Auditing the tax man

Posted on July 13, 2011 by admin

There has been a strong sense in the accounting profession in recent years that Her Majesty’s Revenue & Customs (HMRC) has been in a bit of a mess. More often than not, it seems, ordinary taxpayers have received the wrong tax code and more technical taxation disputes involving business customers have been taking forever, and several changes of HMRC staff of course, to resolve.

Now it is possible to gain more of an inside view of the tax office courtesy of the National Audit Office (NAO). Its report on the 2010-11 accounts of HMRC makes very revealing reading. The report analyses, not always favourably, various aspects of the work of the tax man. For instance HMRC has to administer the tax credits scheme. This, apparently, has been an utter disaster leading to an ultimate horror of a qualified audit report because a substantial amount of public money has been lost. Unfortunately the total amount of the losses for 2010-11 is not yet available but, “the Department estimates that in 2009‑10 it overpaid between £1.75 billion and £2.14 billion to tax credits claimants due to error and fraud”. Perhaps this is no surprise? After all, the whole system of tax credits is a relatively recent and somewhat ill-conceived political invention so HMRC does have an excuse.

Other failings, though, seem rather less easy to forgive. The report sets out the background of historic difficulties with the Pay As You Earn (PAYE) system, “The increasing complexity of employments and pensions made it more difficult for it to administer individuals’ tax affairs without some degree of manual working. In recent years, the number of cases requiring manual intervention exceeded its capacity to clear them, leading to backlogs in processing and uncertainty for those individuals with unresolved tax liabilities.” The tax man’s answer to these problems was a new ‘National Insurance and PAYE Service’ (NPS) launched in June 2009. Intended to clear the Revenue’s backlog automatically, the new computer did exactly the opposite. The report uses civil service language to describe the meltdown that ensued, “The Department encountered a number of operational challenges in 2009-10 following the introduction of NPS….It also led the Committee of Public Accounts to conclude that the Department had failed in its duty to process PAYE accurately and on time, and deliver an acceptable standard of service to PAYE taxpayers.”

All water under the bridge now since “the Department has made significant progress in stabilising its administration of PAYE during 2010-11″ except that another similar disaster seems to be waiting around the corner: “the planned introduction of Real Time Information (RTI) for PAYE in 2013 and the Department for Work and Pensions’ reliance on this information to deliver the new Universal Credit”. To add to the fear that HMRC will be in no position to implement a new system that involves a vast increase in the volume of data that it is handling the report helpfully reminds us that “the Department plans to reduce the headcount in its Personal Tax business area from some 24,900 currently to around 16,400 by April 2015″.

The NAO should not criticise government policy so it only advises the Department “to thoroughly test the adequacy of its plans”. Testing, though, may well simply confirm that HMRC will not be able to cope with yet another huge change in its computer systems at the same time as a drastic reduction in staff. In that case one or other plan, or possibly both, will need to be scrapped.

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Accounting for tabloid stories

Posted on July 8, 2011 by admin

Like the parliamentary expenses scandal of two years ago, the outcry over tabloid telephone hacking has turned into a deafening roar, of course. It is probable that journalists were already despised as much as bankers and politicians, while estate agents have descended into the seventh hell of pity, but at least they had control of the public agenda, until this week. Now we know that it was standard practice at the News of the World, at any rate, to rape the privacy of our children even after they had been horribly murdered and there is an irresistible clamour for retribution.

Public disgust and outrage is unlikely to produce better journalism in our news media and our horrified over-reaction is in danger of distracting us from the parallel issue of payments to police officers for information. Perhaps we need to discover that the police were selling personal details of child victims in order to summon up the same level of indignation? Some, no doubt, would prefer that we focus on sleazy journalists hacking unprotected voicemails instead of bribery in the Metropolitan Police.

