Company tax – do they pay enough?

 

                 To judge by the row over Barclays corporation tax payments many people in the Uk think British business gets off lightly. They argue that  if only business was stopped from avoiding tax, the deficit could come down with no painful decisions.

                Many have pointed out that Barclay’s low corporation tax charge for 2010 was the simple product of two  tax rules. The first is, companies do not pay UK  corporation tax on foreign profits earned abroad where those profits are taxed by those overseas  jurisdictions. The second is, if a company lost a lot in a prior period it can offset recent profits against those losses. Remember, the taxman does not give tax back when a company moves into loss. Profits  Tax is a  one way bet for the taxman.

                  A recent piece of work from the University of Calgary, reported by the Cato Institute in the USA, brings us up to date with levels of corporate tax. Chen and Mintz, who did the study, asked how much tax does a company have to pay on new investment in each country. It is the best question to ask when trying to decide who is going to attract most new investment and jobs.  The UK (along with the US) does not come out well from this comparison.

Effective tax rate on new investment:

UK 27.9%

Germany 23.8%

Canada 20.5%

Switzerland   17.6%

New Zealand    17.6%

Netherlands  16.8%

Luxembourg  16.8%

China 16.6%

Ireland  10.9%

Singapore 8.5%

Hong Kong 4.0%

                  These figures are worrying. If the UK wishes to keep all  its successful financial and business services industry, it needs to note that the main competitors for this business, Hong Kong, Singapore and Switzerland, all have much lower rates of tax. If it wishes to keep its successful recruitment of Head quarters operations for multinationals, it should worry that the Netherlands is now much more attractive as well as Switzerland and the Asian centres. If it wishes to grow its manufacturing base in accordance with Uk government policy, the fact that Chinese tax rates are so much lower, and even German rates usefully below should also give pause for thought.

                All those badly informed critics of Barclays need to know that no government, Labour or Coalition , is going to try to tax the overseas profits of UK headquartered businesses. That would be double taxation and lead to an exodus of many companies. Nor is any likely government going to disallow the carry forward of losses to offset tax. This is not unacceptable tax avoidance. It is just one of the norms of international tax regimes. We have to live in the world and make our living in it. Other jurisdictions offer these advantages. They add to them lower rates.

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33 Comments

  1. lifelogic
    Posted February 26, 2011 at 8:46 am | Permalink

    Tax is far too high. People should invest where they are welcomed – clearly mot the uk under Cameron.

  2. A.Sedgwick
    Posted February 26, 2011 at 9:05 am | Permalink

    Most of your respondents are in agreement that our tax regime is harmful to business and jobs. In nearly 10 months of this government there is no sign of any appreciation of what is needed just more tinkering and continued bureaucracy.

    Whilst I agree that taxing foreign earnings is a non starter, I do not agree on tax losses. I have heard many times shell companies or businesses on their last legs being bought or offered for sale because of the value of their tax losses. The only beneficiary of such a deal is the buyer. Business is based on cut offs and deals, the tax year should be no different.

    If we had a flat corporation tax of 15% my guess is the removal of tax losses would not be an issue.

  3. alexmews
    Posted February 26, 2011 at 9:23 am | Permalink

    good note. i left canada in the early 1990s as it was then, and had been for many years previous, a comparatvely high tax regime. the UK – as your figures show – is now uncompetitive. if you add in to this personal taxation (i have not read the calgary study) or various forms of tax paid by employers in order to take on staff – i am sure the picture is worse. i would be interested to see how australia fares here – they seem much more interested (by design or by need given they are an unlikely place for a global MNC to set up HQ) to encourage entrepreneurialism. UK seems much more interested in harvesting big companies & PAYE but is now, as your blog points out, squeezing that sector til hte pips sqeak as well.

    the only solution is to cut spending. so get on with it.

