By Chas Roy-Chowdhury, head of taxation, ACCA
I gave evidence to the House of Lords Select Committee on Economic Affairs recently about corporation tax and how revenue is now being secured from companies through other means.
The bigger picture needs to be looked at when it comes to how corporations are taxed in the UK. There are other and additional ways by which companies in the UK are taxed, for example through VAT and through National Insurance Contributions (NICs).
A publication produced by the Office of National Statistics back in March, shows VAT numbers have held up remarkably well since the economic downturn because, the VAT rate has gone up to 20 per cent. That is probably what we need to look at in terms of the basket of taxes that we have moved towards—those companies that we know are going to be tied into the UK rather than those that can look at different locations to do business that are more favourable for them, taking tax as one of the factors and one of the components that they look at.
The fundamental problem is that large companies are by nature multinational – their shareholders, activities and customers are spread across the world – whilst national governments are not.
There is a tax chasm between what governments seek to capture by way of corporation tax and what companies, many of which are global in terms of their shareholders, activities and customers, generate in terms of global profits.
In practice, existing rules are highly complex and differences between countries can be exploited well within the law. HMRC has adapted to this and is not sitting on its laurels as some other Parliamentary committees have suggested. They are quick and effective and have developed a greater understanding of how companies work. The majority of corporations go through the tax process with ease. HMRC has achieved this despite declining resources.
ACCA wants to see tax simplicity. But that’s a big ask. Adam Smith’s four principles of what makes a good tax system – proportionality, transparency, convenience, and efficiency – still stand centuries later. I don’t think we’re near this and I also think we are in danger of losing trust in the tax system.
The House of Lords Economic Affairs Committee also raised the issue of naming and shaming those who have promoted aggressive tax avoidance or tax evasion schemes.
ACCA believes if naming and shaming is going to be introduced for tax avoidance, which is legal, the bar needs to be set very high. The complexity of the tax system means there is a risk that mis-interpretation could result in naming and shaming of a tax adviser; this could result in severe reputational damage.
We have long been calling for greater regulation of tax advice. While ACCA and other accountancy bodies have strict regulation and standards, anyone can set up and offer tax advice without those safeguards in place.
There’s no denying that all this is a very tricky and complex situation. But it is heartening to see that the issue is being discussed at international level, from the EU, to the US; and of course the G8 will be looking at the avoidance/evasion debate in June when it meets in Ireland.