Like the phone snooping, the management at News International would like to deny all knowledge of these payments. In any other business the existence of unauthorised and unidentified payments would, at the very least, raise the suspicions of the auditors and the possibility of a qualified audit report. If there was good reason to believe that these sums went out as bribes then the business would be open to charges of false accounting. Yet newspapers and their owners imagine that they are somehow different and should not be criticised, let alone prosecuted, for this kind of working practice.

So, amidst the abolition of the hopelessly ineffectual Press Complaints Commission, and the vague ill-directed inquiries supervised by elderly judges, there is a fundamental accounting principle that is being ignored: whenever someone in business pays money to someone without disclosing to who and for what then they have failed to keep proper accounts. Newspaper editors insist that they need to protect their sources. Yet the taint of corruption on this money is so strong and the tabloid stories that emerge from cheque book journalism so hateful that the claim of journalistic immunity seems utterly hollow. When whistle-blowers and others who are providing the newspapers with stories that are genuinely in the public interest it seems unlikely that they would need to be paid anyway.

Let the sky fall in on certain senior members of staff at News International and let the police officers who took money for information tremble at the thought of criminal investigation but, if we want to clean up the press then we need to ensure that journalism is subject to the same rules, accounting and otherwise, as every other business.

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The government with certain students at its heart

Posted on July 1, 2011 by admin

It is difficult to imagine that anyone in the coalition government, let alone at the Department for Business, Innovation and Skill (BIS), ever believed that allowing universities to charge up to £9,000 per year for their courses would create a competitive market in higher education. Yet that was one of the central objectives of the changes that have cost the Lib Dems, at least, so much electoral support. Of course, when colleges are in competition with each other the last thing they would like to prove is that they are the cheapest.

Predictably, then, beginning in 2012 most universities are charging the maximum fee and an important part of the government’s strategy for higher education  looks to be completely stillborn. After only a year in government, though, it would be a little soon to give up on any treasured policy so the minister, Vince Cable, and his colleagues have refined the details of the tuition fees initiative publishing a White Paper with their newest proposals titled “Students at the Heart of the System”. Much of the White Paper is devoted to sensible plans for improving the quality of information about courses in all their aspects available to would-be students but there are also structural issues to address.

It was always politically unacceptable to allow universities to charge unlimited fees and there is no suggestion yet of lifting the £9,000 cap. Instead the novel idea is to allow colleges to compete for students. This is to be achieved partly by opening up higher education so that a range of new providers can enter. Also, and more controversially, instead of teaching a number of students each year fixed by the Higher Education Funding Council (HEFCE) colleges are to be allowed to recruit as many students as they can as long as they are all achieving AAB or better at ‘A’ Level apparently ”This should allow greater competition for places on the more selective courses and create the opportunity for more students to go to their first choice institution if that university wishes to take them.” Not only that but the government can introduce this new scheme “while ensuring that overall costs are managed” as it is certain that all these students would have gone to university anyway. So the Russell Group universities can take all the students that they can eat. Competition for sure, but only for the benefit of the privileged few from the schools that can virtually guarantee their pupils the top grades at ‘A’ Level.

The foreword to the White paper says that Vince Cable and David Willetts intend to “foster social mobility”. The most radical proposal in the whole document, however, serves only the interests of the government and the lucky few.

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Default and Survive: calling in the Greek debt

Posted on June 24, 2011 by admin

The Greek crisis is the main topic of discussion in the financial media right now. There are almost as many varying views as there are commentators with the BBC, for example, offering a choice of ten different experts on one page. The one thing that all the economists would agree on, of course, is that the solution that they suggest would only be the least of all possible evils.

So far the countries coming together with the IMF to bail out Greece have insisted on much greater austerity on the part of the Greek government and people and there have been real doubts about whether the Greeks can carry through the sort of measures that their creditors are demanding. One reason for reluctance on the part of the Greeks, and their recent inclination towards rioting in the streets rather than meekly accepting the proposed cuts, is the belief that such drastic measures will increase the slope of the country’s downward spiral to the point where complete ruin is inevitable: in which case they still won’t be able to pay back the banks. This sort of scenario would be familiar to anyone who has ever had to deal with a failing business and knows that they could sack all the staff but then they would no longer be able to sell anything.

