Saturday, June 01, 2013

Tax avoidance

Still popping up in the news are the tales of the big UK companies who barely pay any of the 20% corporation tax on their profits; nothing new their. What did catch my eye were those trying to justify it.

The first excuse seems to be - They're not doing anything illegal. In other words it's up to the government to alter their rules to stop them at which point this happens.

Excuse Two is that the company has an obligation to maximise its return for its investors. This happily ignores the minor fact that without the government in place enforcing laws and providing infrastructure there would be no company. One could argue that a company has an obligation to ensure the smooth running of the government that supports it.

Excuse Three is that the money is still going somewhere and it's better off in the hands of people rather than the government. Which could be considered true if you accept the 'people' end up being mostly those outside of your country.

But how does corporation tax work? Well imagine if it applied at an individual level (and thanks to creative accounting it can). A person receives a full paycheck with no tax say £250 for a week's work. They then spend some of that on food, energy etc. At the end of the week they end up with £50 left. Said person then pays £10 in corporation tax (I'm ignoring VAT etc here for the moment). Unlike for an individual tax is on profit and not on income. How to reduce profit, without actually reducing the money made? Well the big companies seem to be using two main avenues:

1. The "Ain't my money Gov'" method or the S.A.R.L. dodge.

When is a UK company not a UK company? When all the money goes through a low-tax country. Keeping things simple - a company registers in both the UK and a tax-low country normally as a S.A.R.L. Any money that appears to be going to the UK company in fact goes to the SARL. But wait; if the UK company gets no money how can it employ people etc.? Easy! The SARL pays the UK company a handling fee; they act as the SARL's agents in the UK and the fee happens to be dead-on as to the companies running costs therefore no UK profit.

2.The trademark/products dodge.

This one is easier to set up than the previous version, but acts in a similar way. In this instance the SARL company owes the rights to use the company name or the products needed. The UK company has to pay a fee to use the name or a fee to obtain the products and oh look it covers the UK profit.

The method used depends on the company; if you have to take cash directly from people in the UK (a coffee shop for instance)  use the trademark dodge; do everything over the internet (like an online book store) and you SARL it.

So how can this money be stopped from being sent overseas? It may seem obvious to just tax companies on income as we already do for individuals; but recall that in the SARL dodge the UK company's only income is the running cost amount. The company hands over, say, £1m to cover the running costs, but £200k needs to go off in tax. They need to hand over £1.25m to pay tax of £250k to leave the amount they needed in the first place. Cue howls that this is squeezing companies; that prices will go up as profit margins would have to be at least 20% to cover the tax; which in turn would lead to a greater amount of VAT on applicable goods etc.

Can tax be raised on just the profit part of income? Potentially yes; in practice no. Businesses would be required to keep the exact profit margins for every single item; and alter it during sales etc. as well as keeping track of every single item of every single type sold and have it presentable to HMRC for checking.

Is it possible to tax money that leaves the country? Any money heading out of the country to a company gets taxed? This presents the exact the same problem as the income tax method as well as problems with other countries (tax money coming into my country and I'll tax money coming into yours)

An obvious solution does seem to present itself - if companies are doing this to get a lower tax rate; then perhaps this country should itself have a lower tax rate? Perhaps the UK could become the tax haven that companies set up brass plate offices in? We'd be getting less tax per company; but potentially they'd be more companies. This approach though leads to a race to the bottom until we end up with no company tax at all.

While that may appeal to a certain type it means that the entire infrastructure of the country becomes dependent on the taxes raised on individuals; who will then very quickly incorporate themselves and invoice their companies direct from Joe Bloggs Ltd and then as sole director take a dividend of all the profits.

So no solutions? Perhaps one. If we discover a company that isn't paying its full share (not 'fair' share) of tax stop using them. As soon as tax avoidance becomes unprofitable they'll stop doing it.


The satisfied Customer said...

All we need to do is publish their names regularly so that people know which ones to boycott.