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KEY POINTS
- Is realpolitik behind the UK's taxation of large companies?
- Why do a third of the largest companies pay no corporation tax?
- Is tax planning distorting the tax burden?
- Will vested interests prevent major tax simplification?
After fifty years or more in the tax profession I have come to the conclusion that we tax professionals are playing out a giant farce. My proposition is that big business and large companies, and in particular the City of London and financial institutions, are treated in a completely different, and more lenient, way by Government and HMRC than small companies and small businesses.
With the disappearance of the British Empire, and the fact that many large companies within the United Kingdom are now owned by foreign investors, whether they are from the United States, Germany, Japan or Russia, the Government needs some factor to illustrate that Britain is still a world power. The reduction in our armed forces means that they cannot be that factor.
However, as regards economic power, the Government is determined that the City of London should continue to be one of the key financial centres, if not the key financial centre, of the world, thus maintaining Britain's place on the world stage.
There are consequences to this decision. The Government, even if it is socialist, tends to turn a blind eye to the large salaries and bonuses earned by workers in the City of London. Of more interest to taxpayers generally and their advisers is the unspoken proposition that large companies are treated far more leniently than small companies by HMRC.
I do not always agree with Richard Murphy of the Tax Justice Network and Professor Prem Sikka, but I do accept that large companies do not appear to be contributing their fair share of tax to the coffers of HM Treasury. Evidence of this was provided by the Financial Times recently, which disclosed that almost a third of the UK's 700 largest companies paid no corporation tax in year 2005-06, and another 30% paid less than £10 million each.
What struck me as significant was that when Richard Murphy appeared on terrestrial television to make this point, the defence of big companies and the City came not from the CBI or other representative organisations, but from HMRC.
Statute law
The taxation of companies, unincorporated businesses and individuals is enshrined in the various Taxes Acts, which now represent a vast compendium of legislation. The national press has commented on the weight and complexity of current legislation included within the Yellow Tax Handbooks published by LexisNexis.
At its most simplistic, a company is required to pay corporation tax at a prescribed rate on its net profits. Equally, an unincorporated business pays income tax on its profits. In theory therefore, there should be no difference between how the taxation of a big business and a small business is calculated, apart from the impact of the small companies rates of corporation tax.
In practice, of course, there is; and without going into all the machinations of allowable expenses, reliefs, the treatment of interest charges and foreign profits, many large companies seem to end up paying a rather small percentage of their profits in UK corporation tax.
Naturally, in the background, they have an in-house tax department and almost certainly the advice of one of the leading firms of accountants, and perhaps tax lawyers. Small companies and businesses, however, do not have such luxuries, and often end up paying corporation tax or income tax at the appropriate rate on their net profits, without the benefit of 'tax planning'.
Tax investigations
The difference of approach is also clearly defined in the area of tax investigations. The legal mandate for HMRC to investigate is set out in the Taxes Management Act 1970 in the case of unincorporated businesses and individuals, and Finance Act 1998 in the case of companies.
In practice, it appears that HMRC consider that the small business is a 'soft target', particularly small cash businesses. And a vast part of the resources of HMRC are devoted to small business compliance and investigation.
Obviously the department regards this initiative as cost effective, and it has involved, inter alia, the IR35 offensive, other status enquiries, managed service companies and the section 660A attack resulting in the case of Jones v Garnett.
Tax advisers do not know the answer to this, but it appears, on the surface, that large companies and businesses are not investigated by HMRC with the enthusiasm and strictness that applies to the small business. This may well be because HMRC assume that the internal controls and prestige of the company concerned render it relatively immune to investigation. But is such a view realistic in the world of the twenty-first century?
The tax gap
The previous Chancellor of the Exchequer was always referring to the 'tax gap' and during his years in office he introduced numerous initiatives to increase the 'tax take', without actually increasing the rates of corporation tax, income tax, capital gains tax and inheritance tax for businesses and individuals.
These are commonly known as 'stealth taxes', and among the most controversial was the cancellation of the tax credit facility on dividends, which has affected the pension funds of many individuals. Other stealth taxes include the increase in stamp duty on house purchases by individuals.
What would happen if large companies and financial institutions within the City of London contributed corporation tax on their profits at the correct percentage to HM Treasury? I do not have the statistics to prove this, but I suspect that many, if not all, of the Chancellor's problems would be solved, and the tax gap would disappear.
There would, of course, be other consequences. It would be unnecessary for HMRC to spend so much time and involve many thousands of personnel in the compliance and investigation of small businesses and individuals. Accordingly there would be substantial redundancies within HMRC.
The in-house tax departments of large companies would also face redundancies, as would the corporation tax planning departments of their professional advisers within the large firms of accountants and solicitors. In effect, the measure I am suggesting would be tax simplification on a major scale.
Conclusion
None of my suggestions will, of course, happen. There are too many vested interests involved in the administration and collection of corporation tax for true simplification to occur.
As already mentioned, the Government and HMRC are at pains to protect the City of London at all costs. Large companies and their advisers retain substantial 'political clout'. If large companies were made to pay corporation tax at a prescribed rate on their profits, that would represent real simplification. After all, this is what the professional institutions and others have been calling for, but perhaps without being specific and thinking things through.
It is noteworthy that in the Pre-Budget Report of October 2007, the Chancellor announced two measures that actually involved tax simplification. One is the proposed flat rate of capital gains tax, and the effective abolition of capital gains tax taper relief. There will be winners and losers from this measure.
The other simplification measure involved inheritance tax. The simplification may have been involuntary, as the real motive of the Government was to respond to the Opposition's proposals by doubling the exempt threshold for married couples and those in a similar relationship. However, the nil-rate band discretionary trust has effectively been consigned to the history books.
Could the Government go further and, as well as simplification, obtain substantial funds for its coffers by reforming corporation tax and making sure that all companies, great and small, contribute equally to the coffers of the Treasury? I doubt it, but there has been speculation that the House of Commons' Public Accounts Committee is preparing to launch an investigation into the current phenomena. I would be happy to be surprised.
Meanwhile the comedy or perhaps the tragedy continues, and hopes of a real change are a mere fantasy.
John T Newth FCA, FTII, FIIT, ATT was Deputy Editor of Taxation magazine from 1988 to 2001, and is now a freelance tax journalist. He won the LexisNexis Tax Writer of the Year Award in 2005.
