Markets & Analysis
The Government made a big thing while in opposition about cutting corporation tax so that companies can keep more of the profits they make.
It remains a key part of its strategy to attract businesses to the UK.But an investigation carried out by another newspaper three years ago found to general astonishment that one third of the companies in the FTSE 100 paid no UK tax at all in the year
2005-06. Another third of that number paid only a nominal amount.
Business may have boomed in the first half of the decade but in big companies the proportion of profit paid in tax fell sharply instead of going up as one would expect.
It turns out that one side-effect of the incentivisation of executives to increase shareholder returns was that UK-based multinationals became much more aggressive in their tax planning.
Shareholders got more money — and executives qualified for their bonuses — partly (at least) at the expense of the tax authorities.
Nor is it just the giant companies. In a thought-provoking speech in Parliament this week, the chairman of the Lloyd's insurance market, Lord Levene, disclosed that of the 53 companies active in the insurance market, only nine were still domiciled in the UK.
Some of course were foreign to start with, but it is nevertheless startling how many of what were indigenous British firms have moved offshore to pay less tax. Even Brit, sponsor of as British a sporting icon as Kennington Oval, has moved abroad.
On top of that we have the aftermath of the banking crisis, which has wiped out the one part of big business which did pay big UK tax. RBS and the others were fond of saying every year how many schools and hospitals could be built with the money they contributed.
But not any more. The massive losses of recent years can be rolled forward to offset future profits and only when these have been used up will they start paying significant amounts of tax again. It could take years.
Indeed when Merrill Lynch announced its huge losses a couple of years ago it was estimated that it was unlikely to pay UK tax again much before 2025.
Similarly it is well known that when British companies are taken over — the likes of Asda, BAA, Cadbury or even Manchester United - the tax they pay to the Exchequer plunges because their new foreign owners organise things so that it appears they make all their profit in some useful offshore low-tax location.
They have to pay other taxes of course, such as National Insurance and business rates, but the overall total is still less than one would expect.
This might prompt some readers to suggest that corporation tax is no longer fit for purpose but it goes much deeper and is much more damaging than that.
A paper published today by the Institute of Directors* highlights the fact that some businesses in the UK do pay corporation tax, and a host of other taxes besides, which are so onerous they are a positive disincentive to growth.
It is fine when you become a multinational giant and can afford armies of accountants to advise on how to take advantage of the latest tax-avoidance schemes, but the normal UK-based small to medium-sized business does not have that option.
So they, rather than the giants, shoulder a disproportionately large share of the tax burden even though as small businesses they qualify for a slightly lower rate of corporation tax.
Indeed the IOD claims that this plus NI, business rates, renewable energy levies and fuel and stamp duties boost the effective rate of tax on the small businesses to well over 40%.
I can well believe it, having once known the owner of a small restaurant who worked out that 70% of his turnover — not profits — went in business rates, NI and VAT. He was full every night but he wasn't making any money. In effect the business rates made it impossible to run a profitable business from his premises. But his appeal for a reduction fell on deaf ears and he was forced to shut down — which meant that the tax office then got nothing as the building stood empty.
The thrust of the IOD's paper is that this tax rate is not only too high of itself but it makes it very much harder for owners to expand — partly because so much of their cash goes in tax, partly because at the bottom end the system works perversely and a small increase in size is likely to increase the tax burden even more.
This matters hugely because it is small firms which provide the bulk of employment in this country and it is small but growing firms which will play a big part in providing the growth on which our future prosperity depends.
It is absurd to have a tax system which actively discourages enterprise. But if the Government genuinely wants to tackle that problem, shaving a percent or two off corporation tax is not the answer. It has to look at the whole package, and particularly the pernicious system of business rates, if it is to succeed genuinely in easing the burden.
*IOD Policy Paper. Tax — The Weighty Burden by Richard Baron
http://www.thisislondon.co.uk/markets/article-23843333-tax-burden-is-pushing-minnows-under.do
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