David Craig, on November 12th, 2012As the head of the Public Accounts Committee MP Margaret Hodge prepares to question Britain’s most prolific tax-avoiding companies, we find out that her family company doesn’t pay Corporation Tax either. You couldn’t make it up.
So, as our useless governments are exposed as having helped our largest companies avoid paying tax while squeezing the rest of us, here’s an article I wrote about 7 months ago for MoneyWeek explaining the blindingly obvious – Corporation Tax is past its useful shelf-life and should be scrapped.
It’s time to scrap Corporation Tax
By David Craig
Recent revelations of how little tax major companies like Starbucks, Amazon, Google and Facebook pay have got many ordinary taxpayers fuming in impotent rage. Yet we should remember that any tax only has a limited useful shelf-life. For a time it will raise revenue. But most taxes outlive their usefulness because they cause changes in behaviour as people find ways of avoiding paying them.
In Britain, we’ve had many taxes that have come and gone. There was Henry VIII’s Beard Tax introduced in 1535. Avoidance was easy – you just shaved off your beard. In 1662 Charles II brought in an early type of poll tax, the Hearth Tax. It was considered too difficult to count how many people lived in each home, so instead the tax was based on the number of chimneys. The result was that enterprising citizens started combining several fireplaces into a single chimney. A few hundred people are thought to have died from the ensuing fires. In 1696 William III brought in a Window Tax leading to many homes bricking up some windows. 1795 saw the introduction of a tax on wigs and wig powder. Result – wigs became less fashionable. And around 1800 the government started a Hat Tax. Each hat had to have a stamp sewed into it showing that it was legal. The penalty for forging these stamps was death, which might give some people odd ideas about how to deal with today’s companies that avoid Corporation Tax.
Corporation Tax came in with the 1965 Finance Act. Prior to that, companies and individuals paid the same income tax with an additional profits tax levied on companies. But perhaps, like so many taxes before it, Corporation Tax is getting past its sell-by date – as companies become increasingly international or operate through the Internet, they find ever more ways of avoiding paying. During the Gordon Brown boom of 2000 to 2007, the amount of Corporation Tax paid by small companies shot up by over 130 per cent. But at the same time, even as their profits and bonuses soared into the stratosphere, financial services firms only paid a modest 27 per cent more, while our largest, often international, companies handed over just 5 per cent more.
Larger companies, banks and of course celebrities have a bewildering variety of ways to pay as little tax as possible. And when they do pay tax, it’s usually in a country where tax rates are minimal. The world’s largest computer systems and consultancy, for example, has over a hundred thousand employees worldwide. Yet for tax purposes it’s based in Bermuda where it employs around a dozen staff. So, one might be tempted to think that the Bermuda incorporation had more to do with tax avoidance than the island being a critical centre for the company’s major customers.
Chancellor, George Osborne has proposed to cut Corporation Tax very slightly over the next two to three years. But perhaps he’s missing a trick. Maybe Corporation Tax should go the same way as the taxes on beards, hearths, wigs, windows and hats. As it currently works, Corporation Tax has an immensely destructive effect on our economy. It places an unfair burden on smaller companies which are the ones we need to take on workers to boost economic growth; it encourages larger companies to move their profits and sometimes even their people out of Britain and it makes it attractive for financial manipulators to buy productive, tax-paying companies by borrowing huge sums of money so they can extract massive payments for themselves, while using the interest payments to minimise the amount of taxable profits. The takeovers at firms like BAA and Cadbury’s have made their acquirers wealthy, while slashing our government’s tax receipts.
If we are to deal with the deficit and create growth, we need to scrap Corporation Tax completely. Instead we should have a transaction tax on all business activities carried out in Britain, regardless of whether the company claims to be based in Switzerland, Bermuda, Ireland, the Cayman Islands or on the Moon. In fact, we already have that tax – it’s called VAT. The government should get rid of Corporation Tax and replace it by retaining the necessary amount of VAT paid to businesses. For financial firms, there should be a tax on their assets.
Binning Corporation Tax would have quite a few almost miraculous benefits for our economy. Firstly, it would make tax avoidance much more difficult. Also, there would be no need for companies to play all sorts of games to shift their profits offshore. Moreover there would be a huge incentive for our companies to stay in Britain and for many thousands of foreign companies to move their bases to Britain, creating hundreds of thousands of well-paid jobs. And, of course, the practice of buying companies while loading them with massive debts would no longer make sense for financial predators. In addition, it would massively reduce the administrative cost of tax collection.
Scrapping Corporation Tax would be the most imaginative and beneficial act George Osborne could ever do. It’s a pity that today’s politicians are lacking in the necessary imagination.
David Craig is the author of GREED UNLIMITED How Cameron and Clegg protect the elites while squeezing the rest of us (Original Book Company £8.99)
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