Towards a fairer model for the corporate tax system
The UK’s system of business taxation is not fit for purpose. A modern system of corporation tax should seek to encourage investment and employment, whilst ensuring businesses are paying their fair share for the public services and infrastructure they use. Tax avoidance should be discouraged. Tax reliefs should only be granted when there is a very strong economic argument for doing so.
Our current system fails to achieve these aims. Over the last decade the principal rate of corporation tax has been drastically cut, from 30% to just 19% - with a further cut to 17% planned. The UK now has the lowest rate of corporation tax in the G7, and one of the lowest in the developed world. The tax system has also become very complicated in recent years due to the introduction of new reliefs such as the Patent box, which reduce revenues and make it easier to avoid tax.
At the same time businesses have seen an increase in employers’ national insurance contributions. Together these changes have shifted the burden of taxation from companies which are highly profitable but don’t employ many workers to those which employ more people but are not highly profitable. At the same time corporate tax avoidance has become a major public issue. While most businesses pay their taxes in full, a few multinational corporations have been able to pay little or no corporation tax by shifting their profits to low-tax jurisdictions. Among the most vociferous critics of such tax avoidance are domestic businesses which are unable to engage in such practices and who must effectively make up for the lost revenues by paying higher taxes themselves.
Contrary to recent claims from the Chancellor that corporation tax cuts have increased revenues, a new report from the IPPR finds that the 11 per cent cut in corporation tax has reduced revenues from 3.5% of GDP in 2006 to just 2.6% of GDP today. Tax avoidance is also costing the UK economy more than ever – with estimates of the corporate tax gap ranging from £3 to £12 billion per year.
In response, the IPPR report recommends a fundamental shift in the balance of business taxation. The report proposes an increase in the rate of corporation tax from 19 to 24%, in order to fund a reduction in employers’ National Insurance contributions by 2% from 13.8 to 11.8%. This would have the effect of benefiting high-employment businesses – allowing for an increase in wages – while placing a higher burden on profitable companies which can afford to pay. It would also ensure that the burden of taxation fell more fairly on shareholders rather than employees.
The report also proposes a radical new approach to curbing multinational tax avoidance. An ‘alternative minimum corporation tax’ would link the amount of tax a company paid to its economic activity in the UK. This would prevent companies like Apple and Starbucks from shifting their profits to low-tax jurisdictions in order to avoid corporation tax. The tax would be levied on a company’s turnover (sales) in the UK, and would be triggered when a company reported very low profits for five successive years.
The IPPR report also argues for the removal of reliefs and allowances that have little economic impact, but which cost the Exchequer significant amounts of money in lost revenues and administrative costs. The Patent Box, for example, almost certainly does little to increase innovation but costs almost £650 million per year. At the same time, the UK should take seriously its obligations to its international partners by introducing publicly available country-by-country reporting, and clamping down on the aggressive tax practices of its network of secrecy jurisdictions.
Together, these measures would improve the UK’s system of corporation tax, raise revenues, and make the system fairer for businesses and taxpayers.