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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Election 2017: 30 MPs at risk from a Lib Dem surge

The Lib Dems are hopeful of winning "dozens" of seats on June 8. Here's a list of the 30 most vulnerable if the party surges.

Buoyed by the 48 per cent's Brexit backlash, Labour's disarray, a famous win in Richmond Park and a string of council by-election victories, the Liberal Democrats say they are on course to make "dozens" of gains come June 8. 

Its targets can for the most part be divided into two broad categories: the first a disparate clutch of seats held before their 2015 collapse, the second a handful of new targets whose pro-Remain electorates are at odds with Brexiteer MPs.

The party is particularly hopeful of recouping the losses it made to the Tories in its erstwhile south west heartlands at the last election. As George revealed last month, internal polling reveals most of those seats could be vulnerable to a Lib Dem surge - as several Labour-held seats in England and Wales that broke heavily for remain in last year's referendum. 

EU referendum results were, for the most part, released by local authority rather than Westminster constituency – the totals in this list, where not officially available, are taken from political scientist Dr Chris Hanretty’s estimates, of which a full table is available here.

Labour-held:

Daniel Zeichner – Cambridge
Majority: 599 (1.2 per cent)
EU referendum vote: 69 per cent Remain

Julie Cooper – Burnley
Majority: 3,244 (8.1 per cent)
EU referendum vote: 40 per cent Remain

Neil Coyle – Bermondsey and Old Southwark
Majority: 4,489 (8.7 per cent)
EU referendum vote: 68 per cent Remain

Thangam Debbonaire – Bristol West
Majority: 5,673 (8.9 per cent)
EU referendum vote: 80 per cent Remain

Jo Stevens – Cardiff Central
Majority: 4,981 (12.9 per cent)
EU referendum vote: 62 per cent Remain

Jess Phillips – Birmingham Yardley
Majority: 6,595 (16 per cent)
EU referendum vote: 36 per cent Remain

Kate Hoey - Vauxhall 
Majority: 12708 (25.6 per cent)
EU referendum vote: 81 per cent Remain

Conservative-held:

Maria Caulfield – Lewes
Majority: 1083 (2.1 per cent)
EU referendum vote: 50 per cent Remain

Luke Hall – Thornbury and Yate
Majority: 1459 (3.1 per cent)
EU referendum vote: 44 per cent Remain

James Berry – Kingston and Surbiton
Majority: 2834 (4.8 per cent)
EU referendum vote: 60 per cent Remain

Marcus Fysh – Yeovil
Majority: 5293 (5.3 per cent)
EU referendum vote: 39 per cent Remain

Derek Thomas – St Ives
Majority: 2469 (5.1 per cent)
EU referendum vote: 46 per cent Remain

Kevin Foster – Torbay
Majority: 3286 (6.8 per cent)
EU referendum vote: 40 per cent Remain

Paul Scully – Sutton and Cheam
Majority: 3921 (7.8 per cent)
EU referendum vote:  49 per cent Remain

Ben Howlett – Bath
Majority: 3833 (8.1 per cent)
EU referendum vote: 66 per cent Remain

Will Quince – Colchester
Majority: 5575 (11.5 per cent)
EU referendum vote:  49 per cent Remain

Mary Robinson – Cheadle
Majority: 6453 (12.1 per cent)
EU referendum vote: 58 per cent Remain

 Alex Chalk - Cheltenham
Majority: 6516 (12.1 per cent)
EU referendum vote: 57 per cent Remain

Peter Heaton-Jones - North Devon
Majority: 6936 (13.3 per cent)
EU referendum vote: 43 per cent Remain

James Heappey – Wells
Majority: 7585 (13.3 per cent)
EU referendum vote: 47 per cent Remain

Scott Mann - North Cornwall
Majority: 6621 (13.7 per cent)
EU referendum vote:  40 per cent Remain

Anne-Marie Trevelyan – Berwick-upon-Tweed
Majority: 4914 (12.2 per cent)
EU referendum vote: 45 per cent Remain
 

Flick Drummond - Portsmouth South
Majority: 5241 (12.5 per cent)
EU referendum vote: 48 per cent Remain

Nicola Blackwood – Oxford West and Abingdon
Majority: 9,582 (16.7 per cent)
EU referendum vote: 61 per cent Remain

Anne Main – St Albans
Majority: 12,732 (23.4 per cent)
EU referendum vote: 64 per cent Remain

 

SNP-held:

John Nicolson – Dunbartonshire East
Majority: 2167 (4 per cent)
EU referendum vote: 71 per cent Remain

Michelle Thomson – Edinburgh West
Majority: 3210 (5.9 per cent)
EU referendum vote: 71 per cent Remain

Stephen Gethins – North East Fife
Majority: 4344 (9.6 per cent)
EU referendum vote: 62 per cent Remain

Paul Monaghan – Caithness, Sutherland and Easter Ross
Majority: 3844 (11.2 per cent)
EU referendum vote: 51 per cent Remain

Ian Blackford - Ross, Skye and Lochaber
Majority: 5124 (12.2 per cent)
EU referendum vote: 57 per cent Remain

 

 

 

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