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Corporate Tax

11 October 2015 |

What is the issue?

Corporation tax and tax avoidance is an important and controversial contemporary issue, one which is often debated in a variety of forums. The most high-profile cases include successful companies such as Starbucks, Amazon and Google who effectively paid no corporation tax at all. Many argue that a solution to ensure corporations do not avoid tax is to simply lower the corporate tax rate, although some state that such a solution would be unfair. This article provides an overview of the debate whether lowering the corporate tax rate in the UK would be beneficial, from a variety of perspectives.

Ireland is a good example of a country that decided to drastically lower their corporation tax (it is currently 12.5%), whereas the United States is an example of a country with a high corporate tax rate (35%). The United Kingdom corporation tax is 20%.

Why is it important to understand?

Tax affects all companies operating in the City and will form a key consideration for virtually all transactions. Tax also has a political element, being one of the mechanism by which the government can impact the economy. It is therefore crucial for candidates seeking to enhance their commercial awareness to develop an understanding of the role of tax in society and economics.

Arguments against lowering the corporation tax rate

  • A high tax burden could enable a reduction in private taxes and greater investment into public service. Taxes fund hospitals, road works, schools, etc. and a higher tax revenue for the government means higher quality of the services the government provides.
  • A low corporate tax rate would force the government to increase income or consumption taxes, which could impose an overly onerous financial burden upon individuals and thus reduce consumer spending.
  • Corporations benefit from tax-financed public resources such as educate workers (as a result of the government paying for schools) and infrastructure (as a result of the government spending money on for instance road maintenance). They should thus be obliged to pay back to society.
  • Generous capital allowance regimes ensure that corporations' ability to maximise their profits is already sufficiently accommodated by government policy-making.
  • In pursuit of equity corporation should not be exempt from paying tax in a society where individuals must pay a variety of taxes such as income, capital gains and value added tax.

Arguments in favour of lowering the corporation tax rates

  • High corporate tax rates encourage extensive tax planning, evasion and avoidance. Corporations will feel that spending money on legal and financial advice to structure their business in order to avoid as much tax as possible is justified in light of the hefty tax bill they may otherwise face. Tax planning, evasion and avoidance means less money will be made by the government.
  • Corporations employ collectively a huge number of people, who in turn contribute to government revenue by paying income tax and national insurance contributions from their salaries. A high corporate tax rate may deter companies from setting up in the UK and thus the government will lose out on both the potential taxes from individuals the corporation could employ and the corporate tax the company would pay themselves.
  • Many economists argue that corporate tax is the most harmful tax to economic growth. Economic growth is stalled when people don't spend money and when corporations have low production rates. Just as you as an individual would be less likely to work more if you were to receive less money in return, a company is less likely to produce more goods and be incentivised to sell more if a large chunk of the profit will be taken away from them.

Defined Terms

Capital allowance regimes

A capital allowance is the sum of money a business in the UK can deduct from its profits why they purchase certain types of assets. The more expenses a company has, the less corporation tax it will pay. This is because the tax is calculated as a percentage of the profit, i.e. after expenses have been deducted.

Capital gains tax

A percentage of the profit from the sale of certain types of property or assets is collected by the HMRC. This applies to both private individuals and corporations.

Tax planning, evasion and avoidance

Tax planning refers to the legal activities carried out to avail a company of legitimate tax concessions. Tax evasion refers to illegal activities carried out to avoid tax, which can involve elements of fraud or non-disclosure. Tax avoidance covers the grey area in between and can be described as activities that are in line with the law but not its spirit. This is particularly problematic as exactly where the boundary is between legal tax avoidance and illegal tax avoidance can be difficult to determine.

Value Added Tax

VAT is a percentage paid in tax by the end-consumer on goods and services.