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Friday, 17 May 2013

Time for a new plan for corporation tax to re-level the field for local employers

What keeps me mad throughout the ongoing corporation tax bunfight is that I agree with no-one.

On one [typically right] side, there is the argument that companies such as Amazon, Vodafone, Starbucks, Google, etc, etc... should not be criticised because they're only doing what they are obliged to do: minimise their tax bill.

Fair enough, but we live in a democracy, so claiming they shouldn't be criticised or the subject of peaceful protest is a bit far fetched.  If enough people feel aggrieved  enough to protest outside a shop then in a civilised democracy there's not much we can or should do.

On the other [largely left] side there is the view that such companies are not pulling their weight and should contribute more.

Well, I don't agree wholly with this either.

Many (but not all) of the companies criticised have a UK workforce and end up paying considerable sums in employer's tax (AKA employer's National Insurance contributions) at around 13.8% of salary, plus provide employment (useful, right?) and hence generate even more tax through PAYE paid by their employees.

The trouble with corporation tax in a global economy is that it is unfair to many smaller, local firms; in that they cannot afford the set-up costs of an offshore headquarters to launder their profits through.

Competition theory largely states that governments should encourage entrepreneurship and regeneration to keep the markets competitive; a market which makes it hard for new entrants tends to get lazy, with the incumbents carrying on as before, unchallenged.

But non-global new entrants find it hard to challenge the global giants if they end up paying more tax - until they get big enough to avoid tax.  Get the idea? The market becomes skewed against the new entrants.

So one answer - and the left won't like this - is to get rid of corporation tax altogether.

But this creates a new problem.  Not all companies provide such large returns to the exchequer through employment taxes.  E.g. city fund managers may rake-in millions yet employ a handful of staff, whilst large retailers such as Marks and Spencer, Tesco, etc each employ tens of thousands of workers.

So to me the answer appears obvious.  Companies should be allowed to offset their corporation tax bill against their total employer's Class 1 National Insurance contribution.

Essentially many companies making modest profits yet already paying millions of pounds a year through employment taxes would be exempt from paying any corporation tax, yet companies who didn't employ many UK staff would be left with a largely unchanged corporation tax bill.

This would perhaps have a secondary advantage of making it more attractive to employ UK staff, as the employer's tax - widely seen as a disincentive to employment - would be offset against corporation tax.

And, importantly, it would allow smaller, growing UK firms who choose to have UK-based staff to pay corporation tax on a similar rate to the global giants.


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