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Monday, 21 February 2011

Sweetheart tax deals: problematic - but not in the way you might think

It's preposterous to claim that every pound "lost" through a so-called (alleged) sweetheart tax deal between HMRC and any given big corporation is a pound that could have gone to the exchequer, thereby reducing the need to cut front line services, saving local libraries, forests and pandas.

In fact a sweetheart deal could, in theory, have increased the tax going to the exchequer.  Say, for example, some large bank or global services company sat down with HMRC and laid out the facts:  "We could channel all our profits through the Caymans, at at total cost to us in fees, etc, of £100m; or we could just hand the £100m to you, if you reduce our corporation tax bill accordingly..."

But sweetheart tax deals are still in my view incredibly bad for competition, enterprise and ultimately long term growth in the UK; as they reward massive corporations who can afford to pay tax specialists and absorb one-off costs associated with setting up offshore schemes, whilst leaving smaller businesses to do or die.

Whilst Barclays and Vodafone are reported to have been cutting deals to shave hundreds of millions off their corporation tax bills, hundreds of IT contractors and other small companies have seen their business investigated for sums involving just thousands of pounds because of HMRC's obsession with tackling what it perceives as payroll tax avoidance.

Firstly, surely, the cost of investigation in such cases outweighs the value of the tax recovered.

But, more importantly, the people striking out on their own - those prepared to go out on a limb, forsaking salary security, pensions and expense accounts; striking their own path in business - should be rewarded, as they form part of the entrepreneurial regeneration of the business cycle.  Instead, they face hassle and threats.

I know many IT contractors forced to work a few months "on site" with clients whilst using their remaining time managing small web design and hosting companies.  Why HMRC should use IR35 legislation to attempt to make these directors of Limited companies account for time spent "on site" as if they were in full time employment, whilst the small business owners are getting none of the salary security benefits - and paying through the nose for accountancy and other essential services that come part of running a Limited Company - is beyond me.

One-person enterprise should be encouraged as the first rung on the enterprise ladder.  Fair enough, I assume some contractors are in the game to avoid a bit of income tax, but I've yet to meet one.  These few exceptions have to be balanced against the numerous former contractors who have grown their one-person business into fledgling companies paying for half-a-dozen salaried staff.

Going off at a slight tangent, some draw comparisons between the total tax bill of the big corporations, once payroll tax is taken into account, and smaller companies left to foot their full share of corporation tax.  One thing I haven't seen is an analysis of tax paid per employee.

But IR35 and the willingness for the tax man to go after small business whilst striking deals with large corporations is only one hillock in the uneven playing field that is the UK business environment.

Competition, or lack thereof

I quite like capitalism.  I'm not overly concerned that the present government wants to trim the size of the state, so long as the business and regulatory environment is used to ensure provision of front line services is not affected.

I don't want to see libraries closed.  I don't want to see forests fenced off.  I don't want to see those too disabled to work have their allowances cut or face humiliating extended examinations to ensure that there really isn't some job they could be doing.

A balanced use of the private sector should not be feared, in that it's often preferable to handing over large sums of taxpayers' cash to government departments and quangos.  Such bodies are incapable of establishing the management structure, IT systems and business processes required to get the job done efficiently.  I know this, because I've seen this.

But a key aspect of capitalism, in fact the key requirement, is fair market competition.  Without competition, the bigger players tend to dominate, profiteering sets in and a large proportion of consumer cash ends up going direct to the shareholders and directors by way of whopping bonuses.

Yes, I really believe the root cause of many of the woes of the banking industry, especially huge bonuses, is lack of competition.

I refuse to accept that any salaried individual is worth, on pure grounds of merit, 1,000 times the salary of another full-time employee in the same company.  But the profits are there for the taking, and the people taking them are duly rewarded.

The profits are there because the customers are getting a raw deal.  Whilst the banks were desperate for taxpayer cash to keep them afloat, they were offering a measly 0.1% in credit interest to these same taxpayers who chose to lodge their cash directly with the bank, via their high street branches.

The key to clipping disproportionate rewards for people providing only a fringe benefit to society is to trim the opportunity to make easy profits, and the way to do that is to encourage better competition in the market.  Better competition would force the big banks to offer better deals for consumers.

Moving away from banks, any big company getting preferential treatment due to its size can be highly damaging to competition.  It raises the barriers to entry for smaller companies far too insignificant to warrant special treatment from the tax man.

There's already a large potential anti-competitive presence in the market, looking to smash any competition from smaller innovative enterprises, and that's the willingness of any established player to defend itself by any legal means necessary.  Patents, copyrights, trademarks are all tools of monopoly.

Smaller businesses should be given a leg-up, not screwed over by giving their larger rivals a tax break.

Corporation tax is becoming a threat to innovation

Because small, local companies are unable to take advantage of global tax planning, corporation tax itself is becoming a threat to innovation.

Any rule applied to large global businesses when calculating sweetheart tax deals should allow small local businesses a least an equal benefit.  In fact, because regeneration through innovation is essential in keeping the markets competitive,  smaller businesses should be able to cut a better deal.

If the rules aren't working, they need to be changed.  Not fudged to keep Vodafone and Barclays happy.

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