Our corporation tax system is broken. Here’s how to fix it

Image: HM Treasury, CC BY-NC-ND 2.0

“We are all in this together” was the familiar refrain used by former Chancellor George Osborne. If we want to pay down the public debt, we must all bear some of the burden for tax rises and spending cuts. After it was announced this week that the target for reducing the deficit had been reached, Mr Osborne announced triumphantly that “we got there in the end”.

It is, however, not at all clear who Osborne is referring to when he says “we”.

The enlarged deficit in 2009-10 was created by the slump in output that followed the global financial crisis, and the spending required to get us out of it. It was the decision to bail out the banks which added £1.5 trillion to the national debt — not overgenerous public spending by the previous Labour Government.

And yet, those people who rely most heavily on our public services have been the ones to bear most of the cost. Our schools have seen almost £3 billion worth of cuts since 2015. Local councils will see their funding fall by 77 per cent by 2020 versus 2015. The NHS funding gap stands to reach a staggering £30 billion by 2020.

Meanwhile, successive Conservative governments have reduced the rate of corporation tax from 30% in 2005/06 to just 19% today. This is the lowest rate in the G7, and one of the lowest rates among the 35 countries of the OECD. Astonishingly, a further reduction to 17% is still planned before the end of this Parliament.

These changes have seen revenues from corporation tax fall from 3.5% GDP in 2005/06, to just 2.6% today. At the same time, it has become increasingly easy for multinational companies to shift their profits to low-tax jurisdictions in order to avoid paying tax in the UK altogether.

Today, nearly half of all children in London, Birmingham, and Manchester live in poverty, whilst UK-based corporations enjoy some of the lowest tax rates in the developed world. So much for “we’re all in it together”.

It is in this context that the IPPR has released a new report calling for a fundamental rethink of the system of corporate taxation in the UK.

First, we are proposing an increase in corporation tax from 19% to 24%. We argue that the revenues from this should be used to reduce taxes on workers by reducing employers’ national insurance contributions from 13.8% to 11.8%.

Taxes on profits are more likely to be borne by the people who own a company, whilst taxes on payrolls are more likely to be borne by workers themselves. So reductions in corporation tax have benefited shareholders at the expense of workers, who have yet to see their wages recover to pre-crisis levels. This imbalance has also had important distributive effects between companies, raising the tax burden of less profitable, higher-employment companies, and reducing that of more profitable ones.

Second, we propose the introduction of a new tax designed to prevent multinational tax avoidance. Our ‘Alternative Minimum Corporation Tax’ (AMCT) would link a company’s tax liability to its sales or turnover in the UK, to ensure that firms were not able to avoid taxes by shifting their profits to low-tax jurisdictions.

While we do not currently have any reliable data on the extent of multinational profit shifting, the exchequer is estimated to lose somewhere between £3 billion and £12 billion each year as a result of these practices. Our AMCT would capture a significant portion of these lost revenues, which would go some way to closing the gap in the NHS budget.

After eight years of austerity borne primarily by the most vulnerable in our society, it’s time that all businesses started paying their fair share.

  • BK

    The link in the article goes to the wrong report – should be this one I think: https://www.ippr.org/research/publications/fair-dues

  • Tax guru

    “These changes have seen revenues from corporation tax fall from 3.5% GDP in 2005/06, to just 2.6% today”

    From a quick bit of research on HMRC statistics show corporation tax receipts in 05/06 as £42,355m and y/e Feb 2018 (latest published) of £54,556m.

    Or to put it in another way corporation tax receipts have increased by 28.8% from 2005 to 2017.

    Statistics haven’t been this dodgy since someone wrote £350m on a red bus. What were you thinking Grace.

  • Tax guru

    “Meanwhile, successive Conservative governments have reduced the rate of corporation tax from 30% in 2005/06 to just 19% today”
    Labour reduced the corporation tax rate from 30% to 28% in 2008 and had legislated to reduce it to 27% from 1 April 2011.
    I would say a coalition government reduced the corporation tax rate from 27% to 20% from 2010-2015.
    Arguably a Conservative government has only reduced it from 20% to what will be 17% in 2020.

  • Tax guru

    “At the same time, it has become increasingly easy for multinational companies to shift their profits to low-tax jurisdictions in order to avoid paying tax in the UK altogether”

    Do you have any evidence to support this statement?

    There has been a huge number of corporation tax anti-avoidance measures introduced in the UK (and indeed worldwide as part of the OECD BEPS Actions) which has made a real impact on base erosion and profit shifting in the corporate world – the most significant of which have been introduced in the last year or two. I believe these anti avoidance measures are the main reason why UK corporation tax receipts have risen so sharply despite the drop in headline corporation tax rates.

    To name but a few:
    – BEPS Action 2 anti-hybrid arrangements
    – BEPS Action 4 interest restrictions
    – Restriction on the utilisation of carry forward losses
    – Other loss restrictions eg in corporate partnerships, sideways loss relief, donations, pre-entry conditions etc
    – Various anti-avoidance on specific financial arrangements and changes to the loan relationship rules
    – Targeted CFC anti-avoidance rules
    – Diverted profits tax
    – Published tax strategy – which had brought tax compliance and tax risk squarely into the boardroom. I have seen a genuine shift in the UK corporate boardroom on approach to tax risk. (this probably applies to Europe too although I feel the US is still lagging way behind)

    From an avoidance perspective I believe a wide and shallow tax base is far better than narrow and high tax base as corporate decisions usually come down to a cost/benefit analysis.

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