How do we get Starbucks, Google and Amazon to pay their fair share of tax? Corporation tax, business rates and the Budget.
The government has been forced to look again at local Business Rates. But isn’t it time to reform all taxes on business, so they’re more simple and fair?
Hi, I’m Leon Hawthorne. We’re talking about taxes on business. What can be done to help shops on the high street and ensure big companies pay their fair share.
Business taxes have been in the headlines because of a revolt over a threatened increase in local business rates. These are based on the notional rental value of a company’s properties.
So, a high street book vendor like Waterstones probably pays relatively more than an Internet bookseller like Amazon, which is based in a warehouse on the outskirts of town.
Clearly, this tax is outdated. It discriminates against ‘bricks and mortar’ retailers and gives an unfair advantage to dotcom businesses that already have lower overheads.
But the problem is bigger than business rates. Big name multi-nationals like Starbucks, Google and Amazon have been criticised for paying virtually no corporation tax, either. That’s a tax on the company’s profits.
Let me explain the problem.
Most people think profit is a straightforward concept. Sales minus costs, right? Well, it’s not that simple. Any first year accountancy student can tell you how to legally massage your sales figure and your costs. So, you can create any profit you want.
This is especially true for two main classes of business activity.
If you have substantial intellectual property, namely patents, trademarks, brands.
And if you have transactions between sister companies in different countries.
So, you can organise your business to choose the location where you want to make the biggest profits… obviously you will choose the countries with the lowest corporate tax rates.
For example, the Netherlands has a 5% rate of tax on intellectual property. So, if I want to sell you mugs like these with my logo, I would set up a holding company in the Hague. Assign my trademark to that company.
Then set up a UK trading company. The UK company would have to pay the Dutch company a licence fee to use the logo. I can pick any figure I like. The consequence is when you buy the mug in the UK, I can drain all the profits out of the UK company into the Dutch company because of the price of the licence.
So, my liability for corporation tax in the UK is zero because I haven’t made a profit here. And my liability for Dutch corporation tax is only 5%.
This is all perfectly legal. Corporation tax is a voluntary tax if you’re a multi-national company. Not so if you’re an average small business.
It’s worth mentioning these companies do pay other taxes. They pay National Insurance on every employee’s salary and VAT.
So, when we see parliamentary committees call CEOs in front of them and attack them, this is all a bit of a charade. None of these bosses has the guts to say what they and the MPs know, namely:
If you politicians make such imprecise laws, don’t blame us for using them to our advantage?
If you want us to pay more taxes, change the tax law, so it’s not so easy for us to legally avoid them.
That’s exactly what I propose. We should abolish corporation tax altogether… and business rates and VAT; and replace these with a single Sales Tax, a flat tax on the turnover of every business in the UK.
This is virtually impossible to avoid. Effectively, it’s a tax on every cup of coffee sold by Starbucks; or every purchase made on Amazon.co.uk.
Big companies, multi-nationals and dotcom businesses could not use clever tricks to avoid paying it. It doesn’t favour one type of business over another. And unlike business rates, it’s not a fixed overhead. It’s a progressive pay-as-you-earn tax on a company’s revenues.
The only question is this. How much?
Ultimately, government has to weigh up just how much to squeeze companies, because this will impact dividends paid to UK shareholders, most likely your pension fund. Also, it will effect the end prices charged to consumers.
But a sales tax is undoubtedly a simpler, fairer and more efficient tax than all current business taxes.
I’m Leon Hawthorne. Thanks for watching.