Collapsing from inherent contradictions

Corporation tax has three purposes. One is to protect the income tax base from attack. The second is to tax capital, which by and large it does, making it a rare tax as a result. And third, it is a tax that should be used to apportion taxable benefits to those locations where value is added in the global supply chains that benefit us all.

Corporation tax isn’t – solely at least – incident upon capital, that’s the very problem with it.

But OK, suppose it is. Thus the tax will be incident upon where the capital is, and so it should be, not upon where the value add is. For it’s the capital adding the value, that’s why the return is to the capital.

Sigh.

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33 comments on “Collapsing from inherent contradictions

  1. That link is spooky because I’m in the process of looking for a new CO alarm for the boat, but haven’t used this laptop for the search.

  2. Corporation tax has only one purpose – to pander to the ignorant masses who believe that someone else will pay for all the free goodies they expect from the modern welfare state.

  3. Surely Corporation Tax, like any other tax, is solely to reduce inflation? Though precisely how I don’t know, but then again I am not the foremost MMT expert in the country!

  4. Rhoda’s rule of taxation, very recently codified, states:

    The punter always pays.

    If we scrapped corporate tax and all associated allowances we could tax dividends. As income within the domicile nation or at source when distributed. I don’t care, I know I’ll be paying it in tax or in the price of goods.

  5. Corporation tax has three purposes. One is to protect the income tax base from attack. The second is to tax capital, which by and large it does, making it a rare tax as a result. And third, it is a tax that should be used to apportion taxable benefits to those locations where value is added in the global supply chains that benefit us all.

    For me at least, this goes straight to the Top Five Dumbest Things Fatso Has Ever Said list.

  6. Did anyone ask the great man how CT protects the income tax base from attack? The number of people who channel all their affairs through companies without paying themselves salaries and dividends must be rather small. Of course there are stories about people who channel it all offshore but they never talk about foreign exchange costs etc

  7. One is to protect the income tax base from attack.

    It is possible that what he is saying here, in his usual incomprehensible way, is that without Corporation Tax the basic rate of Income Tax would be higher.

  8. The way that Corporation Tax taxes capital is through HMRC rules that pretend inflation does not exist so that when the company spends £150 to replace a machine it bought 8 years ago for £100 it has to pay corporation tax on £50 of fictitious profits. A less dramatic but cumulatively worse impact is from paying tax on the fictitious profit from replacing stocks of materials and work-in-progress at current prices instead of the historic prices for the materials in the product just sold.
    Another way it taxes capital is through the “net interest received/paid” ignoring the amount of allegedly net interest that is just inflation before any real net return to the lender/from the borrower so the more capital one puts into a business the more tax on imaginary interest one pays.
    Since Murphy believes (some days) that we can control inflation through tax, this admission is interesting.

  9. @John77 “when the company spends £150 to replace a machine it bought 8 years ago for £100 it has to pay corporation tax on £50 of fictitious profits.”

    How does that work then?

    I’d have thought you got a tax deduction for buying the new machine. AIA would, for most companies, result in a 100% deduction.

    I can’t see any fictitious profits.

    Could you talk me through the tax comp?

  10. DtP, There’s a top five?

    Yes, but truth be told, the way it reads that list could be interchangeable with the list called Fatso’s Last Five Posts.

  11. @ AndrewC
    The Company starts with, say £10k, saved up by the founder and £5k loaned by the bank.
    He buys a machine for £10k and raw materials for £4k and pays £1k in rates (he pays in arrears for utilities and his neighbour gives him some surplus potatoes to eat).
    So he makes some superior stainless steel or brass# widgets and sells them, buys some more metal at a higher price, makes more widgets, repeats again until the machine wears out. At that point his profit is net cash flow but reported and taxable profit is net cash flow PLUS the increase in raw materials and work-in-progress shown in his balance sheet which accountants measure in £ spent not in tons of stainless steel.