    (note the guardian article yesterday arguing that the ‘public sector was the only area in UK still ‘an engine of growth in the UK economy’ so ‘the cuts are goiung to risk the recovery.’ how one taxes onsself to prosperity i do not know. insert Churchill’s quote re: lifitng onesself up in a bucket via the handle here….’

    http://www.guardian.co.uk/politics/2011/feb/25/public-sector-cuts-economy-gdp

  4. Javelin
    Posted February 26, 2011 at 9:50 am | Permalink

    Clearly the tax rate is too high. 20% maximum is reasonable. This tax is based on profit that is borne of risk. It is nothing like an income tax which is a sure thing.

  5. Mark
    Posted February 26, 2011 at 10:31 am | Permalink

    I suspect that many are confused by the Barclays situation and the news also of a rise in CT yield in the January government revenue data. The latter is almost bound to be (more than) accounted for simply by higher North Sea tax revenue as prices rose for oil and gas.

    Banks are now slowly “discovering” that business they wrote and marked in their books as being profitable is turning out not to be profitable after all. Previous years profits that justified a large bonus on a mark-to-market or mark-to-model (fiction) basis, claimed as soon as the multi year facility is signed up with the customer, are now subject to provision for losses. Things might have looked rather different were profit accounted on an accruals basis as it used to be. For now, the cookie jar of loss provisions will tend to extinguish bank profit liable to tax for several years yet.

    Mark-to-market accounting and recognising profit as soon as the deal is done has benefited the banker whose bonus depended on it – but most of all it has benefited the taxman who secures tax on the bonus and tax on the profit long before it has truly been earned and banked. Perhaps in future it should not just be bankers who have deferred bonuses. The taxman is equally guilty of profiting from unearned moneys.

  6. Acorn
    Posted February 26, 2011 at 10:32 am | Permalink

    We did this subject last year JR. http://www.johnredwoodsdiary.com/2010/11/30/some-tax-sense/

    What happened to the 10% corporation tax idea from George O?

    There is the Government Sector; the Corporate Sector and the Household Sector. The corporate sector is ultimately owned by the household sector. This will be by shares; corporate bonds; pension funds and insurance funds. Hence, corporation tax is another tax on households’ income before you even get it; and, pay more tax on it if you are a higher rate taxpayer.

    Reply: Yes, I have written about this before, but the campaign to say all you need to do is to close loopholes is up and running again so we need to consider it.Mr Osborne is planning to cut Corporation Tax to 24% from 28% over this Parliament.

    • Acorn
      Posted February 26, 2011 at 12:08 pm | Permalink

      BTW. According to a bunch of Swiss bankers. In order to return to a Gold Standard, the world reserve currency, the US dollar; would be fully backed at a Gold price of $6,300 per troy ounce. Don’t melt down the wife’s jewelry yet.

  7. Posted February 26, 2011 at 11:36 am | Permalink

    The effective tax rate you are quoting doesn’t include all the other taxes and charges levied on business. By the time you add in all the one off charges from councils and stealth taxes from main government you may just as well write a cheque to HMRC and not bother with all the stress and strain of setting up a business.
    The problem is not how much tax is avoided or evaded- it’s how much the government spend i.e vastly too much. Cut, cut, cut.

  8. Gary
    Posted February 26, 2011 at 12:10 pm | Permalink

    Going after the tax avoiders is like going after cancer with aspirin. The bloated bureaucracy and quango state is the cancer. It needs excising.

  9. Damien
    Posted February 26, 2011 at 12:14 pm | Permalink

    I don’t wish to engage in bank bashing but we need to get real here.

    Banks are not in the same category as any other UK business. Banks are the only business in the UK that are ‘too big to fail’ and so implicitly enjoy the benefits of being underwritten by the british taxpayer. This enables them to borrow at preferential rates as bank bondholders know that they are not risking their capital unlike lending to other UK businesses.

    Secondly it is a canard of the banks to suggest that lower taxes will tempt them to move to Hong Kong, Singapore and Switzerland. This is because those countries would never accept the risk of ‘to big to fail’ banks on the same terms as mentioned above.(error re a named bank deleted-ed)

    The british coffers have been emptied because we have created a moral hazard that by banks taking ever bigger risks they can reap the bonuses ever in the certainty that when they go wrong they can offset this against their taxes and in any event are too big to fail.