If this is truly the situation that Greece finds itself in and, in effect, the country is trading insolvently then there are only two practical alternatives. Either the country’s creditors could turn into investors and effectively give Greece the money it needs to pay off its debts or they can allow the insolvent party to default leaving the banks to carry the cost of the bankruptcy. If this was Argentina, for example, it is highly likely that the country would be forced into default. The immediate consequences for the citizens would be dire as their ability to purchase imports would evaporate overnight but the country’s economy would have every chance to thrive once it was released from crippling debts and an unsupportable exchange rate. The banks would take a hit the size of a small country but at least some of that risk was factored into the exorbitant interest rates that they have been charging.

Greece, though, is not a distant country at the far end of South America. It nestles inside the mighty eurozone. If Greece defaults then it will destroy the myth that lending to countries who share the common currency is more secure than it would otherwise be because of a kind of collective responsibility. Indeed, some economists are arguing that the answer to this crisis lies in strengthening the ‘joint and several’ liability of the members for each others’ debts. As long as the world’s banks believe that the Euro is secure they will continue to lend money to Portugal, Ireland, Spain (and Italy) at affordable rates that wouldn’t be available if those countries appeared to be on their own. If Greece defaults now, on the other hand, it could set off a chain reaction like we saw with the failure of Lehman Brothers.

Ultimately, however, the Euro cannot afford to perpetuate the myth of invulnerability. The countries in the eurozone are not ready for the sort of fiscal, and therefore political, union that would ensure that the peripheral countries can borrow at the same rate of interest as Germany. So Greece must be allowed to fail and, whatever they say in public, the European leaders responsible for managing Greece’s debt crisis should be planning for how to minimise the damage of that failure.

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Ring-fencing is an accounting issue

Posted on June 15, 2011 by admin

Although the Independent Commission on Banking (ICB) is not due to release its final report until September it seems that George Osborne is already about to announce his strategy for banking stability during his annual speech at the Mansion House this evening.

The ICB Interim Report has been out since April. In many ways, and repeatedly, the report simply said that ‘something must be done’. Of course, ever since 2007 when governments around the world began rescuing financial institutions that were ‘too big to fail’ there have been calls for the break up of banks to separate the risky investment, or ‘casino’, operations from the retail banking which is so integral to our economies that failure could lead to national or even global collapse. The ICB did, however, bring forward the suggestion that retail banking operations need not be completely separate from investment banking so long as the two parts of the business were effectively ‘ring-fenced’.

There is much to be said for this approach. No doubt it would be a great deal easier to change the banking regulations in this way than to pass legislation forcing the banks into a full legal separation of their retail and investment arms. New and more stringent liquidity and capitalisation rules would make better sense if applied specifically to the part of the bank that takes deposits and makes commercial loans. A ring-fenced bank would not necessarily be immune from failure if its lending policies were as rash as the Irish banks, for instance, but it would be more straightforward for the state to put together a rescue in a crisis.

There remains, though, the knotty problem of how to define what constitutes a retail activity that needs to be part of the ring-fenced area within the bank. This is essentially an accounting issue but, fortunately, existing accounting methods might prove most useful here. Currently banks use ‘mark-to-market’ valuations for their speculative activities but the accounts produced in this way do not sit comfortably with the ‘historic cost’ figures from traditional banking operations where concepts such as prudence (ie not taking profits until they are actually earned whilst acknowledging losses as soon as they are apparent) apply.

So ring-fencing could produce a double benefit. Not only would we be able to identify the part of any troubled bank that should be saved whilst jettisoning the ‘casino’ bank trading under the same brand but we should also see financial statements from the banks which would be much more meaningful because ‘ordinary’ trading figures prepared under traditional methods would not be muddled up with much more volatile numbers from wholly incompatible mark-to-market valuations.

