Peers call for corporate tax overhaul

The House of Lords committee on economic affairs says the corporation tax regime is not working and needs major reform.

In a new report the cross-party group of peers has urged HM Treasury to carry out a full review over the next year exploring the scope for radical alternatives to the current system, including calls for more transparency, greater oversight and a review of tax rules.

Despite professional advisers telling the peers that corporation tax in the UK was sound and fair, the peers expressed scepticism about this view.

Lord MacGregor, chairman of the committee, said...

Continued...

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Comments

Peers Call For Corporate Tax Overhall    4 thanks

Wayne Pulman | | Permalink

Interesting isn't it.

A group of hereditory lords and a bunch of political lackies who derived much of their wealth by ancestors fighting wars, inheritance from forefathers who used interesting tax planning arrangements to accumulate their wealth and individuals who "brown nosed" their way up the greasy pole of politics now wish to ban accountants from practicing despite the fact that those accountants have done nothing illegal.

They make Margaret Hodge and her "Stemcor" connections look less hypoctrical by the minute.

When all citizens of the UK pay a flat rate of tax on their earnings and the self same Lords give up their family trusts etc I will start to take notice of what they say.

 

Banning?    4 thanks

Sheepy306 | | Permalink

I don't think banning accountants from Practising is part of the reform suggestions is it?
And no, they haven't done anything illegal, in fact they've done an excellent job of tax mitigation but .........isn't that the whole point, the tax laws need changing in order to ensure multinationals actually pay at least some corp tax.
Will it affect any of my small business clients? Probably not, as they already pay corporation tax fairly.

Banning    4 thanks

Wayne Pulman | | Permalink

"The peers also called for new regulations for tax advisers, with the threat of removing their right to practise".

I think the above is fairly clear.

Let me just clarify one point here, I have no time either for the large multinationals who artificially move profits around to reduce tax or the "Big Four" who make fortunes out of aiding and abbetting them.

I feel that UK based SME's should be allowed to minimise their liabilities - in a way which is legal. In my experience where they do this they simply use the money saved to plough back into their businesses or start new businesses which ultimatley benefits UK.

As I alluded to in my previous comment the main critic of tax arrangments at the moment is Mrs Hodge, whose family company are up to their armpits in the sort of activity she is alluding to. She and her children (with shares in family trusts!) benefit greatly from the very thing she is so vocal about.

I also know very well that Mrs Hodge has "banned" all witnesses appearing in front of the PAC about referring to her tax affairs.

My comment was really about the hypocrisy of those in power who would seek to deny us the opportunity of making a living whilst at the same time enriching themselves through other "morally repugnant" method's.

As a final comment I see that a further 13 politcal lackies and party donor's (legalised corruption) have been "elevated" to the Lords.

 

 

 

Mountains    1 thanks

mikewhit | | Permalink

Some globals do not appear to use their profits for reinvestment - more to build up a cash mountain in some tax haven.

Hence it would be better to find a mechanism to tax funds on their way into the cash mountain.

Old Greying Accountant's picture

Easiest way ...

Old Greying Acc... | | Permalink

... is to tax companies that are part of international groups on a percentage of UK income, not of profit! may be with a scale of rates similar to flat rate VAT before anyone starts about service/manufacturing disparities of GP.

How about a turnover / Amazon tax?    1 thanks

parkam | | Permalink

- i.e. on large internet businesses over £Xm turnover per annum - the tax to be the higher of the Corporation Tax under the existing rules or Y% of turnover . . .

It would surely be fairly simple to implement - subject to the revision of tax treaties with our genuine trading partners and the tearing up of the existing unsuitable treaties with aggressive jurisdictions like Ireland and Luxembourg.

Land Value Taxation

androo235 | | Permalink

Cannot be avoided, personally or when incorporated. Will cut to the heart of many social and economic problems and UK could do it unilaterally (we might have to leave EU to get all the benefits, in particular the possible abolition of VAT, that alone will please some). Oh and positivemoney.org too (not to forget that the system as a whole is built to benefit, well we know who).

I agree with comments so far that the mainstream tax debate is mostly hot air. I am only mildly surprised to learn the allegations surrounding Marge Hodge (in comments above), after all, under the present system you are either a fool or  a knave.

Henry George - Progress and Poverty (still on the money 140 years on). I like Steve Keen's Debunking Economics too.

aren't we missing something?    1 thanks

silverghost | | Permalink

The main point here seems to be that UK-based branches of multinationals are paying relatively little tax, because of payments to branches in other (lower-taxed) companies.

