Every time you compare taxation to revenue, an accountant kills a kitten

So stop doing it.

Earlier this week, Margaret Hodge, the chair of the Public Accounts Committee (PAC), wrote an editorial on tax avoidance, in which she pointed out that:

In 2012 Amazon paid just £2.4m of UK corporation tax on UK sales of £4.2bn – less than the £2.5m it received in government grants.

That's just not a valid comparison. Corporation tax is paid on the profits a company makes, not on the amount of revenue it takes in. That's because otherwise, a company with a small turnover but massive profits would pay barely any tax, while a company with massive turnover but a tiny mark-up would pay a huge amount — which would drive the latter company out of business. By taxing profits, we only take money companies can afford to pay, minimising the deadweight loss of taxation.

It's actually the same when it comes to people. It might not feel it, because it's tempting to view income tax as a tax on your "revenue", but technically its a tax on your profits. You can see this most clearly in the tax treatment of self-employed people, who are allowed to deduct the costs of business from their income tax. But it's also why, if your workplace allows you to claim expenses, you don't pay tax on them. Again, they're revenue (the money ends up in your account, after all), but not profit.

The real problem on a personal level is that few workplaces do, in fact, provide everything you need to do your job directly, or let you expense them. So, for instance, if your employer pays for your commute, you are very lucky indeed; most people pay for their petrol, bikes, or season tickets out of their post-tax income. But that's a problem with employers, not the tax system (just as it is in the depressing story in today's Guardian of employers failing to account for transportation time in zero-hour contracts, leading to people driving 50 miles a day for shifts as short as 15 minutes).

So for a company like Amazon, which has a business strategy which involves making as little profit as possible and even making a worldwide loss last year, comparing the tax it paid to the revenue it took in is utterly, utterly misleading.

The problem the PAC has is that companies don't tend to report profit on a country-by-country basis. That's because it's pretty hard to work out; if you spend $10bn on R&D in the USA, and made 20 per cent of your sales in the UK, should $2bn of the R&D cost be subtracted from UK revenue? What if the R&D was mostly spent on widget A, while the UK sales came from widget B? But what if widget B was largely based on offshoots from discoveries made while creating widget A?

It all gets complicated, fast. And in fact, it's exactly those sort of calculations which got Apple in trouble last month; the company attributed a large amount of its R&D budget to its Irish office, and got attacked for it.

Country-by-country reporting of profits could – and probably should – be mandated, which would at least let Margaret Hodge quote the right comparison to the amount of tax companies pay. But even then, the debate will just step one degree up the chain, to whether the reporting fairly distributes profits. The problem, at heart, is that tax avoidance is like pornography: we know it when we see it, but it studiously avoids any set definition.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Five things we've learned from Labour conference

The party won't split, Corbynite divisions are growing and MPs have accepted Brexit. 

Labour won't split anytime soon

For months, in anticipation of Jeremy Corbyn’s re-election, the media had speculated about the possibility of a Labour split. But the party’s conference confirmed that MPs have no intention of pursuing this course (as I had long written). They are tribally loyal to Labour and fear that a split would prove electorally ruinous under first-past-the-post. Many still expect Theresa May to hold an early general election and are focused on retaining their seats.

Rather than splitting, Corbyn’s opponents will increase their level of internal organisation in a manner reminiscent of the left’s Socialist Campaign Group. The “shadow shadow cabinet” will assert itself through backbench policy committees and, potentially, a new body (such as the proposed “2020 group”). Their aim is to promote an alternative direction for Labour and to produce the ideas and organisation that future success would depend on.

MPs do not dismiss the possibility of a split if their “hand is forced” through a wave of deselections or if the left achieves permanent control of the party. But they expect Labour to fight the next election as a force at least united in name.

Neither the Corbynites nor the rebels have ultimate control 

Corbyn’s second landslide victory confirmed the left’s dominance among the membership. He increased his winning margin and triumphed in every section. But beyond this, the left’s position is far more tenuous.

The addition of Scottish and Welsh representatives to the National Executive Committee handed Corbyn’s opponents control of Labour’s ruling body. Any hope of radically reshaping the party’s rule book has ended.

For weeks, Corbyn’s allies have spoken of their desire to remove general secretary Iain McNicol and deputy leader Tom Watson. But the former is now safe in his position, while the latter has been strengthened by his rapturously received speech.

Were Corbyn to eventually resign or be defeated, another left candidate (such as John McDonnell) would struggle to make the ballot. Nominations from 15 per cent of MPs are required but just six per cent are committed Corbynites (though selection contests and seat losses could aid their cause). It’s for this reason that allies of the leader are pushing for the threshold to be reduced to five per cent. Unless they succeed, the hard-left’s dominance is from assured. Were an alternative candidate, such as Clive Lewis or Angela Rayner, to succeed it would only be by offering themselves as a softer alternative.

Corbynite divisions are intensifying 

The divide between Corbyn’s supporters and opponents has recently monopolised attention. But the conference showed why divisions among the former should be interrogated.

Shadow defence secretary Clive Lewis, an early Corbyn backer, was enraged when his speech was amended to exclude a line announcing that Labour’s pro-Trident stance would not be reversed. Though Lewis opposes renewal, he regards unilateralism as an obstacle to unifying the party around a left economic programme. The longer Corbyn remains leader, the greater the tension between pragmatism and radicalism will become. Lewis may have alienated CND but he has improved his standing among MPs, some of whom hail him as a bridge between the hard and soft left.

Elsewhere, the briefing against McDonnell by Corbyn allies, who suggested he was an obstacle to recruiting frontbenchers, showed how tensions between their respective teams will remain a story.

Labour has accepted Brexit

Ninety four per cent of Labour MPs backed the Remain campaign during the EU referendum. But by a similar margin, they have accepted the Leave vote. Jeremy Corbyn and John McDonnell, both long-standing eurosceptics, confirmed that they would not seek to prevent Brexit.

Owen Smith called for a referendum on the eventual deal during his leadership campaign. But with some exceptions, such as Angela Eagle, most of his backers have rejected the idea. Though 48 per cent of the electorate voted Remain, MPs emphasise that only 35 per cent of constituencies did. Some still fear an SNP-style surge for Ukip if Labour seeks to overturn the outcome.

The debate has moved to Britain’s future relationship with Europe, most notably the degree of free movement. For Labour, like Theresa May, Brexit means Brexit.

Corbyn will not condemn deselections 

The Labour leader could have won credit from MPs by unambiguously condemning deselection attempts. But repeatedly invited to do so, he refused. Corbyn instead defended local parties’ rights and stated that the “vast majority” of MPs had nothing to fear (a line hardly reassuring to those who do). Angela Eagle, Stella Creasy and Peter Kyle are among the rebels targeted by activists.

Corbyn can reasonably point out that the rules remain the same as under previous leaders. MPs who lose trigger ballots of their local branches face a full and open selection. But Labour’s intensified divisions mean deselection has become a far greater threat. MPs fear that Corbyn relishes the opportunity to remake the parliamentary party in his own images.  And some of the leader’s allies hope to ease the process by reviving mandatory reselection. Unless Corbyn changes his line, the issue will spark continual conflict. 

George Eaton is political editor of the New Statesman.