Just a thought ... The muddled state of corporation tax

The Oxford University Centre for Business Taxation’s summer conference 2015 marked 50 years of UK corporation tax as well as the tenth anniversary of the centre’s founding.

Although it was an enjoyable and thought-provoking event, it was also depressing to reflect on the muddle that we have reached in the corporate tax system, and the summer budget, followed by 212 pages of Finance Bill, will not improve matters.

Why do we tax companies? Companies are a legal construct and, ultimately, do not bear the burden of any taxes. All taxes are borne by individuals, although there is a lively debate on where the impact of corporation tax falls: on shareholders, employees, customers or suppliers.

Any simplification, if it is to be revenue-neutral, will produce winners and losers.

But broadly, as Edward Troup, HMRC second permanent secretary and tax assurance commissioner, reminded the conference, we tax companies for three main reasons:

• because we can: they have the capacity to pay;
• as a pragmatic substitute for taxing shareholders; and
• as an element of democratic necessity.

I would add a fourth reason: if companies were not taxed, the behavioural response would be severe, as we saw when Gordon Brown introduced a zero rate for the first £10,000 of profits and tax-motivated incorporations soared.

From 1973, relatively early in the life of UK corporation tax, we had advance corporation tax and the imputation system. The logic was that, if corporate profits had already been taxed, they should not be taxed again in the hands of shareholders since that would, in effect, give rise to double taxation.

Advance corporation tax was abolished in 1997, and the last vestiges of the imputation credit disappeared in the summer budget with the announcement of the abolition of the tax credit on dividends. So the pendulum has swung back towards a classical system, which suggests that a relatively low corporate tax rate would be “fair” in that it would make the combined effective tax rate on distributed profits a reasonable one.

A second reason for keeping the corporation tax rate relatively low is that there is a significant body of work (including that by the Organisation for Economic Co-operation and Development on tax and economic growth) which confirms that corporation tax is the least economically efficient tax. It is an important contributor to total tax revenues and has been relatively resilient to increased globalisation. But the UK’s decision to have a competitive corporate tax environment is understandable and recent further reductions to the rate confirm that direction of travel.

It is surprising to reflect that, when I started in tax, the UK corporation tax rate was 52%; it fell to 35% and then to 30%, but few would have expected the level to settle at below 20%.

So we need corporate tax as part of the system and many, although not all, agree that levying it at a relatively low rate is sensible. Why is the system so complicated?

Perhaps it is our own fault: there are too many corporate tax specialists, all arguing about the finer details and protesting loudly at any change proposed.

Indeed, Philip Baker, barrister at Field Court Tax Chambers, in his presentation, went so far as to say that large corporates drive the direction of tax policy.

I interpreted this as meaning that companies can choose where to locate economic activity, so a country that wants to attract mobile investment will need to recognise the impact of its tax policy on investment decisions.

But it is true that any simplification, if it is to be revenue-neutral, will produce winners and losers and, inevitably, the losers shout loudest.

Perhaps, in a low-tax environment, real simplification might be possible.

I would like corporation tax to move closer to an accounts basis, with minimal adjustments made only on a clear policy justification – such as the annual investment allowance.

For most smaller businesses, the tax computation is already close to the accounts profit, plus depreciation, less the annual investment allowance. Would it really cost much to move further in that direction?

I know we have been here before, and many members of the panel and the audience at the conference have participated in numerous consultations on the topic.

But I hope, in the next ten years, the Oxford University Centre for Business Taxation can continue to encourage progress towards a simpler tax system for UK business.

Heather Self is a partner (non-lawyer) at Pinsent Masons LLP
 

Issue: 4511 / Categories: Blog , Business