Why Corporation Tax is failing the British Economy

Corporation tax should be replaced with a levy on multinationals’ UK sales, according to the former Chancellor Nigel Lawson.

In an interview with the Daily Telegraph, Lord Lawson asserted that it was an unsatisfactory situation, when tax had to be collected from big firms through secret “ad-hoc” deals. The former Chancellor’s comments come after an agreement was struck by HMRC for Google to pay £130m in tax dating back to 2005.

The deal has been roundly condemned by critics, both in the media and Parliament, with Labour calling for the public spending watchdog, the National Audit Office, to investigate what it criticised as a “sweetheart deal”.

The government and HMRC defended the deal and the Chartered Institute of Taxation weighed in with a comment that in their opinion, it would be foolish to abandon corporation tax.

Even the European Commission has got involved and has issued a statement saying that it was currently consideration how to deal with a letter of complaint from the SNP about Google’s tax deal with the UK.

Former Conservative Chancellor Lord Lawson told the Telegraph: “It is profoundly unsatisfactory that corporation tax has to be collected from large multinational corporations by a series of ad hoc compromise deals, as we have once again seen with the Google affair. It is also grossly unfair on smaller businesses, who are unable to shift profits between tax jurisdictions and have to pay the full amount due under UK law.”

Google’s tax agreement came after years of criticism of it and other multinational firms over their secretive tax arrangements in the UK and across Europe.

The recent £130m payment by Google praised by Chancellor George Osborne as a “victory” for the government, covered money calculated as being owed since 2005 and followed a six-year inquiry by HMRC.

Lord Lawson said the arrangement showed corporation tax should be replaced with “a much lesser tax, bolstered by a tax on corporate sales”. He added: “While multinationals can artificially shift profits to whatever tax jurisdictions they choose, sales are where they are, and can’t be shifted. Instead of endless discussion at international conferences of one kind or another, the UK should take the lead in implementing this much-needed reform.”

However John Cullinane, president of the Chartered Institute of Taxation, said: “Frustration at the problems of taxing global businesses should not lead us to abandon corporation tax. There are more workmanlike solutions and in the main corporation tax is still a nice little earner for the Exchequer and the country.”

What is corporation tax?

Limited companies, a foreign company with a UK branch or office, or a club, co-operative or other unincorporated association such as a sports club, must pay corporation tax on profits.

Taxable profits for corporation tax includes the money the company or association makes from doing business, returns on investments and selling assets for more than they cost and is currently levied at a rate of 20%

Companies based in the UK pay corporation tax on all profits from the UK and abroad; but foreign companies that have an office or branch in the UK only pay corporation tax on profits from any of its activities within the UK.

Shadow chancellor John McDonnell has written to Mr Osborne demanding details of the Google settlement, but HMRC have intervened with a senior HMRC official insisting that it was collecting the “full tax due in law”.

Do Google pay any tax elsewhere?

To get some perspective on this, you might not know that Google, which makes most of its UK profits through online advertising, only paid £20m in UK taxes in 2013, whilst during the same period the value of its British sales was £3.8bn. This by my calculation is a paltry 0.6%.

The US Company has its European headquarters in the Irish Republic, which has a lower corporation tax rate than the UK at 12.5%, the lowest in Europe. This is where it pays most of its tax.

However it has now emerged that a significant amount of its European profits have been diverted to Bermuda, where Google has company structures and it will surprise no-one that in Bermuda, the corporation tax rate is zero.

The last time I checked, Bermuda was still a British Overseas Territory, so come on Mr Osborne, isn’t it about time that you closed this offshore financial haven for Google and a number of other foreign corporations?

If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.

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