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Championship Accounting

Posted on June 10, 2011 by admin

The Premier League is the envy of the world. The revenue earned by Premiership clubs is the most. The players’ wages are the highest. Britain can be justly proud of an enormously successful industry. Some of that success, of course, seems rather artificial when it comes out of the pockets of Roman Abramovich or Sheikh Mansour but one of the strengths of English football is the fact that even the richest benefactors cannot guarantee that their clubs will dominate the game.

It is worth asking, though, as the Deloitte Sports Business Group has done, whether the finances of football are really stable? Their Annual Review of Football Finance 2011 reveals a business that is quite unique. For instance, Premiership broadcasting revenue since 1991/92 “has grown at a staggering compound annual growth rate of 27%” with an overseas proportion of over 40%. The financial performance of individual clubs varies enormously but there ought to be a collective sigh of relief that the aggregate result for all the Premiership clubs was a small operating profit, thanks to the likes of Arsenal. The results for Chelsea and Manchester City, not surprisingly, are not sustainable and many of the middle-ranking clubs lost small sums but not enough to jeopardise their future.

The Championship, on the other hand, looks quite different. In the desperate struggle for promotion to the world’s top national league many clubs are risking everything. According to Deloitte, “Championship clubs are spending £4 for every £3 they generate in revenue” and they “urgently need to take corrective action”. Wages for players bear no relation to the incomes of the clubs that they play for with the wages/revenue ratio hovering at around 90% and “around a third of clubs in the Championship reported a wages/revenue ratio of 100% or more”. So the losses continue to add up at an ever increasing rate with operating losses, before the cost of servicing clubs’ debts that is, of £133m in 2009/10. With the inevitability of double-entry bookkeeping, this deficit on the bottom line translates into an almost exactly corresponding increase in net debt (excluding the disproportionate impact of Newcastle United’s temporary sojourn in the Championship) of £128m.

The Premiership, then, is nothing like as sound as it looks because the Championship could disintegrate from under its feet with a small avalanche of insolvent clubs going to the wall in quick succession. It is important to remember, after all, that one of the few liquid assets that clubs have is the outstanding transfer fees from other clubs. Perhaps UEFA’s financial fair play rules that are about to restrict entry to the Champions’ League and Europa Cup should be replicated for clubs that are seeking promotion from the Championship?

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Accounting for plumbers

Posted on May 25, 2011 by admin

There is no reason to suppose that plumbers are especially poor at accounting and bookkeeping. There is even something about the very ordered, regular and predictable nature of bookkeeping that might seem straightforward to someone with a practical mind like a plumber.

Her Majesty’s Revenue and Customs (HMRC), of course, appears to take an altogether different view. The taxman has targeted plumbers as a group whose members have failed to account for their earnings properly in recent years and, for a short time, HMRC is offering plumbers the chance to make amends in the form of the ‘Plumbers Tax Safe Plan’ (PTSP). It is worth asking why plumbers should want to step forward and tell HMRC that they owe a lot of tax? Apparently, “If you decide to take advantage of PTSP, you will be able to stop worrying about what might happen if HMRC find out that you’ve not been telling them about all of your income.”: an amnesty, in other words.

The chance of a “fresh start” might not only appeal to plumbers who are behind with their tax returns: other tradesmen and taxpayers of all kinds might want to take up exactly this kind of opportunity. If so, there is good news as, “If you are not a plumber,… you can still use PTSP forms.” So is ‘plumber’ being used as a form of shorthand for ‘taxpayer’? Not exactly. Another group of individuals who are on notice to get their affairs in order are those people fortunate enough to have investments lodged in Liechtenstein. They have their own Liechtenstein Disclosure Facility which allows for rather more complex tax affairs than the PTSP. Not only do the schemes vary in complexity, they also have completely different time scales. The plumbers’ amnesty began in March 2011 and ends on 31 May 2011. The Liechtenstein Disclosure Facility opened in 2009 and will end in 2015. Does this difference represent some sort of class privilege? Perhaps, but it probably has more to do with the circumstances behind each amnesty, or purge depending on how you look at it.