    We have seen what has happened to Iceland when countries underwrite their banks. My question is what happens if oil goes to $220 a barrel and we have a double dip recession? Will the taxpayer be able to afford another bailout?.

  10. oldtimer
    Posted February 26, 2011 at 12:16 pm | Permalink

    It is clear that corporate tax rates are to high and are a disincentive to anyone to invest here. Yesterday I read that Mulberry was deterred from building a new factory in the UK because of the impact of rising National Insurance costs, another negative consideration for businesses. There are third and fourth negative considerations too. These are the 50% top rate of income tax and the relatively high rate of UK inflation compared with other countries which makes earning a return on investment that much more dificult.

    It is a matter of relatively simple arithmetic and calculations of net present values to work out that the UK must be low on the list of priorities for new investment for any international business. The even bigger worry for the Chancellor is the prospect of yet more net migration of businesses and wealth creators out of the UK. His forthcoming budget provides him with an opportunity to make the UK a more attractive destination for new business and investment. The question is: does he, and the PM, have the necessary political will and ability to make the changes that are needed?

  11. Posted February 26, 2011 at 12:21 pm | Permalink

    Those who complain about Barclays not paying enough tax simply don’t want to understand the situation and belong to the “Don’t confuse me with facts, I’ve made up my mind” group of politicians and media “experts”.
    It seems quite reasonable to me that a company should pay its taxes in the country where it makes its profits – if they all just paid the tax in their country of ownership, there are a large number of major foreign owned companies (such as the car industry) who would pay nothing here. Or do these people want them to pay tax in both, because if so no company would want to operate in more than one country and all our cars would be imported.
    Unlike industry, for whom the problem of moving plant and machinery makes things more difficult, but not impossible, moving the HQ of a business in a service industry is somewhat easier – I’m sure Ireland would welcome a bank like Barclays if they wanted to move their HQ to Dublin, and probably give them a grant to assist the process.
    Which is why I’ve given up watching news programmes on the BBC, far to many so-called “experts” talking out the backs of their heads (to use a phrase which is acceptable in polite society!)

  12. david appleby
    Posted February 26, 2011 at 2:08 pm | Permalink

    Business taxes were designed for a prior age, and need to be reformed. The effect of corporation tax is perverse, particularly affecting smaller buinesses. It is extremely hard to borrow money from the banks, and if you can, it comes at a high cost, with strings attached. Many SMEs therefore attempt to build reserves to fund future investment and growth.

    The first problem is that the profits required to do this are subject to corporation tax, at the same rate as profits that are distributed as dividends. Other European countries recognise the difference and tax retained earnings at a lower rate. The UK should do so as well. The ability to retain up to £100k per year free of tax would make a huge difference to my company’s ability to manage future cashflow and grow.

    The second problem is that interest earned on reserves is taxed (with no allowance for previous years’ losses), even if it is earning well below the rate of inflation. However, interest paid on debt is tax deductable. This provides a huge incentive for debt funding, which has led in recent years to major business failures, and a significant fall in corporation tax receipts. I propose that we should move to a tax-neutral treatment of interest received and paid.

    • JimF
      Posted February 26, 2011 at 8:58 pm | Permalink

      Yes correct and to add:

      For many SME s funding is by way of one or a few shareholders; they do not have the luxury of a quoted Company’s shareholder base, meaning the choice when investing is between shareholders re-investing dividends on which income tax has already been paid by them, investing retained profits or borrowing from rather unreliable banks at unreliable rates.
      Most entrepreneurs don’t want their business to be led by the nose by a big Company banker, so will opt for one of the first two. Paying 28% on the Company’s income before re-investing it with no personal use (or even higher % on marginal higher rate CT as we have) before investing isn’t a great incentive.

