The question that hasn’t been asked

I’ve been watching the “Challengers’ Debate” this evening. I watched the Leaders’ Debate the other week. Yesterday, I was at a local hustings meeting with our own local candidates for Mid Worcestershire.

At all of them, many questions were asked. But one subject was a glaring absentee at all of them.

Obviously, with time being limited, it’s impossible to ask every question. So, just on the off-chance that any politician competing for my vote happens to read this, this is the question that I would have asked:

We’ve heard a lot about people who don’t pay tax. Tax dodgers, users of corporate tax havens. But I want to ask a question about those of us who do pay tax.

Like most people with a job, I pay tax. Several taxes, in fact.

Income tax. National Insurance. Council tax. Value Added Tax. Vehicle Excise Duty. Fuel Duty. Beer Duty. Wine Duty. I don’t smoke, so I can’t complain about Tobacco Duty, although I’m sure many other people here will. But I did get stung by Stamp Duty when I bought my house.

And it isn’t just me. Take a walk along our High Street, and you’ll see empty shops. Step inside the open ones, and you’ll hear stories of how difficult trading can be. When I talk to local shopkeepers, I hear over and over again how business rates can be crippling. When they do manage to scrape a profit, they are taxed on it at rates higher than in many other countries, including the ones which are our biggest online competitors.

So my question for the panel is simply this: How do you plan to reduce this burden on me, on my family, and on my community?

More lies and infographics

This time, the infographic is from the Methodist Church, which makes it all the more disappointing as I would have hoped that a Christian organisation would be more concerned about the truth. Here’s the picture:

At least this time it is using the official figures, unlike the other meme that’s been doing the rounds. But even that comparison is still wrong, and for exactly the same reasons.

Lies, damned lies and infographics

There’s a meme currently doing the rounds of Facebook and Twitter, purporting to show that benefit fraud is pretty much too trivial to care about. Here’s the infographic:

It’s pretty obvious what we’re intended to perceive here. Big blue circle on the left, little pink circle on the right, isn’t it obvious that the small one isn’t worth bothering with?

Well, no. There are quite a lot of things wrong with this comparison. Let’s look at a few.

The most obvious is that the big blue circle is the unofficial total of lost tax revenue. It’s there because the official total, in the red circle, isn’t anywhere near as scary (although it’s still bigger than the pink circle). But, on the right, we only have the official figures. The infographic omits it, but there are other, equally unofficial (but equally well-founded) estimates of the value of benefit fraud which greatly exceed the official figures.

To make a meaningful comparison, therefore, we need to disregard the big blue circle on the left and only use the red circle. Anything else is simply not comparing like with like. If we’re sticking with official figures on one side, then we need to stick with official figures on the other, and ignore all the various unofficial estimates.

OK, but the red circle is still a lot bigger than the pink one. But look at what it contains: Tax evasion, tax avoidance and tax uncollected. Those are three very different things. By contrast, the right hand side breaks down excess expenditure into two different circles: overpayment by error and fraud. (We’ll ignore the green circle, as it’s not really relevant to the comparison, save to say that benefits unclaimed are a good thing – it means people are taking responsibility for their own lives rather than expecting the state to provide).

So our comparison still isn’t meaningful. We have multiple categories included in the red circle (£30 billion) and only one in the pink circle (£1.2 billion). We need to find out what part of the red circle is the equivalent of the pink one.

Fortunately, HMRC does actually publish this information. Here’s a pie chart from that PDF:

The document goes on to explain what those different categories mean. You can read the original by following the link, but here’s a brief summary:

Error. This is tax lost due to cock-ups by HMRC. We can ignore this when comparing with benefit fraud, since error is a separate category (the small pale blue circle) on the right.

Failure to take reasonable care. This is the counterpart of error, in this case cock-ups by taxpayers getting their submissions wrong. It is, however, innocent error, caused by carelessness or ignorance rather than malevolence, so it’s still not analogous to benefit fraud. (In this context, too, it should be borne in mind that commercial taxes, such as VAT and Corporation Tax, can be horrendously complex and difficult to calculate accurately, even for professionals).

