fixed Odds Betting Terminals.

For bookmakers they “are one of the most profitable forms of high street gambling” (see paragraph 1.190 here). In September 2014 there were 35,059 such machines (see Table 2) generating an average revenue per machine (amounts staked minus prizes) of £46,315 (see Tables 2 and 3).

They are known to be used by drug dealers to launder money, an issue that Government recognises.

A 2005 report by Europe Economics for the Association of British Bookmakers showed that a bookmakers’ gross margin on FOBTs was 2-3% (see paragraph 1.2.4 here), a figure consistent with March 2012 data published by the Guardian (showing a return of 97%). Taken together with the average revenue per machine, this implies an average of over £1.5m per annum is wagered on each machine. Of course, criminals have to pay people to feed this money through machines but they still look (to this uneducated eye) a cheap way to launder money.

The statutory regulator, the Gambling Commission, has recognised that, of those who use machines in bookmakers, 50% show characteristics which might indicate that they might be a group at risk of harm (paragraph 9.11 here). And machine gambling in bookmakers and problem gambling in bookmakers are correlated with low income (see paragraph 9.9 and 9.15 here).

We also know that Licensed Betting Offices (or LBOs) are clustered in areas of high deprivation:


And in areas of high unemployment:


(both of these charts from this report by the Responsible Gambling Trust which works closely with the Gambling Commission). And that substantially all revenue generated by FOBTs is generated in bookmakers (£1.613bn of £1.623bn see Tables 3 and 8 here).

Government benefits too, and through it so do we. Gambling duty applies at a rate of 25% to that revenue (totalling in September 2014, £1.623bn – see Table 3 here) to generate a yield of some £400m.

And that leaves net revenue for bookmakers (after machine games duty) of a little over £1.2bn.

So let’s sum up.

Bookmakers gain £1.2bn. Government gains £400m. Those revenues come (in unknown part) from money launderers. They also come from gamblers, 50% of whom show characteristics which might indicate they are at risk of harm. And the poor are disproportionately represented amongst those gamblers, a factor that bookmakers take into account in siting their shops.

I should also recognise that bookmakers say that these gambling winnings support employment and so deliver employment taxes.

All Government is about making choices. We make these choices when we decide how hard to clamp down on the money laundering which primes the UK property market bearing in mind that the structures favoured by money launderers deliver unexpectedly high revenues to Government. We make these choices when the College of Policing decides that an answer to the question how “to deliver policing in an age of austerity” is to accept revenues from the Saudis. We make these choices when we decides how aggressively we want to pursue the low rates of corporation tax that have been described by one academic (reasonably, in my view) as an attempt “to become a tax haven” – but which are expected (reasonably, in my view) to deliver increases in the size of the UK tax base.

I don’t want to stand on a high horse and pretend these choices are easy. But an equation that delivers modest (in exchequer terms) amounts of revenue to the Government, substantial amounts to bookmakers, where that revenue is drawn disproportionately from the pockets of the poor and the unemployed, and which facilitates money laundering, doesn’t look like a good choice to me.

Some brief thoughts on Facebook’s accounts

Facebook UK Limited – which I’ll call UK Facebook – has published its accounts for the year ending 31 December 2014. Heather Stewart of the Guardian has written about them here. I wanted to add a few points of my own.

First of all, don’t be fooled into believing that these accounts tell you anything about what advertising revenue or profit Facebook makes from UK based advertisers, or advertising targeted at UK consumers. UK Facebook’s business is this:


So its business is providing services to what I’ll call Real Facebook.

Second, UK Facebook could have chosen to tell us a little more about the transactions it enters into with Real Facebook. But, as is its right, it didn’t:


I don’t suggest there’s anything legally wrong in it having declined to disclose this material. But it seems – to me at least – a strange decision for a company whose tax affairs are very much in the public eye. It could have taken the view that its reputation would be better served by transparency – but it didn’t. And people are bound to ask the question, ‘why?’

Third, its accounts show a more than doubling of turnover from 2013 to 2014:


Most businesses’ profitability improves when they double their turnover. But not UK Facebook’s: its pre-tax loss actually increased from 23% of turnover in 2013 to 27% of turnover in 2014. That’s not a feature most people would expect to see in a rapidly growing normal business.

Fourth, another notable feature of UK Facebook’s accounts is its huge staff costs:


These are obviously substantial: as a proportion of turnover they were 82% in 2014. But, perhaps even more remarkably, they are static as a proportion of turnover: in 2013 they were also, yep, 82%. Again, that’s not a feature most people would expect to see in a rapidly growing normal business. You’d expect staff costs as a proportion of revenues to decline as a business increases in size.

Now, the most likely explanation for this is that UK Facebook charges its services – largely consisting of its employees – out to Real Facebook on a cost plus basis. I’m not suggesting that there’s anything unlawful about this. But it does rather imply that UK Facebook may well never make a profit. Because what are described in its accounts as its revenues are really just its staff costs multiplied by a number (here 1.22). And that extra 0.22 may well never be enough to cover office costs, fixed assets and so on.

Certainly that 82% (or 1.22 multiplier) ratio suggests that the UK taxpayer won’t ever enjoy meaningful profits from whatever success Real Facebook enjoys in the UK.

Indeed, that seems to be UK Facebook’s own view. Its accounts set out how it treats its deferred tax assets (basically, the right to set past losses against future profits) and states:


And does UK Facebook recognise deferred tax assets?


It does not.

Finally, Heather’s article is attracting some criticism from the twitter intelligentisa for failing to recognise that, by paying remuneration in the UK, UK Facebook is actually increasing its UK tax liability. That criticism seems to me to be misplaced for a number of reasons.

  • Even if you assume that all of the remuneration it pays in the UK is paid to UK resident employees, the net effect of doing so is that its employees acquire an income tax (and modest NICs) liability. And UK Facebook acquires a liability to pay Employer’s National Insurance Contributions of 13.8%. That rate is lower than the rate of corporation tax (likely to be 21% depending on timing) on profits diminished by the payments to employees.
  • You want to be careful not automatically to assume that, because the staff are employed by UK Facebook, it follows that they pay tax on their employment income in the UK. For example, if UK Facebook engages staff who are resident in the US, it is the US, not the UK, that has main taxing rights in respect of the income of those staff. So UK Facebook could be depleting its profits chargeable to UK corporation tax by paying salaries to staff resident elsewhere on which salaries no UK income tax liability accrues and which still deplete the corporation tax liability of UK Facebook.
  • Moreover, the average staff member enjoys a remuneration package with an average cost to Facebook of £238,000.  No one pays their staff that unless there’s pretty vigorous competition for the services of those staff. It’s at the very least very possible that, if Facebook wasn’t paying them here, someone else would be.

In any event, clearly, it’s no defence for X, facing an allegation that it doesn’t pay the appropriate amount of corporation tax, to say: ‘well, I’ve done some other things that the law requires of me.’