  13. Katie
    Posted February 26, 2011 at 2:45 pm | Permalink

    I’m an open-minded socialist (you might wonder why I’m on here, but I do like to the other argument). Basically I can see your argument re taxes in an international Market. But cutting government spending? So, no precious and internationally well regarded NHS? No free education to the age of 18? No respect and dignified caringof the elderly, disadvantaged? No giving of opportunity to people with talent and potential who weren’t born with a silver spoon? No support for artistic and cultural endeavour? This is what makes us Great Britain. And some taxation to pay for all this seems fair to me and should be shared by corporations, businesses and individuals alike.

    Reply: Yes, of course we all want some good quality services – we are arguing about how much they cost to deliver, and about the less desirable ways of spending public money.

    • Posted February 26, 2011 at 11:50 pm | Permalink

      “internationally well regarded NHS”
      This may have been true once, but it certainly isn’t now.
      My daughter was taken ill during pregnancy in Sardinia, admitted to hospital, and she got far better treatment than she had previously received here. Most telling was the comment by a senior doctor, who was suggesting that she should stay there for another couple of weeks rather than returning home, “I really think that you should stay, I know how bad the maternity services are in England”. The nurse/radiologist who gave her a daily ultrasound scan, and had been trained on the equipment here, had similar views.
      This wasn’t private treatment, it was provided under the EU reciprocal arrangements. Seems that there is at least one state hospital in Italy which knows it is better than the NHS.

      • Katie
        Posted February 27, 2011 at 8:28 am | Permalink

        Well that may be the case but I’ve had 2 babies on the NHS and both times they were exemplary. I was also fortunate to have the services of Surestart with No. 1 and I cannot praise that scheme highly enough. The fact it’s being scrapped by the backdoor is outrageous.

    • alan jutson
      Posted February 27, 2011 at 9:23 am | Permalink

      Katie

      Yes we all want the kind of services that you mention, but at a sensible cost.

      At the moment we have poor value services, and poor quality services for which we all pay dearly.

      Care with dignity for the elderly, not in my mothers case (age 90) until she went into a private nursing home. Spent months in a NHS Hospital after having a series of strokes which left her with paralysis, vision, and swallowing problems. She only seemed to get fed properly when I visited her, with food often being left at the end of the bed (as was the case with many other patients) and collected uneaten after an hour with a comment, “are we off our food today then”

      Education has gone backwards for many in the last few decades, as many Schools are failing in the basics. How do I know.

      Have you ever interviewed applicants for jobs ?
      I have.
      Many cannot even read properly, add up, or even string a few words together in any meaningful way.

      Like English Pensioners experience.

      My Son in laws father taken ill during a trip to Austria, admitted to hospital immediately within 5 mins of appearing at reception having given them an outline of his situation, we had taken him there at Holiday reps suggestion, who feared he had had a very minor stroke (he was first aid trained)
      The Hospital undertook a whole series of tests over 5 days, all of which proved inconclusive, but gave him a full print out of all of the tests undertaken, complete with the results, so he could give them to his doctor when he returned to the UK.

      Hospital apologised to him for keeping him in so long, and finding nothing toward. Contrast this experience with my pregnant daughter who having had waters break and arriving at hospital was sent home, saying your not ready yet come back tomorrow.

      Or an even worse case with a friend of ours, with a pregnant daughter worried about not feeling any movement with her baby (baby was due within days) went to the hospital to be told “no we cannot hear any heartbeat”, then got sent home, and told to report back the next day, so that the dead baby could be delivered. She was eventually re-admitted the same day but only after her Fathers intervention.

      Note to Moderater.
      I have not named the hospitals concerned, but all of the above experiences can be verified fully, should you wish.

  14. BobE
    Posted February 26, 2011 at 3:01 pm | Permalink

    Do you notice that whatever we say is ignored. There is an agenda which is being followed regardless of any other opinions. I wonder who has set this up? Nothing we say here will be used by those that run the real show. Even our John is a mere bystander in all of this. The Lib Dems know that they will be destroyed at the next election, so are they trying to do something in this, there one and only parlament.
    Assuming the ex LibDems will go labour then there is only four years until another Labour government. They must realise this. Is it a feather your nest time before the inevitable rejection. Will George find himself a nice role in an investment house after this is over?
    BobE,
    Region 6,
    EUSSR.

