I\’m sorry, but this does make me snigger

Over the next four years the top rate of corporation tax in the country will be reduced from 28% to 24%, only paid for in part by a small reduction in the investment allowances large businesses (in particular) enjoy.

Small companies will, at the same time, see a fall in their corporation tax rate from 21% to 20%.

However, all is not as it seems. In the TUC publication The Missing Billions published in 2008 we showed that the effective rate of corporation tax paid by large businesses in the UK was no more than 22%. Subsequent data from H M Revenue & Customs published on their own web site has confirmed this estimate as generous – they show an average rate of 21% and that some large companies pay much less.

Now, do we all recall how Ritchie got to his estimate of the tax gap (for of course this is Ritchie)?

Yes, we do: he said that the headline tax rate is x, the actual tax rate is y and the tax gap is x-y equals loadsamoney. But what he didn\’t include in his calculations was that Parliament deliberately puts all sorts of things into the tax code, things that it really rather wants companies to do. R&D gets a 125% tax allowance for example, there are all sorts of capital allowances, no doubt there are ones that I\’ve not even dreamt of. But Ritchie counted all of these entirely legitimate uses of allowances, companies actually doing what Parliament wanted them to do, as part of the tax gap.

So, what the government is doing is reducing those allowances and offsetting this in part by reducing the headline rate. The headline rate will therefore be closer to the actual rate. X-y equals lessthanloadsamoney.

In short, given the way that Ritchie calculates it, the Coalition has just ensured that the tax gap will shrink, just as Ritchie desires.

And yet he\’s complaining?

And I see that others have the same thought.

2 thoughts on “I\’m sorry, but this does make me snigger”

  1. Actually, perhaps because I’m only an accountant and you’re an economist, you’ve made a slightly better point than mine. My argument is that with lower corporation tax rates then there will be less incentive to avoid/evade tax and, even if companies do, the fiscal impact will be less. Both effects should serve to reduce avoidance/evasion.

    Your (correct) observation might serve to reincentivise companies to dodge tax again, because the broader base will make changes to CT overall fiscally neutral. However, because there will be fewer adjustments to arrive at the tax base, they might find avoidance/evasion more difficult, which again you would expect to reduce it…

  2. Did he really just take the tax charge and divide it by the companies profits shown on the P&L account?

    Even Mr Murphy could not be so disingenuous, surely.

    Suppose we have a company that has published profits of £10,000. It is a typically nasty right wing capitalist vehicle and has spent £90,000 entertaining its directors.

    Entertaining is a disallowable expense, so the company pays tax on £100,000. Using Mr Murphy’s method this is an effective rate of 1000%.

    Is he really saying that? Because then he’d have to say that this company is typical of the sort of enterprise he wants to encourage. And somehow, I doubt that…

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