Thursday, 27 June 2013

What’s coming up in the States? 2 July 2013

Committee of Inquiry: Costs for Local Businesses

Senator Alan Breckon is calling for an inquiry, estimated at £60,000 to look into the cost of doing business in Jersey:

"For many years claims have been made, mainly by the Chamber of Commerce, that it is more expensive to do business in Jersey than other places, although this has never been qualified in any way with any evidence, to my knowledge. Flowing from this, claims are made that this is why goods and services can be more expensive to the consumer in Jersey."

"Generally, the stretch of water for transport between Jersey and the UK as well as employment costs for staff, the cost of premises, other problems associated with operating on a small scale in an Island economy, have all been used as reasons or excuses for some significant price differences between Jersey and elsewhere, however, none of the above or other REAL costs of doing business in Jersey have been examined in any detail."

I can see this being thrown out. It is costly, and endless attempts have been made to try and get a grip on higher costs in shops over the years, none of which threw up anything with great certainly. Why should this inquiry be any more successful? A perusal of town rents shows some very high leases on retail outlets. Equally, the Co-Op have been at pains to point out the costs of freight, which should not be underestimated.

I think that some kind of checking should be made, but much smaller scale, and more targeted. It seems a good scientific principle to have a control group against which prices can be measured. Clearly, the UK is not a good comparison for a small island.

But just across the water in Guernsey, we have very much the same stretch of water, and a small island economy. Adjusting for the element of GST, what could be done is a comparison of prices between Jersey and Guernsey, and as far as food is concerned, a look at the supermarkets which do business in both islands.

Other retail outlets – for petrol, domestic oil supply, domestic coal etc – could also be the subject of this probe. We can pretty well rule transport costs out of the equation, as they must be pretty similar for both islands, so other factors could be looked at in the case of significant differences.

It would I think be necessary for the data collection to be at least partly confidential, as that kind of business intelligence could disadvantage particular retail outlets, and detailed information on staff costs and rents etc would be needed. That is privileged information, and should remain so.  But a joint project to collate the information, between the Jersey and Guernsey statisticians, looking at all factors  - cost of staff, rental etc, could yield some very useful results and we might get an answer to the question why particular prices differ significantly between the Islands.

Chief Minister and Chairman of Comité Des Connétables: Monthly Meetings

This is Deputy Tadier's proposition, "to establish a system of monthly meetings with the Chairman of the Comité des Connétables to discuss matters of mutual interest affecting the States and the parishes, with the meetings to be formally minuted and with the Minutes being made publicly available as happens at present with the Minutes of the Council of Ministers.

This proposition was designed to ensure "the future interactions between the decentralised administrations of the Parishes and the centralised administration of the States of Jersey". In particular it was looking at the situation where the Constables might no longer be ex-officio members of the States.

Given that it was lodged on 16 April 2013, and the Referendum took place on 24 April 2013, it looks to me very much like an attempt to bolster support for "Option A".

The comments by the Committee of Connétables is that this will "seem merely to add to the workload, as relevant papers and minutes will have to be kept, and it is not clear that there will be any benefits. The Chief Minister will be reporting on matters which are the responsibility of individual Ministers and the Chairman can only express the views of other Connétables as the position carries no authority for decision making on behalf of other parishes."

Do we really want States members to be tied up in yet more meetings? I'm not convinced. Having spent much of the early 1980s on various committees, and much of the 1990s attending various meetings, the bulk of the time I think was wasted. The trouble is that attendance of meetings can be seen as a substitute for actual achievement, rather like those politicians who used (in pre-Ministerial government) to say they sat on Social Security, Gambling Control, the States Procrastination Board, etc. Nowadays there are less committees, and prospective candidates seeking re-election have to massage the old CV a bit more.

I'm all for keeping lines of communication open, but there is no indication that adding yet one more meeting will really achieve much. I would say that better liaison between those in the Executive and those outside would be more helpful, so that backbenchers have the chance to discuss propositions or potentially controversial ministerial decisions before they are put forward.

The Council of Ministers under Terry Le Sueur, in particular, often resembled a castle with drawbridge up, and moat filled, where propositions and decisions would be fired from those inside to the members outside its lofty walls, while the press were quite often briefed before States members. That doesn't seem to happen much now, and there seems to be more consultation in general, although unlike scrutiny, the consultations do not publish submissions received.

Ratification of the Convention between Jersey and the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital.