 

So why not invoke Furniss v Dawson, claim that the only purpose of those payments was to avoid tax (unless it can be proved that those payments had some commercial purpose), and disallow the deductions?

 

Multinationals have not suddenly happened, but how many staff have HMRC pensioned off that were well versed in transfer pricing?

Poor, self-serving article    1 thanks

chEEK | | Permalink

Corporation tax rate is "part of a competitive package"... and that's how it must remain, is it? Countries should continue to compete for the 'business' of multi-nationals? What utter nonsense.

Taxation based on the business actually transacted in any given state is clearly the way forward - and it does not require global agreement, despite the author's contrary suggestion (although she doesn't quite say it). For example if the UK enacts law to say that tax must be paid on UK transactions (sales or services provided to UK based entities) then the Cayman Islands don't need to agree, they won't be getting any tax whatever their view may be (unless their people start buying from the companies concerned).

But... according to the article, this is all "... impossible to implement in the short to medium term - and very difficult even in the long term".

What's missing from this statement. of course, is why this would be difficult. As pointed out above, each sovereign state can do this without so much as a by-your-leave from anyone else. If Ms Self sees difficulties then she needs to say what they are.

Accountants must be careful not to adopt a protectionist stance toward their profession at the expense of society as a whole. Creative accounting is in many ways akin to investment banking - unnecessary and in many ways undesirable to society, whereas the core duty of crunching the numbers so that movements of money can be controlled, explained to and planned by clients is the equivalent of retail banking - both necessary and desirable. Not to mention the function of protecting clients from themselves - advising them on the law (and why their latest tax dodge is not a good idea).

It should be pointed out that what may be lost on the 'creative' side will be gained on the other - all this accounting on State-based activity may more than make up for it.

Finally. the HoL suggestion of looking again at debt is also sensible. For a business to claim debt relief in one state while sitting on a pile of cash in another is clearly wrong. And given the ease with which entities that are in fact related can hide their relationship and lend to each other, the scope for abuse is far too great.

The concept of debt relief is intended for investment and growth, not as a pure tax avoidance measure.

Essentially, all professions need to understand their responsibilities to society. When an individual client is paying an individual adviser, it is the duty of the professional to do their best for that client, within the law. But when it comes to input as to what the law should be, the duty of the profession as a whole is to society as a whole, rather than to their client base as a whole.

Otherwise that profession is doomed to become the next group of bankers (what is the collective noun for bankers again?). IMO the HoL proposals are worthy of consideration, they should be given a fair hearing.

Cash mountains and reinvestment

plega | | Permalink

I think this is a naive view of the (sophisticated) tax planning carried out by US firms.  My understanding is that US firms borrow against the cash mountains so that they can make funds available in the US for investment without incurring tax.  So the money is still being used sensibly... just not by Uncle Sam.

Old Greying Accountant's picture

At the end of the day ...    2 thanks

Old Greying Acc... | | Permalink

... these firms will still trade in the UK, despite their squealing , as they need our market. If they are taxed on the sales made here, not the profits, it will not stop them being here.

It migt put prices up, but that will be because UK based firms will then be able to charge a realistic price for their output and still remain competitive.

Failure to address this issue in the near future will lead to the collapse of the UK economy as there will be an increasing state expenditure requirement from a decreasing treasury income.

At that point big business will have destroyed its own market because there will be no one left with any income to buy their wares.

 

Plega - If you're referring to my post

chEEK | | Permalink

Then I think yours is more likely to be the naive view.

I'm not sure why you have the word "borrow" in bold, since that was implicit, but the key point is that if the borrowing is for investment (as in legitimate investment in their own firms) then it would affect pre-tax profits and therefore would not be liable to tax anyway.

The area of concern is where the money is not used for the purposes intended by debt legislation but simply as a tax avoidance measure. Multi-nationals use such methods to keep the money out of the financial period that they are currently reporting, doing things like moving around the world before it becomes liable to tax.

There is nothing 'sophisticated' in this, it's simple enough - and also highly undesirable.

I have to say that I find your post somewhat disingenuous - assuming of course that you were indeed referring to my post.

chEEK and mikewhit

plega | | Permalink

Sorry, I was referring to mikewhit's comment that "Some globals do not appear to use their profits for reinvestment"; I felt that that was probably untrue.

 

I would, however, make a general comment on the other posts that switching to a tax on locus of sales will not go down well when the public see how many large companies are exporting - and avoiding tax by doing so !  The long term solution is lower and simpler taxes and [ducks] fewer accountants.

