Aug 2007 28

One-third of biggest businesses pay no tax5

An interesting report in the Financial Times today reveals that almost a third of the UK’s 700 biggest businesses paid no corporation tax in the 2005-06 financial year, while another 30 per cent paid less than £10 million each. Overall, the National Audit Office report found that the 700 companies paid around half of all the corporation tax paid.

There are a number of reasons for this. For example, pension contributions reduce the tax bill in the year they are paid, while a number of international firms were able to take advantage of tax relief on debt interest payments by having large amounts of debt in the UK.

But overall, a complex corporation tax system with a relatively high rate (30 per cent falling to 28 per cent from next April) makes it worthwhile for firms to seek ways to reduce their tax liabilities. A lower rate with fewer exemptions and reliefs would operate far more effectively.

The Financial Times leader, however, argues against a radical reduction in the main corporation tax rate, saying:

"Let us not fool ourselves into thinking – as the more enthusiastic campaigners against corporation tax seem to – that a lower rate of corporation tax will suddenly deliver so much new investment as to pay for itself. There is a case for lowering corporation tax, but increased revenue will not slide up the Laffer curve into our laps."

In fact, the FT has got it wrong. The TPA commissioned the respected Centre for Economics and Business Research to build a dynamic model of the UK economy. Simulating a phased reduction in the main rate of corporation tax to the Irish rate of 12.5 per cent over 9 years revealed that such a cut would boost not only GDP, employment, fixed investment and household income, but after five years tax revenues would be higher – precisely the Laffer curve effect. These higher tax revenues would come in the form of increased income tax and VAT receipts, as more people would have better paying jobs, more than offsetting the reduction in corporation tax revenues. By the end of the 15-year simulation period, government borrowing would be almost £30 billion lower.

Across eastern Europe and a number of other countries, corporation tax rates have been drastically reduced, with the expected positive effects on growth, investment and tax revenue.

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  • http://profile.typekey.com/TheWiltedRose/ Mountjoy

    Economists have already proven the case for lower taxes increasing economic growth; it is politicians who refuse to believe this, of course, because of their ideology.

  • http://neilreddin.wordpress.com Neil Reddin

    Am I right in noting that this only relates to Corporation Tax? The largest companies will also employ vast numbers of people, which equals large amounts of employers’ national insurance. Then, for example, oil companies will pay petroleum revenue tax. What about business rates? The list goes on … (sadly)

  • Corin

    Neil, you are right. Separate analysis shows that the largest 100 companies pay about half their tax burden in the form of corporation tax, and the other half in the other taxes you cite.

  • http://vindicovindico.blogspot.com Vindico

    Of course, companies do not pay tax. Only people pay tax. People are the only link in the economic chain which earns and spends – tax is just a wedge between the two. The belief that companies pay tax is a fallacy.

  • http://ecforster.netfirms.com/Tax/Doc1.html ecforster

    Vindico is quite correct, but it is consumers who bear the ultimate burden of taxation. Who else but the consumer buys the goods and services that provide your jobs? Where else would the money come from to pay PAYE, executive income tax and corporate taxes? [These are the indirect methods of taxing consumers.] The consumer pays, and how much he does is clearly not appreciated by the public.
    For proof google “How Consumers are Taxed”
    VAT is 17.5%, but with the above hidden costs of taxation in production appearing in consumer prices, the actual tax is equivalent to a colossal 70% VAT, i.e. four times as much. [42% of GDP goes to Government.]
    Thus, everyone is taxed by every purchase and absolutely everyone would gain by reducing the level of taxation. When taxation is understood in this way why would it need to be so complex, if not to confuse voters about the real cost of Government and who is paying for it?