    # I got really pi***d off when the pseudo-gold/pseudo-brass screws on the toilet seats bought to deal with my younger son’s complaints (he hates plastic) rusted both times in a relatively short period and I had to replace the whole thing, twice, because a cheapskate cheated on a very small component.

  12. @john 77

    Why brass/gold plated mild steel?

    Use A4 Stainless steel or Gold Anodised Aluminium fasteners

  13. @ Pcar
    Because the screws are designed to fit and one cannot buy standard screws to fit the holes. My wife was surprised that I was annoyed about it – I was surprised that I didn’t have an apoplectic fit about it

  14. @John77

    Gobbledegook.

    Where has corporation tax been paid on fictitious profits?

    You’re just talking nonsense. The sort of nonsense I hear from people who think they know accounting and tax but don’t.

    Accounting is about matching sales and the costs needed to achieve those sales in the same period.

    You said that buying a £150 machine to replace an old £100 machine would result in tax being paid on £50 ‘fictitious’ profits.

    I say that’s bollocks. Buying a £150 machine will get you £150 Annual Investment Allowance capital allowances tax deduction. Scrapping an old machine might bring a few quid scrap value from a recycler.

    But there are no fictitious profits. No tax on £50.

    I have a 31 year career in tax and accounting. What’s your experience?

  15. John

    I found your example slightly difficult to follow, but I think (big picture) you are saying that if working capital increases (and which might simply be due to inflation, rather than an increase in volume), it is funded by retained reserves (ie the increase in P&L reserves would have been taxed)?

    But that increased W/C has value. It can be sold / realised in cash (with no further tax payable) at any time.

    Or, to look at it a different way – if one counters that argument with “but it’s an ongoing business, we are not going to sell / reduce the size of the business, etc” – then instead of funding the increased W/C through reserves, one might fund W/C through increased borrowings?

  16. “increased borrowings”

    I accept that might not always be possible or that, over time, such shift in equity / debt might not be optimal (but then we would ordinarily be talking quite a long period of time).

  17. @PF

    I wouldn’t bother trying to make sense of it. He’s claiming that as raw materials become more expensive it results in higher profits due to the year end stock being higher.

    That’s nonsense.

    The closing stock figure (valued at the lower of cost or MV) merely reduces the deduction you can claim for in-year purchases which is how it should be. If I spend £500 on materials and have £200 left at the end of the year then obviously I have only used up £300 during the year and that £300 is what I can claim against income earned during that year from realising the £300 stock. You can’t have end of year stock without having spent the money in the first place so the idea that closing stock somehow results in taxable ‘fictitious’ profits shows a fundamental lack of understanding of accounting. Some people read and half-understand a badly written article about tax/accounting by a journalist who half-understands his subject and think that makes them an expert.

  18. AndrewC – I think he’s talking about unrealised profits when he says ‘fictitious’. Not that there are any.

    John77 – following through your example, say he sells all £4k of raw materials for £10k, and buys in £5k more, so operating cash flow is positive £5k – £4k once he’s paid the rates and costs.

    The accounting profit will be the £10k sales less £4k costs making a gross profit of £6k, less say £2k depreciation on the machine and his other operating costs of £1k, so £3k (the difference from cashflow is increase in stock).

    The taxable profits will be the £10k sales less £4k costs making a gross profit of £6k, less £10k Annual Investment Allowance on the machine and his other operating costs of £1k, so a loss of £5k.

    He therefore pays no tax now, and has losses to carry forward against his future profits.

    If we take a longer period: say he operates for 5 years, and wears the machine out in that time. The difference between accounting profits and taxable profits will be zero: the accounting depreciation and the tax allowances will both be £10k over the period, and the level of stock doesn’t affect profit. However, if he then buys in a new machine at £15k he gets a full tax deduction for it in year 1, so his taxable profits are again less than his accounting profits.

    In terms of cashflow, if stock is constantly increasing then you ae right that his cashflow is going to be less than reported profit. But the tax on that profit isn’t payable until significantly after the end of the period it’s earnt in (9 months for a company, so on average tax comes 15 months after profit; potentially much longer for an unincorporated trader), so he has quite a cashflow advantage there. At any given time when he pays tax his cashflow to date is very likely to be higher than the profits he is paying tax on.

