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Tim Worstall, Contributor

I write about busines

The Guardian's Staggering Hypocrisy Over Corporate Tax

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The Guardian’s run some reporting on what they seem to think are the nefarious ways in which companies avoid paying the corporate profits tax that is righteously, even justly, due. I have to admit that when I first read the story I couldn’t understand what it was that they were complaining about: after some thought I’m still not sure but will offer two possible conclusions.

The basic point they’re making is that there are allowances in the tax code which reduce the amount of tax paid on profits. They think this is a bad thing.

Let us take as an example a company which purchases some expensive asset and has borrowed money to do so. In this particular case they have leased the asset. This is indeed equivalent to borrowing money to buy it. In the accounts there will thus appear the amount that they are paying each year to the company that they are leasing the asset from:

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Cash flows from financing activities
Finance lease principal payments (6.0)

Accounting conventions are that numbers in (brackets) are negative numbers. So, they paid out £6 million in lease payments in that year. This payment is an operating cost of the business. It is thus allowable as an expense against tax. The complaint seems to be that this should not be an allowable expense.

So, what are they spending this £6 million on?

Leasing facilities totalling £52.7 million (2012 £58.7 million) are in place, the majority of which relate to the GNM printing presses. All leases have a fixed interest rate for their entire life.

OK, they’ve bought an asset, using leasing as the financing method (which, remember, is really only a loan secured upon that asset). The payments they make on the lease are expenses of the company. We add all of those expenses together and deduct them from the income of the organisation, the difference being the profit upon which profits tax, or corporation tax as we call it, is paid. And they’ve bought a printing press on a lease so the lease really is a valid expense of the company. For, of course, Ha Ha!, this is the accounts of The Guardian itself.

Paying for assets that allow the business to operate is obviously and clearly entirely kosher. Indeed, it’s impossible to think of a method of corporate taxation that does not have some method of allowing this. Because the tax is upon profits: profits are what you have left after deducting all of the costs from the income, and buying machines is indeed a cost of doing business.

But now let us look at what The Guardian is saying about corporate tax in the mobile telecoms world:

On 27 April 2000, after seven tense weeks, the British government’s largest ever auction of a national asset came to a spectacular end.

In the dizzy days of the dotcom boom, five mobile phone networks had offered to pay a total of £22.5bn for the right to operate the 3G licences that would bring the internet to mobile phones.

“Ministers feared they had bankrupted the mobile industry,” says an official who worked for the Treasury at the time. However, while the ability of networks to invest in the masts needed to broadcast 3G around the country was undoubtedly hampered, 13 years later it is the British taxpayer rather than the industry that is counting the cost.

A Guardian investigation has found that the generous tax breaks afforded to companies under British law means that while the UK’s mobile networks are already handing out fortunes to their shareholders in dividends, three of them are still paying little or no tax.

My word, why is this happening?

This is because British law allows relief on a quarter of the money spent on items including debt interest payment, spectrum purchases and installing equipment such as masts and radios. The relief is equal to the tax rate – an average of 25% in recent years.

Err, no. That’s not why. It’s because spectrum and equipment like masts and radios are an essential business cost for someone wanting to run a mobile phone network. As are interest payments on the money that was borrowed to buy them. Indeed, all of these things are just as essential to running a mobile network as having a printing press is to a newspaper. And that’s why the two are treated exactly the same for tax purposes. Well, not exactly the same: there’s actually tax advantages to do it the leasing way as The Guardian does but let’s not quibble over that. Both the mobile companies and The G buy equipment in order to enable the businesses to run at all. Tax law recognises that these are costs to the business and allows the deduction of these expenses from income before calculating the profit upon which corporation tax is due. Yes, there are minor differences: but the basic treatment is the same.

Buying stuff for the company to use is a business expense which is allowable for tax.

The joy of the Guardian’s reporting is that it creates comments like this:

Parliament is to open a new front in the corporation tax war by asking auditors to lift the lid on the tax breaks exploited by multinationals in sectors ranging from the internet to infrastructure.

Margaret Hodge, whose public accounts committee of MPs has already tackled Google GOOG +1.7%, Amazon and Starbucks SBUX +3.14%, said the public was being “conned” by the government about the amount that mobile phone networks in particular contribute to the public purse. She is asking government accountants to investigate whether the vast array of reliefs offered by the taxman are being misused.

Her comments were in response to a Guardian investigation published on Wednesday, which reveals that three of the UK’s four networks are paying little or no corporation tax while sharing billions in dividends, management fees and royalties with their multinational owners.

Margaret, Lady Hodge, has rarely spotted a story that she cannot grandstand upon.

The mobile companies are doing exactly what The Guardian does. The Guardian shouts at the mobile companies for doing it. Which really leaves us with only one question. Why?

Of course, one is always inclined to attribute to malice what is better explained by ignorance. And I’m afraid that I would ascribe this to ignorance. We saw this a couple of years ago when the paper ran a series on how terribly Tescoripped off the taxman. The reporters really didn’t understand how it was all working and their contentions were ripped to shreds within hours of publication. The most amusing part of it being that GMG, the owner of The Guardian, has been using very much the same tactics as Tesco.

The lesson of all of that being that when The Guardian starts to write about tax the reporters really ought to go and speak with their own employer’s accountants: but for some reason they never do. Odd that, really, when you come to think about it.

This particular hysterical story about corporate taxation is simply the result of the reporters not understanding the first and most basic principles of it. Tax is paid upon profit. Buying a mobile licence, is, like buying a printing press, an expense of doing business so the cost, and the financing, of that purchase is deducted from income before profit is calculated. That’s it, that’s all they’ve managed to note and they’ve got all huffy about this essential feature of any tax system designed to tax profits. I really would suggest to Alan Rusbridger that he runs his tax stories past his own tax accountants. Much hilarity at the paper’s expense will thereby be avoided.