Non-Payment. This is tax that would have been paid, but wasn’t. Mostly, this is due to companies going bankrupt and not being able to afford to pay their taxes. Again, while regrettable, this is not fraud.

Legal Interpretation. This is a lovely little weasel phrase, used by HMRC to describe a situation where their lawyers and accountants and the taxpayer’s lawyers and accountants disagree on how much should be paid, and the taxpayer wins the argument. Depending on which side you’re on, this may or may not be considered immoral, but it still isn’t illegal.

Avoidance. This is people taking advantage of legal loopholes to minimise their tax liability. As before, there are various opinions as to the morality of this, but its legality is not an issue. So, still not equivalent to benefit fraud.

Criminal Attack. This is tax lost as a result of deliberate criminal activity such as smuggling and VAT fraud. This is clearly illegal.

Evasion. This is tax lost due to deliberate falsification of information supplied to HMRC – lying on a tax return, for example, or hiding money in a Swiss bank account. This, too, is definitely illegal.

Hidden Economy. This is generally undeclared income, such as earnings from “cash in hand” work and moonlighting. This is illegal too, although it’s interesting that HMRC doesn’t consider it to be in the same category as evasion. (To be slightly more precise, HMRC considers that evasion is an act of commission, telling a deliberate lie, whereas the hidden economy is an act of omission, simply keeping quiet and hoping you don’t get asked).

These last three are the only ones that can reasonably be considered equivalent to benefit fraud, not least because they are the only ones which – like benefit fraud – are actually illegal. Even within those, though, they are not the same. Criminal attacks on the tax system are obviously a serious concern, but they have no real equivalent in benefit fraud (and some might argue that the government is the author of its own misfortune in many cases, as high excise rates are precisely one of the things which encourage smuggling and counterfeiting).

The hidden economy, on the other hand, despite being illegal, is something that a lot of people would either not care much about or even tacitly support. Realistically, anyone who has ever paid cash in hand for work done by a tradesman has probably contributed to the hidden economy; many people who buy and sell on eBay or at car boot sales have engaged in it directly. And, of course, many of the people who work in the hidden economy are also those who are likely to be over-claiming benefits, and for the same reason – they are short of money. If we are being invited to withdraw our condemnation of benefit fraudsters, therefore (which is, after all, the point of the infographic meme), then, to be even-handed, we also have to be equally tolerant of those who don’t declare their earnings for the same reasons. I’ll come back to this point later.

That leaves outright tax evasion, therefore, as the only part of this £30 billion tax shortfall which is both equivalent to benefit fraud and indisputably deserving of condemnation. So where does that leave us, in financial terms?

The answer, according to HMRC, is that tax evasion accounts for approximately £4 billion of lost revenue. That’s still more than benefit fraud, of course (just over three times as much, in fact), so it is a much worse loss.

But it isn’t several orders of magnitude bigger, as the infographic misleadingly implies. If £4 billion is worth caring about (and it is), then £1.2 billion, though lesser, is worth caring about too.

In any case, the other implication of the meme, that the government cares more about benefit fraud than it does about tax losses, is completely and utterly false. HMRC spends a lot of time end effort tracking down evaders and tax frauds, and the police put just as much effort into hunting down criminal gangs that scam the state. The idea that the government is blithely unconcerned about various tax crimes, while clamping down hard on people who over-claim a few quid on benefits, is purely an invention of those who seek to discredit those in power. If anyone really thinks that the Chancellor of the Exchequer would prefer to miss out on £30 billion of tax revenue than take any action to recover it, then they’re just plain daft.