I expect some comments from Trevor Pitman on this. He has recently commented on Facebook that:

"As for the issue of 'evasion' and 'avoidance' I take the view put forward by a lawyer friend that at the bottom line the two definitions are very much just man made and ratified by what we then decide is 'law' or 'legal'. Not a difficult reality to grasp at all in my view - whatever one's politics."

But of course the law is man-made.

We have for example, an age of consent, which would rule out the marriages that took place in the Middle Ages. In 1396, Richard II of England was joined in marriage to young Isabel of France, who had been 7 years old when their engagement was announced the previous year in Paris. Chaucer's Wife of Bath boasts of having had five husbands since the age of 12. St Elizabeth of Aragon (1271 – 1336) was aged 12 when she was married to King Denis of Portugal and gave birth to three children shortly after.

And in modern times, in Denmark people at 15 can get married if have the municipality's approval, and which requires that they have their own homes. In Canada, the age of consent was only raised from 14 to 16 in 14 to 16 in May 2008 (with special provisions for those below that age and legally married).

We can see that the legality of what constitutes marriage has varied in different times and in different countries. But I think it would be very special pleading for maths teacher Jeremy Forrest to say that it is merely man-made when he went off to France with an underage schoolgirl. Man made norms are made for a reason, ratified for a reason. We are far more aware of the vulnerability of young children to sexual predation.

If we can see that clearly legal boundaries are man-made but not arbitrary in the case of marriage, why is it that some politicians seem unable to see it in the case between tax evasion and tax avoidance? Just because something is man-made does not mean that it is arbitrary or that we should say the distinctions do not matter. It was, after all, legal exactness which enabled Portia to save Antonio from Shylock in The Merchant of Venice.

So what might be a case of legitimate tax avoidance, or tax minimisation? When C.S. Lewis was not particularly well off, but had begun broadcasting for the BBC, the money he earned for his talks as well as from The Screwtape Letters was being given away by him to charity.

As Alan Jacobs notes in "The Narnian":

"He did not realize that even when he gave the money away he was still expected to pay taxes on it, so when his tax bill came due he could barely pay it. After that shock, Barfield helped Lewis set up his own charity so he could practice his extraordinary generosity without bankrupting himself."

Now that is a kind of tax avoidance, but is it the same as tax evasion? It is legal, and it is a means whereby C.S. Lewis was able to channel income from his books into charitable purposes directly without incurring personal income tax liability for that. Lewis was well known for his generosity, and I doubt if anyone can doubt that there were any false motives for a charitable trust. But it was a restructuring of his affairs to minimise his tax liability, so in a sense it was tax avoidance.

I'm not saying that all tax avoidance is as noble in intent as C.S. Lewis. What I am saying is that the terms themselves can be value laden, and "avoidance" suggests something shifty, which it may in fact not be.

A lot of mud has been hurled at Jimmy Carr, but let's look a bit more closely at the actor or entertainer's dilemma.

The UK tax system, with different bands for different earning limits mean that someone in the entertainment business, who can have large earnings over say 5 years, then 5 years slack or resting, can end up paying considerably more than someone on a steady salary whose total earnings over the 10 years are the same. That's because the tax system is geared to tax on the assumption that wages are more or less stable, which is not the case with actors or entertainers, nor with farmers.

It seems to me to be wrong that someone whose total income over (say) 10 years is £x should pay 40% and someone else whose income over the same 10 years is £x should pay at 45% because the tax system has built in assumptions which penalise people with very variable incomes. Equally the difference could be one person at 20% and one at 40%.

Of course if you have a flat rate like Jersey, the tax bill would be more or less the same either way; it's the structure of the UK system that makes it unfair for people whose income is notoriously unsteady.

That, of course, is one reason why actors and entertainers try to "convert" the years of plenty into a steady overall supply for the years of famine. It may not be the only reason; but it is one: the inherent unfairness of the system in this respect.

I think that as a matter of fairness an individual engaged in employment, writing a story or making an invention, the compensation for which is largely bunched in a single year, should not bear a heavier tax burden than he or she would have borne if the income were received in equal installments over the period encompassed in the rendition of services, the writing or the rewriting.

The UK tax system does not allow that, and is manifestly unfair. Using accounting strategies to spread the income in a manner which should have been proper could be seen not as tax avoidance, but as tax planning to rectify the problems with an unjust system in which one size does not fit all.

Is it tax avoidance to try and spread the burden of tax so that someone whose income goes up and down like a yo-yo should pay the same as someone on a steady income over the same period? So much attention has been paid to the fact that the actor or entertainer is using tax planning to not end up on the highest rate, that very little attention has been paid as to the structural weaknesses of the UK tax system over a flat rate system.


