It's time to kill off corporation tax for good

Britain's competitors soon will

February 04, 2016
The Googolplex building in Mountain View, California. Google is one company that has come under fire recently for its tax avoidance.
The Googolplex building in Mountain View, California. Google is one company that has come under fire recently for its tax avoidance.
Read more: No, Google shouldn't pay more tax 

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A good test when it comes to taxes is "if it didn’t exist, would we introduce it?" Plenty of revenue raisers pass the test. For corporation tax, however, the answer is an emphatic "no." As a national tax levied on the domestic profits of global companies, it is a long time since corporation tax has been an effective way to fill public coffers.

Taxes should be simple to understand, straightforward to collect, and non-negotiable. On all three counts, corporation tax falls down. Consider the way that Google and other multinationals are currently negotiating with European governments. Or look at the ridiculous episode in 2013, when Starbucks offered up £20 million in voluntary corporation tax. Everybody in the country would surely agree that taxes should be binary in nature: Google and Starbucks either owed that money or they did not. Backroom deals and the perception that the taxation of multinationals is pretty much random, understandably leave a sour taste in the mouth.

Even without the latest round of outrage, there is more than enough justification to consign corporation tax to the dustbin. The arguments companies use to defend such tax arrangements are not without reason. It is tricky to pin down exactly where "profit" is created, and thus, where tax is due. The cup of coffee or online advert may be sold in central London, but marketing, research and development, retail, sales, distribution and manufacturing teams strewn across the world may all have a hand in it.

This is without even mentioning the various reliefs and exemptions from corporation tax that some companies receive, or indeed the cyclical nature of corporate profits, which means that companies that pay the tax one year may be under no obligation to do so the next.

Peculiarly, this debate comes as the importance of corporation tax as a money-spinner is on the wane. In 2006, companies coughed up £48 billion—9.7 per cent of all money raised by central government. Last year, this had slipped to £45 billion, just 7.1% of the total take.

This means the government has some room for manoeuvre. While the alternatives to corporation tax are far from perfect, that is no reason to accept our lot. The Google row has shown that we are in desperate need of a radical shake-up. So what are the options for a replacement?

A turnover or sales tax is perhaps the most straightforward. It would create a much more organic link between a company’s market share and their tax contribution and address the anger directed at companies raking in billions in sales but paying little corporation tax. It also scores favourably on the guiding principles of what a tax should be—simple to understand, easy to collect, and impossible to aggressively avoid.

It is simple because the idea of a turnover tax can be summed up comprehensively in a few words: a tax on the total value of goods or services sold in a single country. It is easy to assess since every company will know their annual sales, and straightforward to administer as it could be linked to existing VAT systems. At a modest rate of somewhere between 0.1 and one per cent, it would be low enough to discourage firms from setting up complex avoidance schemes, and, even if they wished to, near-impossible to get away with.

There are, of course, some snags. In theory, corporation tax works because it targets only profits. For businesses with wafer-thin margins a sales tax could be a hefty and unaffordable burden. There is also the potential for the tax to compound along lengthy supply chains—hiking the cost to the final consumer. Assuming it would apply to companies of all sizes, a turnover tax might also require simplifying rules on capital gains and dividends to stop swathes of employees setting themselves up as a business to cut their tax bill artificially.

These kinks, however, are far easier to smooth than those created by a cumbersome corporation tax. In fact, the opportunity to prune layers of the UK’s archaic tax code is reason enough to consider moving from a tax on profits to one linked to revenues.

Nevertheless, a better route would be to replace corporation tax with a smorgasbord of small money-makers, rather than a new megatax. This would also dampen the potentially disruptive effects of abolition on individual firms. For this reason, money-raisers like higher but more targeted employers’ national insurance contributions and a better-designed business rates system should also be part of the mix. Combined smartly with a modest sales levy, these taxes would better capture a firm’s domestic presence in terms of sales, value-added and physical footprint.

“Do not fear death,” Bertolt Brecht warned, “so much as an inadequate life.” No statement could better apply to corporation tax. Bumbling from avoidance scandals to "sweetheart deals," all the while raising the ire of politicians and companies, corporation tax’s main achievement is to create a nice line of business for advisers and lawyers. Its demise is all but inevitable—it is in everybody’s interest that Britain kills it off first, before one of our competitors does.