Andrew Goodall

HMRC spin on climate change

This is my first week as news editor of the Tax Journal. I'm really pleased to take this on. The job will complement nicely my role as editor of Tolley's Practical Tax newsletter, which I've edited for the last three years. It means that I need to take in an interest a few more taxes. As well as income tax, capital gains tax, corporation tax, national insurance contributions, inheritance tax and tax credits, I'm going to be interested in VAT, stamp duties and probably petroleum revenue tax, insurance premium tax, landfill tax, aggregates levy and climate change levy. I don't think I'll be interested in council tax or business rates.

That list is a reminder, by the way, that anyone trying to make sense of the government's tax policies needs, in theory at least, to know something about a lot of taxes, as well as the tax credits system. There are more ... I forgot to mention excise duties, fuel and gambling duties, air passenger duty and I guess customs duties. And the new broadband levy.

I'm already interested in climate change. But I've never really got to grips with the climate change levy. Wikipedia says it is:

"... a tax on energy delivered to non-domestic users in the United Kingdom. Its aim is to provide an incentive to increase energy efficiency and to reduce carbon emissions, however there have been ongoing calls to replace it with a proper carbon tax."

The Carbon Trust website takes you to the HMRC website, which says:

"The levy is part of a range of measures designed to help the UK meet its legally binding commitment to reduce greenhouse gas emissions. It is chargeable on the industrial and commercial supply of taxable commodities for lighting, heating and power ..."

But Wikipedia points to a page on HMRC's site that is titled "Climate Change Levy in depth". It seems that this page was last modified last October – there are lots of fairly recent updates. But have a look at the first few paragraphs, beginning with:

"Climate change is widely recognised as one of the key environmental challenges facing all countries today. There is growing scientific consensus on the potential impacts on climate of increasing concentrations of greenhouse gases in the atmosphere. The impact may vary starkly across the world, with rising sea levels and flooding in some regions at the same time as water shortage and famine in others. Already, in England four of the five warmest years in the 340 year record have occurred in the last decade. But we could see a very much greater rise over the course of the next century unless action is taken to reduce significantly greenhouse gas emissions ..."

Two things struck me about this introduction. First, it's many years old! Note the reference to Budget 1999. HMRC said:

"Climate change is a global problem requiring actions on a global scale. At the Earth Summit in Rio in 1992 the developed countries agreed a voluntary target to return their emissions of greenhouse gases to 1990 levels by 2000. The UK is one of the few countries on course to achieve that target ... The UK has also set itself a domestic objective that goes beyond our legally-binding Kyoto target – to reduce emissions of carbon dioxide by 20 per cent on 1990 levels by 2010."

It's just been reported that the UK government has accepted that this 2010 target will not be met.

Secondly, while the introduction on this "in depth" page is clearly out of date, it is HMRC's job to "ensure the correct tax is paid at the right time", not to promote or justify government policy. I'm not making a comment here about the policy – it's just that I don't expect HMRC to try to persuade me that it's the right policy.

Climate change, glaciers and the precautionary approach

IPCC error does not alter the importance of the precautionary approach – we have only one chance to get it right on climate change.

What do you think about cIimate change and how did you come to that view? I have relied heavily on the IPCC because climate science is not my strong point. It is precisely because climate science is complex and uncertain that the IPCC was established "to provide the world with a clear scientific view on the current state of climate change and its potential environmental and socio-economic consequences".

Now it turns out that the IPCC, whose role is to review and assess information "to ensure an objective and complete assessment", relied heavily on "grey" (not peer-reviewed) literature – in the form of a report of an interview published in the New Scientist in 1999 – in arriving at a key finding regarding glaciers. Today's Times reports that:

"The UN's top climate change body has issued an unprecedented apology over its flawed prediction that Himalayan glaciers were likely to disappear by 2035."

This is an astonishing admission. The scientist who was interviewed for the New Scientist article is quoted as saying that he has not made "any prediction on date" although he did say the glaciers were "shrinking fast".

But as Ben Webster says in the Times (paper edition), what this means is that climate sceptics have identified one serious error in the IPCC report. It seems unlikely that they will find many more, he says:

"The IPCC should now re-check all the sources of statements in its report, but this process will not alter the conclusion that man-made emissions are very likely to be the main cause of global warming."

That seems reasonable. And in any event, the error does not alter the importance of the precautionary approach – we have only one chance to get it right.

It is the nature of the glaciers error that is disturbing. The IPCC report said in 2007: "Glaciers in the Himalaya are receding faster than in any other part of the world ... and, if the present rate continues, the likelihood of them disappearing by the year 2035 and perhaps sooner is very high [the IPCC's term for more than a 90% chance] if the Earth keeps warming at the current rate. Its total area will likely shrink from the present 500,000 to 100,000 km2 by the year 2035 (WWF, 2005)."

