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The great Corporation Tax conundrum

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There’s a lot of negative press lately surrounding global technology companies, and the ease with which they appear to avoid paying tax in the UK. Alongside this negative press is misinformation, uncertainty, and a lack of knowledge about what is going on and what the government intends to do about it. What there isn’t a lack of is opinion, so allow me to add to it!

What is going on?

It appears that the government, and the public are becoming hot under the collar about the apparently small amounts of corporation tax that these hyper-global-mega companies are paying. Some of the top offenders reported are household names and if reports are to be believed include Google, Apple, Facebook and Vodafone. But it’s not just technology institutions – many of us were outraged to find that Starbucks, purveyors of expensive but ultimately ordinary tasting coffee appear to make very little in the way of profits in the UK, despite advising shareholders just how great their business was doing.

What is Corporation Tax?

Put simply, corporation tax is a tax on a company’s profits. If, after all necessary deductions, a UK company makes a profit at the end of the financial year, then it will have to pay a percentage of this profit to the Government. Whatever is left over will then be used to reinvest in growing the company alongside a payment to shareholders (the owners) by way of a dividend (which may also be taxable). It’s worth noting that dividend payments are one of the main sources of funds for private pensions. A tax on a company is a tax on your pension.

How can ‘successful’ companies avoid paying this tax?

Very good question. I’m not a tax adviser, and I’m sure a creative accountant could advise on numerous ways to achieve this, but let me offer a simple example known as offshoring profits.

Let us say your International coffee company is making healthy profits in the UK, but is run from somewhere that has favourable or zero rates of corporation tax, such as the Bahamas. If your UK arm sources all of its supplies from the parent company, and the parent company sets a price which just so happens to wipe out all of your UK profits, then there is no UK tax to pay. This isn’t a problem for them as it serves to increase the profits of the parent company – who may also pay no tax because of their chosen country of operation. Now imagine this isn’t physical products, but rather payments for the rights to use the brand, and you can start to see exactly how clever accounting can ensure the UK division never makes a profit.

What is wrong with doing this?

Well if its not that obvious, you should be able to see that this is depriving the Government of revenue that it should probably expect to benefit from, even though no laws are being broken. Worse still, some other country is benefiting from the profitability of the company’s UK operations. Even worse still, UK based competitors, who do not have the wherewithal to offshore their profits could be seriously disadvantaged by this activity. Anyone fancy a Costa?

So what’s the solution?

This is a difficult one. I’m sure would like a solution whereby there was a global rate of Corporation Tax – offshoring profits would then seem to serve no benefit. Unfortunately, dictating to other countries how their tax systems work is almost impossible and unless you’re the IMF, it isn’t going to happen. I’ve heard many solutions including taxing turnover, making corporations pay VAT, and many other equally flawed suggestions, but by far the best solution I have heard is to scrap Corporation Tax altogether.

Say what?

It seems Corporation Tax has outlived its usefulness, and it is not the first tax to expire. The Window Tax, the Beard Tax and the Hearth Tax were all useful revenue generators at one point, but were replaced by fairer and more useful mechanisms. In a time where businesses can easily choose their country of operation, it seems that Corporation Tax has become a wholly ineffective instrument.

For 2012/13 it is forecast that the Government will receive £591bn in tax receipts, of this, Corporation Tax represents £43.9bn (7.4%). This figure represents the cost of scraping this tax altogether, and is the amount the Government would need to look to raise elsewhere.

Or is it?

We hear of European companies relocating to Ireland or Luxembourg due to their favourable Corporation Tax rates, or on a larger scale, countries like the Bahamas, in order to avoid Corporation Tax altogether. These countries economies are benefiting from our unfavourable rates, as even without Corporation tax, these companies will be indirectly raising taxes for their countries of choice through other means (employment, sales taxes, etc.). I don’t have the skill or resources to predict what the value of such things might be but clearly there is a value there. Could it be that over time the net effect of scrapping Corporation Tax could be that the Government raises more money by having such companies relocate to here? That the UK becomes THE place to do business?

Tell me your thoughts on the matter? Do you think scrapping Corporation Tax could offer a solution?

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