Old Greying Accountant's picture

There is no real solution ...

Old Greying Acc... | | Permalink

... to get taxes low enough to stop avoidance there would be insufficient treasury income! IMHO.

Interestingly, last nights Top Gear illustrated Plega's latest comment.

I was astounded at the amount of automotive production in this country, the largest part of which serves non UK markets.

I also really like the imaginitevly named NBFL replacement for the Routemaster (for those that missed it, New Bus For London). Designed and built in the UK.

 

The cash mountain must erupt or colapse

RKemsley | | Permalink

From my few dealing with tax affairs, it does seem that it is this word' accountable to society' that we feel should be given merit. A new mindset from currently thinking of me me me, will need to occur if this is what we are seeking. However, I seem to think that this thought pattern is bubbling to the surface because of the lack of cash-flow and the need to collaborate.  We can in fact live on very little - Water we buy but cannot create - Iphones and other essentials are just not that and we will destroy ourselves very successfully if we cannot rise about the value of money and embrace the 'human' race as a whole.  Do we want to change the tax system to be fairer for all or just fair for some of us and the votes towards the 2015 election? I do wonder where people's motives lie. If the tax schemes are valid then carry on. Well done for taking the time and effort to discover the way through - The film 'The Firm' comes to mind and if as an advisor you have got wealthy for your efforts good for you too. If the tax schemes are invalid then the Law needs to invest in bringing these corporates and governments to justice.  Remember, money leads to money so what we really need is people that can make money with a pure heart in government and less of our taxpayers money will get wasted. The only way to make the budget balance is to spend less money and make more money.

itp3asso's picture

oh yes ... mrs hodge .

itp3asso | | Permalink

oh yes ... mrs hodge ... nee oppenheimer.... yes we know her very well.

Simpler/Lower taxes not = lower tax take

chEEK | | Permalink

Old Greying Accountant wrote:

... to get taxes low enough to stop avoidance there would be insufficient treasury income! IMHO.

Well I think both routes work (lower, simpler taxes and legal routes to prevent profit-shifting). And they are not mutually exclusive.

Hong Kong is the shining example of what happens when you radically simplify and reduce taxes. IIRC that was done in the early 20th Century, when the colony was deep in recession and facing collapse. The governor swept away the tax code, bringing in a simple system whereby only the wealthiest paid income tax.

The result was a boom in economic activity and an increase in the overall tax take. The HK economy never looked back - and yet they also have excellent public services (which should be qualified in the context that their expenditure is less than a larger country - they have lower infrastructure costs, they don't need to run certain things like a defence budget and so on).

The UK tax system is self-defeating. Not only in terms of rates and complexity, but even at the level of basic concepts, such as employers NI - a tax on employing workers based in Britain thereby encouraging firms to have their people based/employed in other countries and ship their goods to the UK or even provide their services from elsewhere (IT, call centres etc).

Re-investment

chEEK | | Permalink

plega wrote:

Sorry, I was referring to mikewhit's comment that "Some globals do not appear to use their profits for reinvestment"; I felt that that was probably untrue.

 

I would, however, make a general comment on the other posts that switching to a tax on locus of sales will not go down well when the public see how many large companies are exporting - and avoiding tax by doing so !  The long term solution is lower and simpler taxes and [ducks] fewer accountants.

Thanks for the clarification. However, I tend to agree with mikewhit in that cash mountains arise from profits and their continued existence in itself tells us that they haven't been spent. Therefore there is an amount of money that has not been taxed, has not been paid to shareholders as dividend and has not been used for investment.

There's not necessarily anything wrong in a company holding cash reserves, and they may have used some of their 'mountains' for those purposes, but significant amounts are being held and shareholders should be asking why - and they should be asking why they are not getting their share. Shareholders don't seem to do that very often or very well and when they do they are easily fobbed off so, as a form of corporate governance, responsibility to shareholders doesn't really seem to work very well in practice for society as a whole.

The current system of company ownership and governance was invented centuries ago - it's long past time it was revised for the modern world.

johnjenkins's picture

Does it really matter?

johnjenkins | | Permalink

Cos soon we will not be voting for political parties. Instead we will be voting for the company who decides which people will be in power (albeit in name only). Don't laugh we're not far off that now.

Employers' NI

plega | | Permalink

chEEK wrote:

employers NI - a tax on employing workers based in Britain thereby encouraging firms to have their people based/employed in other countries and ship their goods to the UK or even provide their services from elsewhere (IT, call centres etc).

