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Five tips for a better corporate tax system

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19th Jun 2013
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With G8 leaders chewing over aggressive corporate tax avoidance at their Lough Erne summit, the House of Lords economic affairs committee is collecting evidence to shape a new approach to the problem. Nick Huber collects some of the suggestions received so far.

As the tax arrangements of multinationals such as Apple, Google and Amazon continue to dominate the headlines, the The House of Lords economic affairs committee is considering whether a "new approach" is needed for taxing global business.

Corporation tax by numbers

• £28.1bn (Corporation Tax Receipts in 2003-4)

• £46.4bn (2007-8 )

• £42bn (2011-12)

• £32bn - The "tax gap" estimated by HMRC to be the difference between the tax that should be collected and the amount actually collected. Some experts believe the gap is far higher.

• 23% - UK Corporation tax rate

Source: HMRC

Critics accuse the companies of being immoral by using legal loopholes to pay little or no corporation tax. Companies, and some accountants, argue that governments should stop moaning and change tax laws if they feel companies aren't paying their fair share of tax. The arguments are familiar but what are accountants' tips for improving the corporate tax system that was introduced in 1965?

The accountancy profession has made their suggestions to the Lords inquiry, which is due to report by the end of the summer. Here are five suggestions for improving corporate tax rules.The suggestions were given as evidence for the enquiry.

Tax medium-sized businesses as if they were partnerships

Many medium-sized companies would welcome the opportunity to elect to be taxed (on a permanent basis) as if they were partnerships (or a business with a sole proprietor where there is only one shareholder), according to BDO .  "This would procure a single level of taxation of profits – that is, tax transparency – in contrast to the current position for owners of corporate businesses which have corporation tax and income tax liabilities."

Under this rule, companies would still need to prepare a partnership tax return but this would determine a figure for each investor’s share of the underlying taxable profits and gains, which would be included directly within the individual’s self-assessment return.

Consider scrapping Enterprise Investment Schemes

Do the EIS (and related Venture Capital Trust) tax incentives "really work as an incentive to invest or do they simply reward investment that would have happened," the Chartered Institute of Taxation asked the inquiry.

Expand tax breaks for high-risk business investment

The current technical requirements to access venture capital reliefs (such as the Enterprise Investment Scheme and Venture Capital Trusts) for investment in high risk, early stage businesses are too restrictive, the British Venture Capital Association said. It has called for "the extension of the existing venture capital reliefs to all types of businesses, irrespective of their ownership structure."

Hire more HMRC workers and pay them more 

There are about 1,100 staff in the HMRC's "Large Business Service" dealing with the tax affairs of the UK’s largest 770 businesses, which isn't enough, according to The Association of Revenue and Customs (ARC), a trade union that represents senior managers and professionals in public service. Hiring more tax investigators would more than pay for itself, ARC said. "A significant increase in HMRC resources dedicated to the tax affairs of large corporate would generate yield of around 50 times salary costs through tax gap closure and improved voluntary compliance."

Recruiting new staff will be difficult, however, ARC argues, because staff morale at HMRC is so low and tax experts can get much more in the private sector. One answer would be for HMRC to "reduce these pay disparities," ARC says. Failure to improve pay and conditions for HMRC workers "risks a rerun of the damaging loss of resources seen in the 1980s when the Inland Revenue was losing 10% of its trained and experienced senior tax professionals each year.

Make companies reveal how much profit they pay in each country

Companies' tax arrangements should be made clearer by introducing a country-by-country reporting standard, which would require companies to reveal how much pre-tax profit they make. This reporting standard should include tax-haven subsidiaries, which are generally "de-facto excluded from current US and EU reporting standards", according to Action Aid, an international non-governmental organisation.

What do you think of the ideas so far - and what suggestions would you put forward to their Lordships?

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