TonyTheProf said...

Daniel Wimberley comments:


Why are you trying to confuse (in what you say about tax avoidance) what is mainly a simple issue?

Yes, the case you cite, where a person has a lumpy income stream, shows that the tax law should allow for the stream to be evened out. (although at a guess, this might very well lead to MORE tax being paid. It depends on the sums involved and the degree of lumpiness, I suspect)

But that is not the main point in this argument is it? What the tax campaigners say, and they are right, is that COMPLIANCE is activity which follows the intention of the legislators. It is compliant to put your money into an ISA and claim tax relief. The legislators INTENDED for this to happen, they WANTED to encourage saving. And it is very clear that this is the case.

Which is why Senator Ferguson is so so wrong when she repeats her mantra that we are all engaged in tax avoidance - we are not. Or I am not anyway.

It is NOT COMPLIANT, it is TAX AVOIDANCE to do things which have no real substance, which are not what the legislators intended (that is, they exploit a "loophole") but which have the aim of paying less tax.

The obvious example is Google. I have watched much of the PAC's grilling of Google. It is clear that the claim that sales did NOT take place in the UK was stretching the truth. Everyone else thought that that sales WERE taking place in the UK. The fact is that the BILLING took place in Ireland as a wheeze to justify the non-payment of tax.

Jersey's Income Tax Law puts it very clearly. I always find it ironic that we have had a general anti-avoidance principle in our domestic law for ages whilst allowing foreigners to avoid their taxes by exploiting the absence of such a principle in their home jurisdiction.

Article 134A states;

"If the Comptroller is of the opinion that the main purpose, or one of the main purposes, of a transaction, or a combination or series of transactions, is the avoidance, or reduction, of the liability of any person to income tax," then he can take action to get at that tax.

You can argue not to pay his assessment on the following grounds:

"(a) the avoidance, or reduction, of the liability of that person to income tax was not the main purpose, or one of the main purposes, of the transaction, or the combination or series of transactions;
(b) the transaction was a bona fide commercial transaction, or that the combination or series of transactions was a bona fide combination or series of transactions and was not designed for the purpose of avoiding or reducing liability to income tax;

(plus an additional argumnent about the TOTAL assessment amounting to overcharging.)

It is not a muddle as you suggest,it is absolutely clear, in 9 cases out of 10."

TonyTheProf said...

You may notice that I do not say the K2 scheme is legitimate - in fact, once the UK has General Anti-Avoidance, it would certainly not be. What I am saying is that people on variable income seek a means of making the system fairer by tax planning. That means, of course, that they are vulnerable to sharks who go beyond what would be fair, and provide something much more aggressive.

I do think that there is legitimate scope for making the system work more fairly, and progressive taxation doesn't do this. The UK is also very bad at coping with nomadic peoples like the travelling Romany; it assumes people live in one place, and can't adjust for anything outside the box easily.

Regarding another kind of tax avoidance which is quite legal - the UK actively encourages non-dom status high wealth individuals into the country. That is a government structured form of taxation which allows some people - like the 1.1ks in Jersey - to pay less tax than everyone else. But it is what legislators intended. Just because something is built into legislation does not make it any the less avoidance.

I am also not looking at corporate tax avoidance which is a whole different ball game. Monty has been going on about Jimmy Carr, which is why I was focused on why people like him would look for schemes - either because they are wickedly wanting to avoid tax, or because they want to even the income stream. I'm just suggesting the second explanation is just as rational and likely as the first. Singers are another example - look at Bono, for example.

Companies are a very different matter, especially international ones which can avoid territorial taxes. But it must be remembered that we have trading companies - like De Gruchy - next to Voisins - where the shareholders pay no tax locally. We were told that a territorial tax on trading companies would be illegitimate under EU rules. To some extent Google, Amazon etc are exploiting the EU's own principles on ownership and locality, so if they change the rules, I'll be pleased if it means De Gruchy, Waitrose etc can start contributing more to the Jersey economy. But largely as I see it, it is the EU rules which are preventing this, so they are hoist with their own petard.

TonyTheProf said...

Daniel writes:

I really do think we should be clear on definitions. This paragraph once again muddies the waters. And this suits the abusive tax avoiders down to the ground - as they want very much everyone to be confused.

Some time ago, TJN in their main pamphlet - "TAX US IF YOU CAN" - split it up like thios:

Tax evasion - illegal behaviour
Aggressive Tax Avoidance - behaviour which is not illegal but clearly is aimed at not paying tax by finding loopholes, creatibng transactions with no economic substance, etc. As described in the Jersey Article 134
Tax avoidance - behaviour which is not illegal and is sanctioned by the legislators - like your excample of favourable treatment for non-doms, like payments into pension pots, like exemptions on mortgage interest, like child allowances.