The reference here to a WWF report is surprising because the WWF clearly cited other sources, including "the International Commission for Snow and Ice" and the New Scientist. The WWF said (in 2005):

"The prediction that 'glaciers in the region will vanish within 40 years as a result of global warming' and that the flow of Himalayan rivers will 'eventually diminish, resulting in widespread water shortages' (New Scientist 1999; 1999, 2003) is equally disturbing."

Now the WWF has published a correction (on page 2 of the pdf):

"On page 29 of the following report WWF included the following statement: 'In 1999, a report by the Working Group on Himalayan Glaciology (WGHG) of the International Commission for Snow and Ice (ICSI) stated: "glaciers in the Himalayas are receding faster than in any other part of the world and, if the present rate continues, the livelihood[sic] of them disappearing by the year 2035 is very high".'

"This statement was used in good faith but it is now clear that this was erroneous and should be disregarded. The essence of this quote is also used on page 3 in the Executive summary where it states: The New Scientist magazine carried the article 'Flooded Out - Retreating glaciers spell disaster for valley communities' in their 5 June 1999 issue. It quoted Professor Syed Hasnain, then Chairman of the International Commission for Snow and Ice's (ICSI) Working Group on Himalayan Glaciology, who said most of the glaciers in the Himalayan region 'will vanish within 40 years as a result of global warming'.

"This statement should also be disregarded as being unsound. WWF regret any confusion this may have caused."

The IPCC has admitted that its report included a reference to "poorly substantiated estimates of rate of recession and date for the disappearance of Himalayan glaciers":

"In drafting the paragraph in question, the clear and well-established standards of evidence, required by the IPCC procedures, were not applied properly."

The Guardian reports today that "the claim was questioned by the Japanese government before publication, and by other scientists".

‘Windfall support’ and the case for the bank bonus tax

We need banks, but we don't need every bank "at any cost". A bank that is "too big to fail" is too big. Is the tax on bank bonuses unfair discrimination? No, because banks are in a unique position and many of them have benefited from positive discrimination in the form of a government guarantee against failure. Nowhere was the case for a windfall tax on bonuses made more eloquently than in the Financial Times, shortly before December's pre-budget report. Martin Wolf said this, admitting that windfall taxes generally are "a ghastly idea":

"First, all the institutions making exceptional profits do so because they are beneficiaries of unlimited state insurance for themselves and their counterparties ... Second, the profits being made today are in large part the fruit of the free money provided by the central bank, an arm of the state ... Third, the case for generous subventions is to restore the financial system – and so the economy – to health. It is not to enrich bankers ... Fourth, ordinary people can accept that risk takers receive huge rewards. But such rewards for those who have been rescued by the state and bear substantial responsibility for the crisis are surely intolerable. What makes them yet more so is that the crisis has devastated the prospects of tens, if not hundreds, of millions of innocents all over the globe. The public finances will be devastated for decades ... Fifth, it is hard to argue in favour of exceptional interventions to bail out the financial sector at times of crisis, and also against exceptional interventions to recoup costs when the crisis is past. 'Windfall' support should be matched by windfall taxes ..."

"Finally," Wolf said, "these are genuine windfalls. They are, as George Soros has said, 'hidden gifts' from the state. What the state gives, the state is entitled to take back, if it is not used for the state's purposes."

The question was, Wolf said, not whether a windfall tax could be justified but whether it could be designed successfully. He was right, surely.

Tax-dodging medics risk public shaming

HMRC launched a "Tax Health Plan" to encourage medical professionals to make a voluntary disclosure of any understated income. The department is obtaining information from various sources "including NHS trusts, private hospitals and medical insurers". The government's "increasing but selective use of tax amnesties" is "putting aside fairness in the pursuit of a quick boost to tax revenue," PKF claimed. Mike Down, tax risk partner at Baker Tilly, said: "HMRC has always checked up closely on the tax returns of doctors and dentists … The THP operation suggests that a large amount of tax is going astray".

This week's issue of Tolley's Practical Tax newsletter has more on this and other developments:

• Tax rates fixed by guidance? Mark McLaughlin reviews draft HMRC guidance that is set to replace a concession relaxing the small companies' rate rules for corporation tax;
• The Commons Treasury Committee has urged its successors in the next parliament to assess how effective the bank payroll tax has been in changing behaviour "so that banks increase their capital, rather than providing large discretionary payments to employees";
• Remuneration policy should not seek to compensate directors for higher tax rates, the Association of British Insurers has warned. "Remuneration committees should be aware of the potential damage to the company's and shareholders' reputation from implementing such schemes," the ABI said;
• Hiding money in offshore accounts to evade tax is "economically and morally unacceptable", the financial secretary to the Treasury declared, as HMRC revealed that about 10,000 people had notified their intention to make a voluntary disclosure under the new disclosure opportunity.

