EXECUTIVES from Google and Starbucks were summoned yesterday to give evidence to the UK’s public accounts committee on their approach to UK taxation. Grilled by Margaret Hodge MP – an outspoken critic of the tax strategies adopted by multinational companies – their treatment reveals two myths about corporation tax that continue to confuse MPs and the general public.
The first myth is that all multinational companies are compulsive tax dodgers, to the detriment of local businesses. Actually, multinational companies do pay corporation tax. Quite a lot of it.
A report by the Oxford University Centre for Business Taxation shows that, of the £40bn that corporation tax brings the Treasury each year, over 80 per cent is paid by multinational companies. That 80 per cent is roughly half from foreign multinationals and half from UK-based firms. This isn’t small change; it’s a significant contribution to our coffers.
By contrast, small businesses only pay about 10 percent of the overall corporation tax take. This isn’t a trivial amount, but it’s untrue that independent businesses are shouldering the burden of corporation tax.
The second myth is linked to the idea that big companies only pay a fraction of their sales in tax, so they must be avoiding it. This stems from comparing the profit in financial accounts to the tax paid. Yes, the way taxable profit is calculated does have similarities to the way profit in financial accounts is reported. But there are also some differences.
First, taxable profit uses capital allowances not depreciation. Imagine a business that buys a new building for £100m. If it intends to use that building for 100 years, it would write off the cost of the building over those 100 years in its accounts, at a rate of £1m per year.
But if the tax system adopted this basis, the company would have a cash outflow of £100m but would only receive tax relief of £1m. This would discourage companies from investing, which would in turn potentially hinder economic growth. Instead, the tax system has a more generous scheme – capital allowances – which give a larger deduction for tax purposes than the company gets for accounting purposes. Profits are taxed eventually. But they just don’t get taxed in the same year as the accounting profits are reported.
Second, taxable profit also allows companies to make deductions. Almost every expense with a legitimate business purpose gets deducted in the calculation. Interest payable, royalty payments and directors’ salaries are all allowable. So commentators who compare anything other than pre-tax profit to tax paid will end up with a daft answer, because they’re omitting real deductions that the company, in accordance with tax law, is allowed to make.
I’m not apologising for tax evasion, or even avoidance. If the way we tax companies is unfair on other taxpayers, then it should be changed. But it’s vital that any changes in tax policy are based upon a sober analysis of the facts about corporation tax, rather than tired myths.
Christie Malry is a pseudonym. The author is a chartered accountant. He blogs at www.fcablog.org.uk