  15. Doppelganger
    Posted February 26, 2011 at 3:02 pm | Permalink

    I see no inconsistency in supporting lower rates of tax generally whilst at the same time being concerned in general about banks in general and all they entail (which has rightfully been discussed endlessly here).

  16. Geoff not Hoon
    Posted February 26, 2011 at 3:16 pm | Permalink

    Mr. Redwood, Excuse my ignorance but what is meant by ” how much tax does a company have to pay on new investment”. Does the point relate to VAT on capital equipment, investment in perhaps a new subsidiary, some other heading ?

  17. Mike Stallard
    Posted February 26, 2011 at 5:45 pm | Permalink

    This government seems to me to be Socialist. High Tax, High “spend”. Loads of bureaucracy and the idea that the State should control and run everything.

    I want a lot less tax and a lot more freedom for the rich. They have a patrician duty to make jobs for people and increase our prosperity to pay for “the vulnerable”. (This does not, of course, include the very fat cats in the European, National and Local governments who are takers not givers.)

    Meanwhile the “vulnerable” have a duty to stop being seriously jealous and mean about the rich men and women’s salaries: without them there will be no recovery.

    The answer to all these young men sloshing about at the bottom of the ladder, illiterate, untrained, hopeless, is to provide jobs for them to do with pay and a chance of promotion. This opportunity exists in the Far East, even in the Middle East. Why not here too?

  18. John McEvoy
    Posted February 26, 2011 at 5:55 pm | Permalink

    I am increasingly sick of trying to make a reasonable living in this Tax Republic. I may well sack the 5 people I employ, jack it all in and go somewhere warm and sunny and do SFA. The civil servants and public employees I support can take a running jump.

  19. sjb
    Posted February 26, 2011 at 5:57 pm | Permalink

    Two countries have negative rates: Serbia, –5.1%; and Belgium, -1.7%. But are Barclays et al about to move to Brussels?

    Brazil, France, India, and Korea (presumably just the South) all have rates higher than the UK: 35.1, 34.0, 33.6, 29.5 respectively.
    http://www.cato.org/pubs/tbb/tbb_64.pdf

  20. Posted February 26, 2011 at 8:16 pm | Permalink

    The main point being neglected here is the iniquitous use of droves of tax accountants in order to exploit every Revenue loophole and avoid every penny of tax which they are morally obliged to pay.
    Such luxuries of professional advice are not available to the rest of us. What you have not done is compare the mega-corporate tax burden to that of small business and private employees. Looked at in that light, what multinationals and banks pay in tax is a genuine social evil. I say this not as a person if the Left, but as a believer in mutual community responsibility as one of the building blocks of civilisation.

    • Katie
      Posted February 27, 2011 at 8:36 am | Permalink

      The most sensible and considered comment here. The accountants should be indeed be taken to task. I have a friend who has risen to the rank of partner in a big international accountancy firm as a tax specialist. He takes home over £500 K pa plus many other perks. Outrageous and as bad as the banker bonuses. I have said this to his face by the way!