I can at least agree with you wholeheartedly on this one.  Employers' NI is unjustified and distortionary.  I guess it was brought in after the war to encourage capital formation.  I can see no reason why it remains a good idea.

I was under the impression

joro2801 | | Permalink

I was under the impression that it was a basic principle of taxation that it shouldn't be used to transfer income from one person to another.

The NI benefits like pension and unemployment benefit were paid based on stamps and effectively "earned".

DSS payments were made on a different means tested basis according to the principle that any decent country doesn't allow people to starve.

If we are going to move to a single payment that is means tested and doesn't rely on NI contributions then NIC could be done away with.

But any oncosts are effectively part of the salary budget so e'ers NIC is just a part of salary we have no control over but isn't subject to PAYE - that's how I look at it.

Like non-contributory pension schemes seemed like a good idea to many people but if it had been added to salary and taken from there as an e'ees contribution, final salary would have been higher and so would the pension.

VAT extension - to discourage outflow and encourage inflow

drakeltd | | Permalink

The issue seems to be with money flowing from a higher corporation tax country to a lower corporation tax country. So could a principle be used which encourages companies to decreases this cash flow out of the UK and also increase the cash flow into the UK.

A modification to VAT to create an emphasis of the tax on cash flow out of the UK, implemented by categories with various rates, according to the declared usage eg a high tax rate for money stockpiled in an overseas bank account  and a low (,zero or even negative) tax rate for imported energy.

For cash flow into the UK a refund could be implemented which can be offset against the tax, with the offset either being grouped with equivalent categories  or starting with the lowest tax rate that has been paid within a deemed period and is limited by the overall tax take within the deemed period.

A Categorised offset example would be corporate investment or property purchase money sent overseas offset against the returned dividend or rental income. The categorised rates need not be the same for outflow as inflow.

For example the outflow investment tax rate could be lower than the inflow dividend offset rate, thus encouraging overseas investment, indeed promoting the more successful and/or lucrative investments.

A matched high tax rate v low offset rate example might be a conglomerate which imports a large number of expensive of high emission cars and exports a small numbers of cheap, high carbon cost, plastic garden gnomes.

A matched zero tax rate v high offset rate example might be a company which imports rice and exports whisky and sake.     

Adjusting the categories and rates would provide a means for monitoring and encouraging/discouraging the money flows.

Excessive inflows compared to outflows could be detected and, provided they are proven to be legitimate and respectful, cause further encouragement of these flows.

Excessive outflows compared to inflows may need to be discouraged, unless the economic cycle was clearly understood and seen to be beneficial overall.      

The categories and rates could be different for various geographic zones or carbon unit measures thus encouraging/discouraging short/long distance movement of goods or climate change effects.

By extending the VAT system in this way it encourages cash flow which is beneficial to the the UK economy. Defining the categories and changing the rates enables the effective control.

Corporation Tax, being currently based on a company's profit, discourages companies from making profits, which is counter-intuitive. The UK should be encouraging companies to make profits, especially earned from outside the UK, as long as the profits are used to improve the UK economy and also with a view to improve the world/earth as a whole.

Old Greying Accountant's picture

Eh ...

Old Greying Acc... | | Permalink

chEEK]</p> <p>[quote=plega wrote:

Therefore there is an amount of money that has not been taxed, has not been paid to shareholders as dividend and has not been used for investment.

... isn't that the bit left after tax?

What is needed is incentives to spend it so it can be taxd again and again, and not be sitting in a stagnant back water!

As things stand, John is right - too many vested interests. Although my view is we will end up in a Judge Dread (South Africa!) like situation with a small minority of super rich living in fortresses protected by private armies why the rest scavange a living in the ghettoes!

As for Employers NI, totally agree - for every 7 jobs, one is lost to NI contributions - surely the savings on benefits would out-weigh the loss of NI revenue - but different pots so won't happen - not until someone looks at the big picture - much of which was exacerbated by Gordon Brown's love of micro-management - pity he was crap at it!

"I was under the impression

AndyC555 | | Permalink

"I was under the impression that it was a basic principle of taxation that it shouldn't be used to transfer income from one person to another." Joro2801

 

Not sure if that was written ironically?  It has in fact been a basic principle of UK taxation for decades that income IS transferred from one person to another, from those with more money to those with less.  The entire benefits & tax credits system is set up to do exactly that.  Whether that's a good thing or not, goes too far or doesn't go far enough is another argument but it can't be denied that it is happening.