There's a lot about tax on the news and in the press lately; and a lot of what is being said and written about is ill-informed or plain wrong. This is a state of affairs that is fuelled partly by the fact that the UK tax code is too voluminous, too complicated and, very often, illogical when viewed as a whole.
Recent news items on Starbucks, Amazon and Google have whipped-up a semi-hysteria about large, multi-national companies and the size (or lack of size) of their UK tax bills.
Then we have the stories of UK residents using esoteric tax-planning schemes, which usually involve some element of "offshore" i.e. non-UK operations.
Finally, but less sensationalised, the press often carries reports maligning the UK taxpayers who choose to run their business (and sometimes their employments) via a limited company, rather than directly, in their own name. There can be many reasons for so-doing but tax mitigation is a significant, and often sole, factor in the decision.
Broadly, the tax benefits from routing income via a UK limited company arise from the ability to:
- Defer tax by accumulating income in the company, with the taxpayer (shareholder/director) only paying tax on income withdrawn; in the form of salary, dividends or benefits in kind, and
- Avoid national insurance payable on salary by withdrawing income in the form of dividends instead.
Now, I want to be clear before I go on that I am strongly against a tax regime which leads to those with the deepest pockets and cleverest accountants being able to avoid taxes that Parliament clearly intended they should bear. However, I am also on the side of Lord Clyde on this, who basically said that nobody has a duty moral or otherwise to pay more tax than they legally have to - and that it's the Government's job to make tax laws work as they intended them to.
So, against this backdrop I am pondering a big question: could we abolish corporation tax in the UK?
I am thinking that tax should logically be levied on people not corporations.
Since corporations are ultimately owned by real individuals, and any profits a company makes eventually find their way into the pockets of people one way or another (as dividends, salary, benefits in kind or capital gains on liquidation or sale), why should the company pay tax too?
A company is an artificial construct for tax purposes, given the status of being a separate legal entity to its shareholders. But companies only exist because people create them, for a purpose defined by those people. They are run by people and it is real people who take the benefits of profits made, either on an ongoing basis (dividends and salary, subject to income tax) or in the form of capital growth (distributions on liquidation or the proceeds of sale, subject to capital gains or inheritance tax).
Yes, there are distortions caused by the different types of UK taxes having a bewildering array of specific exemptions, reliefs and rates of tax but, broadly speaking, we already have everything in place to ensure that, over the life of a company, all profits and gains made will be taxed on the individuals receiving them. Other simplifications and changes would be needed in other parts of the tax statutes, taking a more holistic approach than has ever been done to date, but could we simply abolish corporation tax and make a huge dent in the UK tax code?
I have had notable contributions to this idea on Twitter from the likes of @jwgn, @TruenFairview and @Gareth_Hughes1 who point out the potential for exacerbating the problem of tax avoidance by multi-national corporations and wealthy individuals and I accept these arguments. However, these issues already exist and I wonder if abolishing corporation tax now might clear the legislative decks, and some Treasury heads, sufficient for the avoidance and evasion schemes to be better isolated and dealt with?
Since I envisage no corporation tax, multi-national corporations' transfer pricing arrangements would be of no interest or consequence to HMRC. Assuming that foreign companies based here generate VAT, pay employers NI and help reduce the country's benefits costs, I believe that is enough to cover their use of the UK's infrastructure, legal framework and emergency services.