Going back to the comments about the hidden economy, though, I do actually have quite a lot of sympathy both with those who over-claim benefits or who under-declare income. And that’s because the tax and benefit systems often seem designed to cause the greatest pain to those who play by the rules. Benefit traps are a classic example – it’s possible for someone to take a job, but be worse off as a result when their benefits are abruptly withdrawn. And income tax often hits low to middle income earners the hardest, as they have lower disposable incomes with which to pay over-inflated housing, fuel and transport costs (all artificially high due to government manipulation) and little in the way of mitigation from benefits. So it isn’t surprising that someone who has just got a job will “forget” to mention that fact when collecting housing benefit, or that someone who can get paid in cash will just pocket the money rather than log it in their accounts. I don’t approve of all forms of benefit fraud or hidden economic activity, but I do find it hard to disapprove of that which is clearly encouraged by the system.

So what’s the solution to the real problem of benefit fraud, the problem that the infographic tries to pretend is insignificant? I think it’s the same as the solution to the problem of most tax avoidance and the hidden economy. We need a simpler, more transparent and easily understood tax and benefit system which never penalises someone for working harder or earning more. But I suspect that isn’t going to appeal to whoever created the infographic.

Update: The Methodist Church has got in on the misleading infographic act too, with one which avoids the error of comparing official with unofficial figures but otherwise makes exactly the same errors as this one. Sigh.

Some facts about Google

Prompted by yet another economically illiterate tweet criticising Google for the relatively small amount of corporation tax paid in the UK, I decided to do a little research myself and find out a bit more about Google’s financial situation here.

Google is, of course, a multiheaded multinational, with a lot of different companies both in the UK and trading in the UK. But we’ll start with the most obvious, Google UK Limited.

You can get a full copy of Google UK’s financial statements as submitted to Companies house from that link, but you have to be registered and logged in to do it. So, for the benefit of those who can’t be bothered, there’s a copy of the most recent here. And here’s a summary of what you’ll find:

Google UK’s income for 2011 was approximately £396 million (£395,757,534 to be precise, but for the rest of this article I’ll stick to rounded numbers as they’re easier to take in at a glance. You can get the details from the linked documents) That’s all gross profit as Google UK doesn’t have any outstanding debts or liabilities.

However, Google UK’s expenditure for the year was £417 million. It doesn’t take a genius to work out that this actually makes Google UK unprofitable in a standalone sense. I’ll come back to that later, as the question of where Google is profitable is relevant. But, for now, here are some of the payments which account for that expenditure:

Payments to the parent company Google Inc: £62 million
Donations to charity: £76 million
Wages and salaries: £214 million
Social security costs: £22 million
Corporation Tax: £6 million

(I can’t be sure, but I suspect that the “social security costs” are things like SSP and Employer’s NIC contributions).

The rest is mostly things like marketing expenditure, pension contributions, rental and lease costs, etc. None of it is exceptional or unusual.

Google does have several other companies registered in the UK, but compared to Google Uk Limited they are all pretty small and, to all intents and purposes, fiscally irrelevant.

It’s pretty clear, therefore, that Google UK’s corporation tax liability is actually more than what would be expected. Any standalone company with these figures wouldn’t be paying corporation tax at all. So where is the money coming from?

The answer to that is Google Ireland Limited, which is the EU base for the majority of Google’s operations. In particular, if you are based in the EU and you use Google Adwords (which is Google’s primary income stream) to advertise your business, then you’re paying Google Ireland to do so.

Unfortunately, data from Irish companies isn’t as easy to get hold of as data from Companies House in the UK, but the Guardian has helpfully put a copy of Google Ireland’s financial statement from 2009 online at Scribd. It isn’t as up to date as the UK version, but it is, nonetheless, interesting. Here are some headline figures (in Euros now):

Turnover in 2009 was €7.9 billion (that’s US billions, ie, thousand millions, as this seems to now be standard in the financial world)

Of that, €2.4 billion was paid out as “cost of sales”, leaving just over €5.5 billion was gross profit.

