So Why So Little Corporation Tax?

As we know, the NAO released a report part of which pointed out (the actual report was about the efficiency of the taxman in collecting the money) that a lot of large companies pay little or no corporation tax. There's a nice piece explaining this:

"After the likes of BP and HSBC there is a very long tail of     much smaller companies," says Bill Dodwell, head of tax policy     at Deloitte. "If you look at the companies pushing for     promotion to the FTSE 250, you come across names like Melrose     Resources, Law Debenture and Kingston Communications. These     companies are not very big. Take Melrose Resources - it makes     pre-tax profits of about £5.6m. When you think this through,     it's no surprise that so many of the 700 biggest companies in     the UK pay less than £10m tax. Many of them don't make £10m profits."

That seems entirely sensible: I'd not really thought about it that way, that there aren't actually that many companies that do have profits of hundreds of millions to be taxed.

"One of the industries that pays little or no tax is the car     industry," says Patrick Stevens, tax partner at Ernst &     Young. "One reason for that is that car industries have very     big investment programmes. In the car industry, you have got to     build a dirty great factory. Building factories brings tax     allowances, which governments put there in the past to encourage     people to build things like car factories and stimulate     manufacturing. The tax allowances come to you quicker than you would     write the value of those factories off in the accounts."

This would apply to pretty much any form of manufacturing of course.

Moves to wipe out pension fund deficits have also slashed their     tax bills. Accounting rules mean that cash sums paid into pension     funds can be offset against tax. In the year the NAO report refers     to, billions of pounds were pumped into pension funds by FTSE companies.

J Sainsbury, the supermarket group, paid £110m into its pension     fund in 2005/6 which resulted in it receiving a tax credit of £3m.     Last year, it paid £240m into the fund, leading to credits of £9m.

Again, it all seems entirely sensible. Certainly, so far there's nothing that we would even call tax avoidance, let alone evasion.

But the biggest mitigating factor is more obvious. UK corporation     tax is only paid on the profits made in the UK. These days,     Britain's biggest multinationals make most of their money     overseas.

Aha....and....

Take British American Tobacco. Last year, it made profits of     £2.6bn and paid £716m in corporation taxes. But none of that went     into the Treasury's coffers because BAT's comparatively     small business in the UK lost money.

But that logic also works in reverse: profits made by the UK     subsidiaries of American, German or Japanese companies are taxed in     Blighty. It is worth noting that overall UK corporation tax revenues     have soared by close to 50 per cent in the past four years and are     projected to hit £50bn in the current financial year. Clearly     someone is paying tax.

So we might have this rather odd situation that, the largest 700 companies are paying very little UK corporation tax because they are paying foreign corporation taxes...while there are chunks of revenue coming from the foreign companies operations in the UK....it's just that we don't count them amongst the 700 because they're not British.

There's one more spanner in the works here, something which might (will?) have a much greater effect in the future. There's an EU law (the Bolkestein Directive maybe?) about company taxation. Rather than where the economic activity takes place being the determinant of where profit taxes are paid, it's where the head office of the SE (Societee Europeienne?...equal to a PLC) is based. Under this it would be entirely legal for BP, for example, to have the head office in Liechtenstein (yes, any EU or EEA country) and the only corporation tax would be that levied there. Or Estonia, where that on retained profits is zero.

I've mentioned this before and I'm really not sure that directors who don't move in order to take advantage of it might not be in breach of their fiduciary duty to shareholders. Being able to pay 0% corporation tax on all profits made in the EU certainly seems worth the cost of having board meetings and a brass plate in Tallinn.