I find the use of the word "avoidance" for 2 and 3 above is confusing for the average punter. And it is this ambiguity which is playred on ny people like Senator Ferguson when she says: "we all do tax avoidance" - rolling 2 and 3 into one.

So my terms are:

Tax evasion - illegal behaviour
Tax Avoidance - behaviour which is not illegal but clearly is aimed at not paying tax by finding loopholes, creating transactions with no economic substance, etc. As described in the Jersey Article 134
Tax compliance- behaviour which is not illegal and is sanctioned by the legislators - like your example of favourable treatment for non-doms, like payments into pension pots, like exemptions on mortgage interest, like child allowances.

TonyTheProf said...

Daniel, I accept that there is a difference between tax avoidance and tax compliance in your definition. But schemes have to be proven under Article 134; it is not a magic wand which can be used as and when the Comptroller likes. I suggest you listen to the Unreliable Evidence which does show some complexity.

TonyTheProf said...

Tax avoidance is legal but ‘is it fair, or even moral?’ asked Clive Anderson, the broadcaster and former barrister, as he introduced a panel of tax law specialists on the BBC’s Unreliable Evidence programme, broadcast on Radio 4 last week.

‘Companies owe their shareholders a fiduciary duty to make as much money as possible,’ he said, but protestors have pointed out that ‘all sorts of big names on the high street have all sorts of devices which allow them to keep more of their money and avoid sharing it with the rest of us’.
One way to ‘curb tax dodges’, he said, might be to introduce a general anti-avoidance rule (GAAR) allowing HMRC and the courts to look beyond the intricacies of financial arrangements to enforce ‘the spirit as well as the letter of the law’.

Three of Anderson’s panel on the programme – which is available on BBC iPlayer – are members of the group conducting a study into the merits of a GAAR at the UK government's request.

They are the tax barrister Graham Aaronson QC, the study group’s chairman; Judith Freedman, Professor of Taxation Law and Director of Legal Research at Oxford University's Centre for Business Taxation; and the retired Law Lord and revenue law expert, Lord Hoffmann.

Anderson’s fourth guest was Stephen Edge, Tax Partner at Slaughter and May. Both Freedman and Edge have contributed to Tax Journal many times and sit on its editorial board.

The fact that ‘the tax affairs of the larger people are more complicated’ makes it difficult for anyone to judge whether the government is collecting the right amount of tax, Lord Hoffmann suggested.

Aaronson agreed that the question how much the government should be getting is an ‘extremely complicated matter to work out’. He claimed that what was being said ‘in the street’ by the protest group UK Uncut and others ‘does touch on paranoia’.

There may be a ‘grain of truth’ in it for some taxpayers, he said, but most multinationals are ‘very earnest’ in ‘trying to find out how much tax is really due and paying it’.
Freedman said it should be remembered that companies pay ‘a lot of taxes’ other than corporation tax. They may be collecting some of those taxes for other people but ‘in a way they are just collecting corporation tax for other people as well’. There was, she claimed, a good argument for ‘not having any corporation tax at all’. People would not be getting away with paying nothing – they would pay tax in other ways, she said.

'Silly schemes’
The speakers discussed the distinction between evasion and avoidance, and the Ramsay principle established by the courts in the 1980s.

The circumstances in Ramsay itself were extreme, Aaronson said, resulting in a ‘nonsensical’ tax outcome. Hoffman observed that the House of Lords said of the scheme, ‘come off it, look at the reality’. Edge said judges ‘will rightly strive’ to knock down an arrangement that produces an ‘apparently magical result’.

Aaronson said his group was a third of the way through its work on a possible GAAR. If a GAAR was considered to be worthwhile, he said, it would be worthwhile for two reasons.

First, it would ‘deter right at the start people who want to carry out silly tax exploitation schemes’.

Secondly, it would allow judges ‘just to look at the words of the legislation as they stand, and say whether or not the tax arrangement achieves the result the taxpayer wants according to the black letter of the legislation, read sensibly’.

If the answer was that the taxpayer should succeed in ‘a scheme which is really wholly unmeritorious’, then the GAAR could operate to block the scheme because the outcome ‘could not possibly be what parliament intended’.

‘Who is to make these decisions, as to what is wholly unmeritorious?’ Anderson asked. ‘That’s what we’re examining in very great detail,’ Aaronson replied.