TAX NEWS - 2010

UK Tax: Ritchie and the overegged tax gap

Ritchie had a nasty shock recently.  A Westminster Hall debate was called on tax avoidance and - wow! - his work was referred to.  Only things went south when the beastly Exchequer Secretary, David Gauke MP, suggested that Ritchie's calculations were, er, a load of complete cobblers.  Of course, he used much more temperate language, but he came as near as an MP can to calling Murphy's work a load of rubbish.

Ritchie has, of course, hit back.  Today he published a paper that has been hastily thrown together to rebut Gauke's claims.  And I mean really hastily thrown together - you can almost smell the drool flecked over every word as he has tapped away his response.  Check out page 10 - he's got the axes for the graph labelled the wrong way, so the years go from 0 - 14,000 and the x-axis is labelled £'million, despite ranging from 2000 - 2006.

But that's of minor import compared to the factual howlers.  Tim Worstall has correctly hit on one - that Ritchie is claiming that the legitimate use of allowable deductions should somehow be considered tax avoidance.  However, adjusting for Tim's criticism would only have a minor impact on Ritchie's errors.  Net allowable deductions (i.e. deductions with other income and gains added back) amounts to approximately £9 billion of total net trading profits of £217 billion in 2007-08 (figures from HMRC).  And in 2007-08 net allowable deductions was actually an addback - it increased profits, not reduced them.

However, Ritchie's real howler is where he claims, on p.11, that large companies pay an average tax rate of 22.2% as if this is evidence of wholesale avoidance.  Ritchie has used the tax payable figure of £47.7bn and compared this to average chargeable income of £226bn to get all frothy at the mouth about the iniquity of this effective tax rate of 21.1%.

But the HMRC figures show that the actual tax charge on those profits is in fact £65.5bn, for an effective tax rate of almost 29% - bang on what you would expect given a statutory rate for large companies of 30%.  This charge is then relieved by the provision of double tax relief on £16.8bn of the tax due, to reduce the actual amount payable to £47.7bn.

What the berk has done is ignore double tax relief altogether.  Double tax relief is an essential part of our tax system to keep it fair.  It ensures that companies that trade in one jurisdiction but are legally resident in another only pay tax on those profits once.  Basically the UK and another country come to an agreement to tax each other's companies to ensure that profits aren't taxed twice.

Ritchie's analysis needs to take account of double tax relief or, as he's capably shown, you end up with idiotic garbage as a result.

Now, it looks like he owes Gauke a big apology. And he'd better go back to the drawing board, because his estimates of tax avoidance are now clearly several orders of magnitude too big.