(Most of that “cost of sales” is money paid out to website operators who display Google Adsense on their sites. Like this website for example. A teeny, tiny little bit of that pile of cash came to me for adverts on this blog. I suspect I spent most of it on beer.)

However, Google Ireland paid out just under €5.4 billion in administrative expenses, leaving a total operating profit of €45 million.

That may not seem a lot left, so where did all that money go?

This, unfortunately, is where the Irish accounts let us down a bit, because they’re nowhere as detailed as those from the UK. But there are a few interesting tidbits:

“Research costs”: €18 million
Wages and salaries: €100 million
Social welfare costs: €10 million
Asset purchases: €118 million
Depreciation: €87 million
Amounts owed to other Google group companies: €1.2 billion

That doesn’t add up to the total amount of expenses, but, again, I’d expect that most of the rest of it is normal corporate expenditure on things like rent, leases, consumables, etc. It’s that €1.2 billion which is interesting. Where is it going, and why?

The accounts don’t say, but media reports suggest that it’s going to Google Bermuda, which, contrary to what you might think, is the real financial HQ of the company. Bermuda’s tax rates are low, and Google has no significant expenses there, which means that practically all of the money which flows into Google Bermuda can flow out again to the shareholders without being taxed on the way. The shareholders will, of course, pay tax on those dividends in their local jurisdiction, but that’s unavoidable and, in any case, is of no interest to Google the company.

What’s also worth noting is Google Ireland’s final corporation tax situation. Initially, the assessed tax for 2009 was €17 million. But not all of that went to the Irish authorities. Further down the document, we see that Google Ireland owed €8 million in foreign withholding tax. Withholding tax is tax paid to the government of a territory in which a company operates, as opposed to the one in which it is based, and what that means is that Google Ireland owed €8 million to various non-Irish governments for that year. Some of that will have been the UK, as Google Ireland sells to UK-based customers. Checking a few other documents suggests that, in 2009, HMRC received £1.8 million.

So how much extra would we have got, had Google Ireland not sent €1.2 billion to Bermuda? Well, assuming it was all taxed at the same rate as the €45 million which was taxed, then Google Ireland would have paid something like €777 million in tax. In reality, it would have been lower, since that makes an effective tax rate of 37% and Ireland’s corporation tax rate is actually 12.5%. So something in the order of €263 million is more plausible. Of that, the UK would have received £59 million. Assume (which is always a dangerous assumption when it comes to finance, but what the heck) that broadly the same proportions applied last year, in 2011, when Google UK paid £6 million in tax, and that means HMRC would, instead have got around £197 million in tax instead.

(Apparently, Google’s own spokesman has said that the actual amount they have saved is around £150 million. That’s a bit less than my guesstimate, but it’s in the same ballpark. I’ll stick with my own figures, since I’ve already done the maths on them and it doesn’t affect the comparisons much, but it’s worth noting that I may be overestimating).

£197 million may sound a lot. And, of course, compared to £6 million, it is. But it’s less than Google UK paid in wages and salaries for the year. It’s also less than half what the government earns from fuel duty every single week of the year. It’s less than the government earns from alcohol duty every week. It’s about the same as a week’s worth of tobacco duty. It’s about eight hour’s worth of VAT.

In overall terms, therefore, the amount of corporation tax foregone by HMRC as a result of Google Ireland shuffling off revenue to Bermuda is trivial. And the same applies to pretty much every multinational. The reality is that Google is putting money into the British economy simply by being here – salaries paid to British workers, rents and leases paid for British properties, council tax, VAT, PAYE and even the money spent on pizza by its staff.

It would be open to the governments of both the UK and Ireland to legislate so as to force Google to retain more of its revenue here. But if that came at the cost of inducing Google to close its London and Dublin offices and, instead, sell to the UK and the rest of the EU directly from the US, then we would lose far more income in total than we are currently foregoing in corporation tax. Which, of course, is precisely why the British and Irish governments haven’t tried it, because they’re not stupid. And why those calling for such actions are.