Tax controversy and an editor’s role

A reader, a practising accountant, has taken issue with a comment made in a recent article in Tolley's Practical Tax newsletter about the UK government's code of practice on taxation for banks. The code requires banks to follow the spirit of the law in managing their tax affairs. I'm not inclined to discuss the particular issue here but I think it is fair to say that the comment, and the reader's reaction, reflect the strength of feeling – on all sides of the debate – over the banks' role in bringing about the financial crisis and the reaction of governments around the world. See for example, today's FT which reports that US and UK banks face political heat.

I can't remember there ever being so much public debate about taxes. While the newsletter continues to focus on changes in law and practice, I think it is important that it provides a platform for a range of opinion relevant to current or future tax policy and practice. If I commission writers to give their reaction to new developments – and I do ask contributors to provide analysis and insight as well as sharing their views where appropriate – there is a limit to what I can "edit" out just because I think it might be unpalatable to some readers. I try to ensure that the newsletter reflects a range of opinion on tax issues – this is one reason why readers' feedback (whether or not for publication) is especially useful.

Scottish accountants back Christian Aid’s tax campaign

Christian Aid's tax campaign has had "a very important influence" on the development of UK government policy, financial secretary Stephen Timms declared in a video message published on the charity's website and on YouTube. The campaign, which has been largely ignored by accountants until recently, has also won the backing of the Institute of Chartered Accountants of Scotland (ICAS).

The caption to a video posted by ICAS read: "ICAS executive director of technical policy, David Wood, adds his voice to the campaign by Christian Aid against tax avoidance by companies working in the developing world."

The short film began with a report that a clampdown on tax avoidance in Bolivia had transformed people's lives, according to Christian Aid: "Now every primary school child gets a free breakfast and everyone over the age of 60 qualifies for a state pension." While Bolivia was a success story, Christian Aid was saying that "more must be done to get companies to pay the right amount of tax".

Alex Cobham, Christian Aid's head of policy, said: "A lot of companies try very hard to keep their tax affairs in the right place but when you look at the global picture you see that an awful lot of money is being shifted out of developing countries through different types of evasion and avoidance."

David Wood of ICAS said: "Companies are very keen to be seen to have corporate responsibility … but it must be the most responsible thing to pay the right amount of tax at the right time."

Stephen Timms said that tax avoidance and evasion had moved very quickly up the political agenda around the G20 London summit in April. The charity's thinking – including its theological work and campaigning on tax issues – had been "very valuable" in helping the Treasury to make "real, substantial policy progress", Timms said.

Christian Aid has estimated, and continues to claim on its website, that "tax-dodging multinationals cheat the developing world out of at least US $160bn each year". That estimate comprises the impact of alleged "mispricing", or false invoicing, and "abusive transfer pricing".

"The secrecy offered by tax havens is a major obstacle to [poorer] countries finding out where the money has gone," Christian Aid said in response to the recent Foot review of Britain's offshore financial centres. "If used according to current spending patterns, $160bn could save the lives of 350,000 children under the age of five a year."

Alex Cobham welcomed Deloitte's observation – in a report released alongside the Foot review – that "better governance, not just in developing country tax administrations but also within companies, is the obvious way to address [the practice of 'trade mispricing']".

Cobham pointed out that the big four firm had refused to support Christian Aid's calls for country-by-country reporting. "We look forward to engaging more closely with Deloitte on the specifics of our proposed international accounting standard to deliver the necessary improvement in governance," he said. But Deloitte's head of tax policy, Bill Dodwell, has criticised the charity's campaign and claimed that its proposed solutions "aren't based on any firm foundation".

In arriving at the $160bn estimate the charity used an estimate, suggested by Raymond Baker in 2005 in his book "Capitalism's Achilles Heel", that seven per cent of trade volumes was "illicit capital movement". Baker is the director of Global Financial Integrity, a Washington DC-based think tank. GFI claims that for every $1 that poor nations receive in foreign aid "an estimated $10 in dirty money flows illicitly abroad".

But Dodwell warned that Christian Aid's supporters "now seem to think that the $160bn is a real figure, when it manifestly isn't". Writing in Tax Adviser, the journal of the Chartered Institute of Taxation, Dodwell claimed that there were "so many holes" in Christian Aid's approach that "it seems unkind to point them out".

"Surely what we need to do is help developing countries with their tax systems and tax administration – and do so by helping them design systems that work best for them, rather than simply following the rich country model," he added.

This week's issue of Tolley's Practical Tax newsletter features this and other developments:

• Inheritance tax – Ian Maston of BDO examines some of the conditions and pitfalls associated with business property relief;
• Bank tax "has failed" – bankers are angry but banks will pay the bonuses and the tax, say reports;
• Capability review warns of 'very low' morale at HMRC;
• Treasury blocks 'offensive' charity tax relief scheme;
• HMRC puts 'tax gap' at £40bn.