Fair Tax Mark: Corporation tax criteria to be revised

Since I noted on 28 February the cautious welcome given to the new Fair Tax Mark by ICAEW and Baker Tilly, ICAEW’s Tax Faculty team has published a second statement on its tax forum. The cautious welcome remains, but ICAEW stresses that “to succeed [the FTM] needs further work”.

A key question for anyone considering the invitation to support the FTM or become a “Fair Tax Business” is the question I asked on 23 February: “What is the ‘right amount’ of tax, and who decides?” I guess there are two questions.

First, what is the “right amount” of tax? A “Fair Tax Business” is, according to the FTM website, a business that has, among other things:

“adopted a fair tax policy that suggests it is seeking to pay the right amount of tax (but no more) in the right place at the right time, where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes”

A “guiding principle” set out in a criteria note for companies that trade solely in the UK says:

“A company should pay the right amount of tax (but no more) in the right place at the right time according to the spirit of the law of the jurisdiction in question.”

The note adds that the FTM team is “unambiguously seeking to boost the fortunes of those companies that pay fair tax …” And feedback is invited: “Developing the criteria is an evolving process of negotiation that responds to changes in the regulatory environment and is open to as many voices as possible.”

The criteria note says companies are awarded points for meeting each criterion – up to a possible 20 points – and in the first year companies can achieve a Fair Tax Mark by scoring “above the threshold of 13”.

The assessment criteria 1 to 5 are concerned with transparency. Numbers 6 to 11 relate to “tax rate, tax avoidance and disclosure”. Number 6 relates to the company’s “tax policy” and number 11 relates to disclosure of directors’ remuneration. The remaining criteria (7-10) are those relating to corporation tax liabilities.

Number 7 compares the company’s average tax rate over four years with “the expected headline rate”. Between one and four points are awarded here, depending on the difference between the current tax rate and the headline rate.

No points are awarded if the current tax rate is more than seven percentage points below the headline rate. However, two bonus points (subject to the overriding four-point maximum) can be awarded at number 7 “if the company explains its tax position well by scoring above four [that is, five] points in questions 8, 9 and 10”.

Mike Truman has pointed out that the absence of “weighting” for the amount of profits could disadvantage some companies. But that should not prevent most companies from getting the FTM “if they are willing to make the appropriate disclosures”.

Ben Saunders went further, pointing out that the present criteria do not appear to discriminate between “fair” and “unfair” adjustments (ie. differences in tax rate).

Andrew Jackson said he was expecting that the FTM “would ensure that a company displaying the mark had paid a fair amount of tax, where ‘fair’ means the amount is reasonable given the tax laws of the country”. But, in a long exchange on Richard Murphy’s blog, he suggested that the present criteria would allow a “clearly tax-avoiding company” to get a Fair Tax Mark.

Murphy replied (in his final comment on 3 March): “You’re right: the condition [behind criterion 7] may not be sufficient. We’ve never denied the criteria will change.”

Murphy has confirmed today that the criteria will be revised. So I’ll revisit the “right amount” question in due course, and say something shortly about “who decides”.

Update 7 March: An extract of this blog post has been published in Tax Journal (registration required).

7 thoughts on “Fair Tax Mark: Corporation tax criteria to be revised

  1. Andrew

    Thanks for this

    Firstly, Mike Truman’s comments on profits averaging are wrong: we do exactly as he asks regarding weighting. We’re bemused by his claim. Indeed, we always did do what he asked in the sense that we averaged profits. The tax rate issue is so small it takes an extreme example of the sort he used to find it, and it could never by itself prevent a Mark being awarded.

    And the revisiting is a minor clarification to make clear that, as we thought was always clear, but obviously is not, that if the conditions of para 6 are not met and that fact is revealed in the accounts then a Mark will not be awarded

    I hope this clarifies issues

    Regards

    Richard Murphy
    Fair Tax Mark

    • I understood that the averaging mistake had been fixed, but there isn’t anything I can find on Fair Tax Mark’s website to confirm this. Given that no actual assessments are available to review, there is understandably concern that the rate of tax over four years has been calculated correctly.

      I say this because the averaging of rates Mike highlights was certainly how the averaging of the “difference in rate to expected” was performed in the first First Tax Mark methodology (ignoring the arbitrary weighting according to which year they occured in). This is also how rates are averaged in your corporate tax gap estimate, so I’m sure you appreciate that in the absence of any evidence to the contrary there is a question mark over the actual method being used.

      The easiest way to clear this up would be if you could confirm that the average rate for four years is now calculated as:

      A) 100% x (Sum of tax paid over all 4 years) / (Sum of profits from all 4 years)

      as opposed to

      B) (Rate 1 + Rate 2 + Rate 3 + Rate 4) / 4

  2. My email to Richard 13th Feb “…What’s not clear without any figures is how the average rat[e], and difference from the average rate, will be calculated. Is it a straight average of the figures for the four years in the “Difference [of actual tax rate from expected tax rate]” line on the template? The issue, as you’ll remember, was whether that should be weighted for the profit that the difference in tax rate applied to.”

    Richard’s reply, same date: “It’s an average over the years, yes

    I think the weighting you suggest is immaterial in 95% of cases in the UK so we dropped it.”

    On the claim that “Method A has always been used”, see http://www.fairtaxmark.net/wp-content/uploads/2014/01/WH-Smith-plc-Fair-Tax-company-report.pdf as an example of the old version. The line “Difference” in the table is, as I said in my email, the difference between the main rate of CT and the actual rate paid. There is then a weighting for later years which has been dropped in the new mark.

    The 7.6% generated in the weighted average line, final column is the average of those rates, weighted only for how recent the year was, not for the amount of profits. That is the figure which is then used to get the tax rate score of 0: “WH Smith plc has an average current tax rate more than 7% less than that expected”. While an expectation gap is also calculated by multiplying the actual profit by the unweighted difference in rates, it was not the figure that seems to have been used when determining the tax rate score. This issue was explored at great length last year on Ben’s blog.

    So I’m bemused at why Richard is bemused, and why he thinks he always used Ben’s method A. I am writing this very late at night after a long day, so apologies if I’ve got anything wrong, but if I have I cannot currently spot it.

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