The rate of corporation tax is once again playing a key role in the UK political debate. The Conservatives have recently announced they would postpone a reduction in the tax rate from 19% to 17% while Labour plans to raise the UK corporation tax rate to 26%. Some Conservatives have argued that lowering the rate generates more income, while Labour wants voters to believe that big corporations are not paying their fair share of tax.
Both parties make the mistake of assuming that the rate is all important but, in truth, the effectiveness of the corporate tax regime is as much about yield, ie actual tax receipts, and the wider impact the corporation tax regime has on the UK economy.
The big picture is that corporation tax currently accounts for 9% of total tax receipts collected by HMRC, a small but not insignificant amount. In 2018/19 corporation tax receipts were £55.1bn out of a total of £627.9bn with income tax and NIC accounting for more than 50% of the total.
Drilling down into the figures to discern what they can tell us about the importance of the rate of corporation tax, statistics show that corporation tax liabilities and receipts have risen every year since 2012/13. This was against a backdrop of the corporation tax rate being reduced from 24% in 2012 to 19% currently. In percentage terms corporation tax receipts have increased by approximately 33% since 2012/13 (total receipts then were £41.3bn according to HMRC), at the same time the corporation tax rate has been reduced by 5%.
In addition, despite relatively little economic growth since the EU referendum in June 2016, corporation tax receipts have continued to rise during the period since then (total receipts were £44.4bn in 2015/16). It is also the largest companies that pay a large and increasing amount of corporation tax. In 2017/18, roughly 4,400 companies (less than 0.3%) had liabilities over £1m. These companies contributed over 50% of total corporation tax liabilities at £31bn.
So the corporation tax yield is increasing, despite a lower rate of corporation tax and the largest, typically multinational, companies are paying more. This may seem counter-intuitive but it is the current situation. What is the explanation?
The UK’s low corporation tax rate compared to other major economies is part of the reason but other favourable measures, such as our country’s dividend and share sale exemptions, are also important factors. Tax incentives for investments in intellectual property, favourable reliefs for capital expenditure and no withholding tax on dividends to shareholders make the UK one of the most competitive fiscal environments in the world from a corporate taxation perspective. This helps to encourage UK businesses to remain in the country and overseas business to locate operations in the UK, leading to investment in infrastructure, intellectual property development and people.
In this way the UK corporate tax regime has a much bigger impact on the UK economy in overall terms than simply the tax revenue it generates.
Despite the low rate and numerous incentives, corporation tax revenues remain an important part of the strategy and the UK government has already introduced a wide range of measures to boost the yield. It has been a leading participant in the Base Erosion and Profit Shifting (BEPS) initiative led by the Organisation for Economic Co-operation and Development on behalf of the G20 group of countries which has looked at ways to identify and tackle international tax avoidance. Legislation introduced in the UK during the BEPS review includes the Diverted Profits Tax, which is contributing to growth in corporation tax receipts as multinationals review and amend their transfer pricing positions in favour of the UK, including locating more functions, activities (ie people, jobs, etc) and risk in the UK.
What’s more, the UK has introduced further measures including, for example, the hybrid mismatch rules, the corporate interest restriction, restriction on the use of brought forward tax losses, the removal of indexation relief and the profit fragmentation rules, all of which will contribute to an increased yield in the future.
In summary, corporation tax should not be used solely as a means in itself to raise tax revenues but as a fiscal conductor to encourage behaviours which drive up profits and foreign investment in the UK, all of which underpin the stability and growth of the UK economy.
All political parties should be considering corporation tax from a strategic perspective rather than focusing on the sole objective of a higher corporation rate in the belief it will lead to higher revenues, a focus which would appear, and I would suspect transpire to be, misguided.
Chris Denning is a corporate and international tax partner at MHA MacIntyre Hudson