The Liechtenstein Disclosure Facility is the result of a Memorandum of Understanding between the governments of the UK and Liechtenstein that introduced a “5 year taxpayer assistance and compliance programme under which Financial Intermediaries in Liechtenstein will need to be satisfied that, where appropriate, clients are UK tax compliant”. The thinking behind the Plumbers Tax Safe Plan is, no doubt, equally pragmatic. HMRC, like everyone else, can access the CORGI register of plumbers and fitters. It is reasonable to assume that all those registered traders have been working profitably and should have been paying their fair share of tax.

So the taxman doesn’t have to look hard to find plumbers who might not be owning up to the full extent of their income. The PTSP also has this advice for the future, “If you have not kept proper business records you should begin to do so from now on. The PTSP is your chance to put things right from now and reasonable estimates will be accepted. It cannot help you if you fail to keep to the rules in future. HMRC could charge you up to £3,000 if you do not keep proper business records.”

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Counting Inflation

Posted on May 17, 2011 by admin

Inflation, of course, is impossible to measure as it varies for each one of us according to what we are earning and what we are buying. So it is easier to look at rising prices selectively as the Office for National Statistics (ONS) does when it calculates the Consumer Prices Index (CPI). The index is supposed to represent a typical selection of purchases for the average person un the UK. The advantage of this approach is that it allows for consistent analysis of the results from one month to the next.

The latest total figure for the increase in the CPI, at 4.5%, invites us all and especially politicians to wonder why inflation appears to be galloping out of control. Fortunately the ONS provides  a briefing detailing every category of items in the index. We can see, for instance, that alcoholic beverages and tobacco “rose by a record 5.3 per cent between March and April 2011 compared with a rise of 2.1 per cent a year ago” and that transport costs “overall, rose by 2.8 per cent” despite the reduction in fuel duty. Apparently “the largest upward effect came from air transport where the timing of Easter contributed to fares rising by 29.0 per cent between March and April 2011″.

The prices that are rising less rapidly, though, are just as interesting if less alarming than the areas where the increases feel most painful. So furniture, household equipment etc prices fell by 0.8% in a month. It is all too easy to imagine that retailers are having to reduce prices to lure ever more reluctant consumers whose funds are being pinched by the excessive elsewhere and who can, after all, defer spending for some time.

The briefing does not quite take the straightforward view of these ups and downs, however. Furniture, household equipment etc appears as a category that is fuelling inflation. This is because the prices dropped less between March and April this year than they did in 2010 (-1.6%). Nevertheless this mathematical approach seems at least counter-intuitive. Admittedly some prices, particularly food, have annual patterns but for others comparing this month’s change with the same month last year is simply meaningless: a price rise is a price rise even if it is less than last year’s increase.  So clothing and footwear went up 1.3% in the month and households are poorer as a result even if the rise is smaller than it was in 2010.

In the end most of this inflation can be explained as the outcome of rising worldwide commodity prices. The country could probably cope with this, even at an overall annual rate of 2.8%. The remaining 1.7%, however comes from increased taxation. It remains to be seen if this is the straw that breaks the camel’s back.

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Climate Change Committee adds up the Cost

Posted on May 12, 2011 by admin

The Climate Change Committee (CCC) came into being because unusually far-sighted politicians could see the risk that their successors in government and what is currently the Department of Energy and Climate Change (DECC) might easily be tempted into backsliding on expensive commitments to cutting the UK’s CO2 output. The committee has no authority, of course, but it can warn us in reports like the latest Renewable Energy Review if we appear likely to miss our targets.

The Review recognises that this is a crucial decade if we are to turn the corner and begin using less fossil fuel rather than more but, on the other hand, we begin the decade in the midst of a economic and fiscal crisis which affords us very few of the luxuries of renewable energy. It is refreshing then to see that much attention has been paid to the cost of each option per unit of electricity or per kilogramme of carbon saved.

