We tax experts are a knowledgeable bunch, but very few of us understand how the law actually works. I am one of the exceptions, maybe the only one.
One of the features of recent tax avoidance cases in the media has been a technique known as “paying yourself”. Most tax experts don’t understand why this is illegal, so I feel it necessary to explain at length here.
Google, Facebook, Ebay, Star Bucks, Apple and Amazon all have UK companies owned by non-UK companies. These non-UK companies are granted the license to use the brand of the US parent within a geographical area, such as Europe.
They then grant a sub-license to the UK company.
Now, the important thing to remember is that this right, the right to use the brand and benefit from centralised advertising, management, supply chain, logistics and finance structures, is completely worthless.
Nobody in their right mind would pay money for this sort of thing. Everybody in business knows it, but tax experts seem to think that it actually costs money.
People who run franchises of an international brand will recognise this. This is the basis for their very generous franchise subsidies, which the franchise seller is willing to pay because it significantly reduces their administration and logistics.
Now international businesses pretend that this service is actually worth something (sophistry!) by an avoidance loophole called “transfer pricing adjustments”. This legislation is included in TIOPA 2010, which was enacted in the year that the coalition was “elected”.
Coincidence? I think not. That is why all this avoidance started ever so recently in 2010.
But, basically, there should be no allowable payment for these recharges. Because, ultimately, they are just “paying themselves”.
Consider how unfair this is on small businesses whose shareholders are taxed through PAYE the second an invoice is raised by the company. This is because they must deem themselves to be employees of their customer and preretrospectively apply RTI.
Why? Because they are “paying themselves”.
What’s more, if the shareholder lends the business money and charges interest, or rents it property, no deduction is allowed for these things in calculating profits chargeable to corporation tax.
That is because no deduction is ever allowed for tax purposes where a business “pays itself”.
The underlying legal principle is that we ignore situations where somebody “pays themselves” because it is nonsense.
And yet the income is still taxable on the shareholder. Why is this if we ignore situations where somebody “pays themselves”?
Although a good tax expert disregards the expenses in calculating taxable profits of a business, they should always remember that only one side of the transaction is ignored.
This doesn’t seem to apply to the Star bucks and Googles of this world who seem to think they can get deductions by “paying themselves”. Well, not only are they wrong, the government is wrong too because it is legal and exactly what is intended by Parliament.
This is completely intolerable because, on the face of things, nobody has done anything illegal it immoral. And yet they are so clearly wrong because I am so very outraged.
This situation has come about by neoliberals entrenching their concept of “the rule of law” over a thousand years and establishing principles that clearly are only there for the avoidance of tax.
I know that well-respected judges and MPs read my blog, so I may well find myself in contempt of court, for saying this: the courts have failed to interpret the law correctly and the intent of Parliament.
MPs don’t really want people to not pay income tax on interest in ISAs, they don’t want businesses to claim capital allowances, they don’t want shareholders to receive dividends, and they certainly don’t want there to be individual legal entities.
Everything is supposed to be treated as one thing: The State. Therefore, any transactions are regarded as The State “paying itself” and the income is taxable and the expense is not allowable.
This is another reason why you should always, always, always ignore the accounts. That and the fact they have been written by sociopathical accountants who are only in it for the love of money.
What does this tell us about the UK’s tax system? It tells us that it is unfair.
We can only change that by having a good tinker with the tax system, preferably supervised by a suitably experienced tax expert.
Labour almost managed to perfect the tax system with their short time in office, but that has all been undone by the relentless consultative process for tax legislation that has been put in place by this coalition. Asking people their opinion as to how to improve the system? Pah! The State shouldn’t need to ask, it should know.
Well, if there is one person who does know, it is me. I have joked before that perhaps I should be putin charge of The State.
Whilst I am widely recognised as the world’s finest raconteur and the loss of my renowned sense of humour would leave the world a darker place, perhaps it is time I stopped joking about such things.