  19. “And third, it is a tax that should be used to apportion taxable benefits to those locations where value is added in the global supply chains that benefit us all.”

    You mean like exactly as recognised in the current transfer pricing rules? Those same transfer pricing rules you have decried for so long?

    Could Murphy try hard just once to remember today what he said yesterday?

  20. To try and make sense of John77’s point.

    In the 1970s I was a bookseller (aka slow moving consumer goods): sell a book for £1, a steady seller, so replace the stock on the shelf with another copy, which the publisher has just reprinted at a new price of say £1.50. Happened all the time in those days. At the end of the year the value of stock on the shelves has increased greatly (or the the value stays the same and the shelves are rather bare). As my boss at the time said: it may look like a profit to the taxman but they won’t take books to pay the bill.
    It is not capital tied up in machinery that is a problem, there are, as has been said, allowances (avoidances!) for that, but the need to increase working capital.

  21. @ AndrewC
    If I buy a small item, I can claim Annual Investment allowance against tax but last time I bought a major capital item I was required to claim on a reducing balance basis until I scrapped it. The AIA has increased since then but it is not infinite.
    Maybe you know better than HMRC?

  22. @ Pellinor
    If a company starts the year with £100 cash and ends the year with £102 cash the £102 is worth less than the £100 it started with due to inflation but the company will be taxed on the £2 which is a fictitious profit.
    That is what inflation does.
    Maybe I should have missed out the complicated example of a trading company.

  23. @John77

    “Maybe you know better than HMRC?”

    Frequently. I was fast-tracked to HM Inspector of Taxes Grade 7 (that means full technical training) back in the early 90s. Done nothing but tax all my career. Can’t recall losing a technical argument with HMRC (pick your fights wisely) and am forever quoting their own internal manuals back at them.

    So you once bought a capital item that you couldn’t fully write off against tax? That makes you a tax expert?

    You started with an example which had more holes in its logic than a string vest, now you’re talking about something that happened years ago, nothing to do with your example (which you clearly tried to say could happen now), completely misunderstand how closing stocks work and you still won’t couldn’t can’t are unable to admit that you are wrong.

    You’re as bad as Murphy at accepting that you don’t know what you are talking about.

    Go back to your argument, give us the tax and accounting that shows how buying a £150 machine to replace a £100 machine creates £50 taxable profits.

    Talk us through the tax and accounting that shows how buying stock can create taxable profits.

    If you can’t, then just gracefully admit you were wrong.

    Or carry on wibbling and make a bigger fool of yourself.

  24. I never said that buying a £150 machine to replace a £100 machine produces a taxable profit. I said that you had to pay the £50 out of fictitious profits.

    I went onto HMRC website which listed the maximums for AIA which are still not infinite. I am prepared to believe that you know better than HMRC *but* I am stuck with what HMRC says.

    Now, hearken. If you start with 1000 widgets costing £1000 in your rented shed and end with 1000 identical widgets and an extra £1 you have, in reality, made a profit of £1. If that £1 arises from selling one widget for £2 and buying a replacement for £1 you will pay tax on £1. If that £1 arises from selling 1000 widgets for £1600, buying 1000 replacement widgets for £1500 and paying £99 rent, the accountant will report that you made a profit of £501.
    For those working on a cash basis starting with 1250 widgets costing £1250 selling them for £2000 and replacing them with 1000 costing £1500 after paying £100 rent will yield a taxable profit of £400 on which you pay tax of £76 although that leaves you with £324 not enough to pay for the other £250 which are delivered and paid for in the next financial year.
    Denis Healey introduced temporary tax relief for stock inflation so clumsily that the main beneficiaries were supermarkets that didn’t need it because they sold their stock for cash before they paid their suppliers and the sensible idea and LIFO accounting have disappeared.

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