Google’s tax arrangements have rightly caused concern amongst the British public. Some digital companies have been taking advantage of an international tax system – set up in 1928 at the League of Nations – which has been reliant on the idea that companies are taxed where profits are created, not where they sell products and services. This principle has allowed some firms to shift UK profits abroad with relative ease and avoid paying domestic corporation tax.
Of course, it is not only some digital companies that have been paying little or no corporation tax in the UK. The Sunday Times, for example, has recently reported that most of Britain’s biggest companies paid no corporation tax in 2014. The issue of transfer pricing – where, for instance, a subsidiary company sells goods to a parent company – is just one example of how some large non-digital companies are avoiding corporation tax.
A study by Pricewaterhouse Coopers (PWC) gives us an insight into how the UK’s taxation of large corporations is increasingly moving away from corporation tax. For every £1 of corporation tax paid by large corporations £4.46 is paid in other taxes, according to the study. This is up from a ratio of 1:1 in 2005, and this change has been reflected in the Government’s overall tax take (see figure 1). The tax take for IT, NICs, VAT and Business Rates have all increased over the past decade, while corporation tax take has flat-lined.
Table 1: Total Net Receipts from Various Taxes
Income Tax (IT)
National Insurance Contributions (NICs)
Value Added Tax (VAT)
Although this obviously raises questions about the long-run sustainability of the current corporation tax system, evidence suggests that effective tax rates on large corporations have actually increased. The PWC report referred to earlier suggests that large private multi-national companies are now paying a total tax rate of 42.9%, which is up from 38.2% in 2008.
It would also be unfair to suggest the Government has been ‘soft’ on large corporations. The Apprencticeship Levy announced in the Summer Budget, for example, will act as an effective increase in corporation tax for large companies. Ministers have also been active in trying to clamp down on the offshoring of profits. The implementation of the anti-avoidance rule, the diverted profits tax and recent agreements from the OECD on tax transparency are all geared towards cutting out this sort of abuse.
Figure 1: Tax Gap by Type
Source: National Audit Office
Figure 2: Tax Gap by Tax Type
It is also important to highlight that tax avoidance is a small element of the “tax gap” – the estimated difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected. Only £2.7bn out of the estimated £34 billion tax gap is accounted for by tax avoidance, and corporation tax is only responsible for around 9% of the tax gap, according to HMRC.
Issues other than tax avoidance are far more costly to the Treasury. For example, it is estimated that around £5bn of tax is lost to legal interpretation, which will, in large part, be due to Britain’s enormous 21,000 page tax code that has around 1,100 tax reliefs. Furthermore, the Black Market economy is estimated to lose the Treasury more than twice the amount lost to tax avoidance.
This is in no way to excuse successive Government failures in obtaining the correct levels of corporation tax from multi-national firms. The Government needs to act on this. Companies operating in the UK must pay their fair share of corporation tax, and questions surrounding the long-term sustainability of the corporation tax system are justified. The authorities need to take an uncompromising approach on these issues, and alternative suggestions will need to be brought forward.
However, at the same time we must not lose sight of the bigger picture. Large corporations in the UK are increasingly paying a higher proportion of other taxes such as business rates, and this is not necessarily a negative development. There are also far greater issues relating to the so-called “tax gap”, which must not be neglected.