  21. Posted February 26, 2011 at 9:31 pm | Permalink

    it seems that we have created an insatiable appetite for spending and can only satisfy that by high taxation.
    also high taxation pleases the mob who bay for the so called rich to be punished.
    much goes on unemployment.
    i stay in an hotel in london from time to time and the vast majority of the excellant staff are polish,german,american,or from anywhere but the UK.
    many come from poor counties and are bettering their way of life.
    many are not however and are simply using their acquired skills in preference to british workers.
    the work does not always require a high level of skill but the staff perform their tasks to a high standard.
    the question i ask is why there are no staff from those poorer areas of our country where unemployment is high and vast sums are spent on the social needs of people who have and may never worked.
    is it because first they are well paid not to work,second because their education is so poor they are incapable of being trained to serve drinks,third because it is beneath them to be in the service industry, fourth because they can produce children till the cows come home and will be looked after from the cradle to the pub and betting office and then to the grave and last because many are trouble makers whom no one really wants to employ.
    if we resolved this problem, removed those immigrants who do not subscribe to our way of life or actively endangered it ,left the EU, stopped sending aid to boom countries like china and india and got rid of pathetic non jobs in the public sector maybe we could then lower not just the corporation tax rates but also direct income tax to a flat rate across the board and attract inward investment. it would also help stop outward emmigration of skilled workers many of whom search for a more tax friendly country to live and work in after we have spent a small fortune on training them.
    however so long as the voters,of whom a large number are uneducated layabouts thriving on benefit are conned by the arguments of a bunch of soft polititions seeking a halfway house society between the capitalist USA and the old communist block we are going to decline.was it not margaret thatcher who was horrified when she came to power to hear that there was an acceptance amongst many in positions of influence that we needed to decline gracefully.
    i am sorry john redwood but i suspect you are surrounded by many such.

  22. David John Wilson
    Posted February 26, 2011 at 11:56 pm | Permalink

    While there are clear arguments for reducing corporation tax to levels comparable with other countries in the current financial crisis situation there are other priorities. It would make much more sense at this time to reduce employers’ national insurance contributions. This should initially be concentrated in three areas: Firstly the under twenty fives should if possible be removed from the tax. Secondly the level of earnings on which it is paid should be raised. Thirdly companies in areas of high unemployment should have the rate reduced for staff employed in those areas.

    There a a number of economic reasons for these choices which include the obvious potential improvement in unemployment rates and the reduction in the costs of our exports.

  23. Alte Fritz
    Posted February 27, 2011 at 9:37 am | Permalink

    Having read Sunday’s post before this, I recall the BBC announcing the Barclays profits story with barely a mention of overseas earnings and loss relief. How on earth can there be significant lobbying for a harsher tax regime in the face of the Cato figures?

  24. GaryB
    Posted February 27, 2011 at 11:45 am | Permalink

    I remember reading a few years ago (pre crash) that a third of the 700 biggest companies in the UK paid no corporation tax and a third paid less than £10 million. Also half of all CT is paid by small businesses.

    MNCs have much more opportunity to transfer profits to the lowest tax region.

  25. Andrew Gately
    Posted February 27, 2011 at 2:17 pm | Permalink

    Good answer to a very strange news article.

    Why did they distort the truth to try and make out that Barclays are not paying their fair share of tax and that if they did then there would no need to reduce the amount the public sector is spending.

    I think some people are just not right in the head.

  26. Lindsay McDougall
    Posted February 27, 2011 at 6:45 pm | Permalink

    Step one. Reduce our company tax rate below that of Germany.
    Step two. Reduce our fuel taxes to the level prevailing in Europe.
    Step three. Cut public expenditure even harder. The government cannot explain why expenditure on the EU and on foreign aid should rise, because it shouldn’t.
    Step four. Set the rotweilers onto shroud waving local authorities. Central office should, for example, give a detailed account of how the City of Manchester is cutting expenditure, and how they ought to be cutting it.

    Public sector remuneration is still 7.5% greater than that of the private sector and they still get better pensions.

    And we still haven’t seen a government endorsed plan for the taxpayer to get back all the money loaned to the banks, plus interest.

  27. Elliot
    Posted March 1, 2011 at 12:27 pm | Permalink

    As an inhabitant of the “real economy”, it’s a moral outrage that loss-making enterprises can receive such massive state support. The beneficiaries of such state-aid are, in my opinion, morally obliged to pay *more* tax. If they want to go, let them go, but reclaim *our money* first.

    The whole relationship between the banking industry and politicians stinks in my opinion.

    One more thing: the banks do NOT generate wealth – they extract it from other parts of the economy. While they pass it on to others, e.g. pensioners, they keep too much for themselves.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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