The cost of the Severn Barrage, for instance, would be prohibitive even if the environmental concerns weren’t so that is ruled out along with other tidal range options and any photo-voltaic (PV) schemes. The cost effectiveness of all the other renewable initiatives depends very much on the amount of investment that they require and the ‘discount rate for annualising capital costs’. The Review bases its conclusions on a rather high discount rate of 10% but also gives some indication of how much more attractive all the renewable options would seem if rates as low as 3.5%, ‘a social discount rate’, were used.

The results of this costing exercise favour nuclear power as the only technology that is anywhere near as affordable as simply burning natural gas. Next comes onshore wind but the committee knows that it will not be possible to unlimited numbers of nuclear reactors or onshore wind turbines because of the strength of the planning objections so two further options enter the mix; offshore wind and carbon capture and storage (CCS). So the only viable strategy is to create a portfolio based on as much nuclear and onshore wind as possible with offshore wind and CCS bringing the total up to 65% of all our electricity output by 2030.

All this assumes that the UK is ready to make the necessary investment. The committee recommends that the government extends the time period for which it is prepared to guarantee an attractive price for electricity from renewable sources in order to attract private capital for onshore wind projects, for instance, but the country will nevertheless find itself borrowing very substantial sums to pay for low-carbon energy energy. To ease or divert the pain from the Treasury the Review also recommends that the newly created Green Investment Bank (GIB) should be able to borrow cash in its own right straightaway in order to invest in these projects. It is highly unlikely, though, that George Osborne will allow the proponents of green energy to have that much control, if any, over a major proportion of the public sector borrowing requirement for the time being.

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Accounting for AV votes

Posted on May 4, 2011 by admin

Tomorrow will see local elections across the UK and even some quite significant polls with the election for the Scottish Parliament, for instance. The referendum that is taking place alongside these elections, though, may have more long-term significance. We are asked whether we want the Alternative Vote (AV) system for electing MPs or whether we prefer to retain the existing ‘first past the post’ system in our constituencies. Whilst other countries such as Egypt and Libya are experiencing much more dramatic political upheaval at the moment, of course, the choice of whether to opt for AV is still rather radical by British standards and is only the second referendum ever in England, the first being the vote on membership of the European Community in 1975.

The proposed Alternative Vote is intended to address two perceived problems with the existing voting system. The first is the problem that, when there are three parties of similar strength, constituencies will return MPs who have only received just over a third of the vote. The second is that many constituencies are seen as safe seats where it is inevitable that the candidate for one of the parties will always be elected. It would be remarkable, maybe even miraculous, if a new voting method could deal with both of these contradictory failings of the ’first past the post’ at the same time but the supporters of the ‘Yes’ campaign present AV as a panacea for virtually all voting ills.

One aspect of AV separates its supporters from the ‘No’ campaign more profoundly than all the others. It is the question of whether marking candidates in order of preference on the ballot paper destroys the principle of ‘one person, one vote’. The ‘Yes’ campaign tries to dispel this ‘myth’ saying, “Whether you just vote 1 for your favourite candidate or list a preference for every candidate on the ballot only one vote will be counted.” This is exactly like saying that only one point matters in a game of tennis; the last one. After all, the winner is always the one who wins that final point but it would be absurd to claim that none of the previous points counted. The British electorate, which already has a strong ‘anyone but him/her’ mentality, is somewhat inclined to vote tactically and the AV system would provide many more permutations in a voting game of trying to get the most ‘effect’ or ‘value’ out of a single ballot paper.

In the end, of course, what matters is whether AV or ‘first past the post’ will produce good governments. Any answer to that would be pure speculation as there are too few examples in the world to provide us with evidence. It would be particularly disappointing, though, if this reform was adopted on the strength of a small, apathetic turnout or, alternatively, if the opportunity for radical reform was missed for the same reason. So get out and cast your ballot tomorrow for the voting system that you deserve.

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