Brown's corporation tax headache

As the UK budget deficit spirals, figures reveal the vulnerability of the corporate tax base...

Last Updated: 31 Aug 2010

According to the House of Commons public accounts select committee, about two-thirds of the £24bn corporation tax take in 2006-7 came from just 50 companies – most of whom were in the energy and financial sectors. Meanwhile a quarter of Britain’s 700 biggest companies didn’t pay a single penny in corporation tax, thanks to some clever accountants – which means that unless HM Revenue and Customs cracks down hard on tax avoidance, there’s going to be a serious shortfall in the next few years...

For a Government that’s apparently decided to spend its way out of a recession, these figures make grim reading. Since corporation tax is paid on company profits, the effects of the financial crisis (and the impending recession that will inevitably follow) will slash this year’s take – there was an 8% fall in September’s receipts compared to 2007, as banking profits were hammered.

The worrying thing is just how reliant the Treasury has been on taxes from the City (Gordon Brown may be putting the boot into the banks now, but we don’t remember him complaining when he was using their taxes to fund his public spending). Oil and gas companies have been the other big contributors (hence their indignant response to the threat of a windfall tax), but they’re also likely to see profits slashed as the oil price drops. Since these two sectors have made up such a huge portion of the corporation tax base, their struggles will have a significant effect on the overall take.

To make matters worse, the corporation tax collection system clearly leaves an awful lot to be desired. The committee says that 181 of the biggest 700 firms managed to avoid paying a single penny, thanks to lax rules and poor targeting by HMRC – apparently 60% of its investigations yielded less than 1% of the additional tax raised. Some reckon that the public coffers could be losing out on more than £8bn a year, which is not exactly ideal when the cupboard is as bare as it currently is.

Because it’s not just corporation tax that is falling – stamp duty (thanks to a 50% decline in house sales), national insurance and excise duty are all in decline, and this will only get worse in the coming months. So in order to keep spending, the Government will have to borrow even bigger sums of money. Another £8.1bn in September took the first-half budget deficit to £37.6bn – that’s more than for the whole of 2007, and the highest total since records began (and it doesn’t even include the cost of nationalising RBS and co).

So companies can expect a lot more scrutiny of their tax returns for the next couple of years. Which could well mean more people following the example of Sir Martin Sorrell and decamping overseas...

In today's bulletin:
Income gap shrinks - but for how long?
Green backs off Baugur as Arcadia slips
Brown's corporation tax headache
MT's Little Ray of Sunshine: The ten o'clock brainwave
'35 under 35' spawns its first business 

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