Laurence Field, Tax Partner discusses whether increased transparency is the answer to tax fairness.
The Shadow Chancellor, John McDonnell, recently said that he wanted companies with more than 250 employees to publish their tax returns and associated correspondence in full. He alleged that there is a gap of £36 billion between what should be collected and what is actually being paid by large companies. The Shadow Chancellor claimed that ‘sweetheart’ deals between companies and the taxman reduce tax bills and that “tax avoidance is a scourge on society that company secrecy laws help facilitate”. A labour platform of standing up for the average person seems quite likely in the weeks ahead. Fairness, and tax fairness could be a new port.
It is unclear whether the Shadow Chancellor is targeting a lack of professionalism in the Inland Revenue, the companies themselves or maybe it is a combination of both.
The latest figures show that only 8% of revenue collected by the Exchequer is in the form of corporation tax, an amount that has declined over the last generation, albeit tax rates have fallen from 52% in 1979 to 17% by 2020, so this could be by design rather than accident.
Would the publication of tax returns help the situation?
The initial question is which returns would it be useful to see? There are corporation tax returns, VAT returns, payroll tax returns, special returns for companies that own residential properties, EC sales lists and Intrastat returns to name a few. Company accounts prepared under UK or International accounting standards already summarise the group or company tax charge, reconciling the accounting profits to the tax expensed and explaining where future tax liabilities or reductions may be available. There are obligations for multinational companies to make information about their tax affairs available to all the tax jurisdictions in which they operate.
Would more information shed any light on the matter or would it just confuse the issue further?
Financial statements are now so complex they are often not fully understood even by those, who are paid to draw conclusions from them. It is questionable whether a flood of opaque, commercially sensitive and, to be honest, extremely tedious information do anything to help the public understanding of a company’s tax affairs.
Some might say that the best place to hide something is in plain sight. A tsunami of detail, published without explanation or context can often sow confusion, especially when it cannot be readily understood, even by some of the most sophisticated users.
Headlines would be generated based on analysis by ‘experts’, some that are specialists, some self-appointed, some enthusiastic amateurs – but it will only be motivated commentators who feel the need to comment. Objectivity will not necessarily be guaranteed. Will this commentary change the behaviour of civil servants and companies as the Shadow Chancellor wants, or will it generate more heat than light?
An interesting outcome could be that it could hold politicians to greater account on tax policy. Assuming the information makes it clearer where the alleged flaws in the legislation rest, as McDonnell hopes, it will not take long to work through Hansard to see who voted in favour of the defective provisions. One assumes that if this were to happen, the newly informed public will want to know why.
With a General Election scheduled for June, we can expect the announcement of eye-catching tax policies from all sides, along with abandonment of promises made less than a couple of years ago. The Shadow Chancellor just may get a chance to put his ideas into action earlier than he hoped.
A version of this article first appeared in Taxation in May 2017.