Please help me out here about corporation tax

I\’m a little confused about what\’s going on with corporation tax.

So, UK total dividends seem to be some £80 billion this year.

However, Capita Registrars is forecasting total 2013 dividends of £80.5bn, which is flat ion a year-on-year basis. Underling dividends are expected to rise 8.6pc over the course of the year, implying an increase in dividend growth through the rest of the year.

Corporation tax runs around £40, £45 billion a year.

Now, some of that corporation tax paid is (or is it not?) the tax paid on dividends in advance of their distribution.

The company pays corporation tax at the usual rate (now 26%?) and the dividends are treated as if they\’ve already got basic rate income tax paid. That\’s right, isn\’t it?

So, some portion of that £45 billion corporation tax is actually the equivalent of basic rate income tax paid on that £80 billion of dividends, yes? Well, actually, no, because we want the grossed up amount of the dividends which is more like, err, £105 billion or summat?

So, the amount of corporation tax which is really just advance income tax on dividends is around and about £26 billion?

Have I actually got that right?

Thus, if we move from the current system to one where we just tax dividends as the normal income they are that £26 billion collected moves from corporation tax to income tax but nowt else changes.

The actual collections from corporation tax itself, on the retained profits of companies, is thus more like £19, £20 billion.

Thus the cost of simply abolishing corporation tax is not the £45 billion collected in corporation tax but the £19 billion that we\’ll not catch via our new dividend taxation policy?

This seems to simple: I\’ve got something wrong here, haven\’t I?

13 thoughts on “Please help me out here about corporation tax”

  1. TheJollyGreenMan

    Hi Tim,

    According to HMRC the withholding tax rate for the UK is 10%, and not the marginal rate of 20%. Remember old Gordon abolished the 10% tax band.

    See excerpt from HMRS webpage here:-
    How tax credits are worked out

    The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the dividend income.

    In the USA and South Africa they introduced a 15% dividends withholding tax. In the USA the with holding tax was introduced this year and Cat paid their quarterly dividend at the end of December to save their investors millions.

    You have the right logic with some wrong numbers. The corporations tax take is higher. That is way they are talking about dropping corporation tax but jacking up the with holding tax.

  2. Tim

    You may be remembering the old advance corporation tax. That was a payment of CT on a distribution that would be offset in getting the final balance of CT at the end of the period.

    The UK has no withholding tax on dividends (not sure where JGM is quoting from). The 10% tax credit is notional. It is not repayable and it just makes sure that a basic rate taxpayer has no liability on the divi.

    So if you imagine a world where all UK shares are held by overseas investors, ISA accounts and UK pension funds then if we abolished CT then we’d get nothing else to offset because none of those entities pays UK tax on their income.

  3. Tobin has explained the technicalities.

    Apart from that, the post and assumptions are broadly correct, except that it is far more efficient to tax all non re-invested corporate profits* at the same rate than to just tax dividends.

    Doing the latter encourages companies to hold on to vast amounts of superfluous cash rather than paying it out. And there would be all sorts of shenanigins with companies disguising dividends as share buy backs and so on.

    * Reinvested profits are not taxed, by definition, as companies get a corporation tax deduction for money reinvested in the business. Sure, the timing of relief for ‘capital’ expenditure is a bit whacky (on an 18% reducing balance instead of on a cash basis) but such is life.

    And money which companies spend on bare land is not being reinvested in the business, it is just being parked to one side. Land is not capital in that sense.

  4. Tim, you have it exactly right and your term “Advanced Income Tax” is absolutely perfect.

  5. Hi Tim,

    Also, presumably annual CT collected is the CT collected net of CT refund for companies currently making loss in that year.

    Some loss making companies maybe paying dividend from reserve and so are profitable one. Then we also have profitable companies not paying out dividends.

    I think the picture is far more complex.

  6. Mark, but if companies hold one to large reserves of cash, then its being kept in a bank. So the banks can use the money. Can’t they? So though it might not be going to the government in tax to waste, its being used in loans etc and all helping the economy.

  7. The main rate of corporation tax is 23% for 2013-14 (due to fall to 20% over two years). Dividends are deemed to be paid net of 10% tax. The dividend income tax rate, including that 10%, is 10% for basic-rate taxpayers, 32.5% for higher-rate taxpayers, and 37.5% for additional-rate taxpayers.

    So, if an additional-rate taxpayer receives

  8. The main rate of corporation tax is 23% for 2013-14 (due to fall to 20% over two years). Dividends are deemed to be paid net of 10% tax. The dividend income tax rate, including that 10%, is 10% for basic-rate taxpayers, 32.5% for higher-rate taxpayers, and 37.5% for additional-rate taxpayers.

    So, if an additional-rate taxpayer receives [pounds]900 in dividends, that is deemed to represent [pounds]1000 in dividends taxed already at 10%. He is required to pay another 27.5% in income tax, which is [pounds]275, which is 30.56% of the money he actually received.

    If all profits net of tax were paid out in dividends to payers of UK additional-rate income tax, the combined tax take would be 23% + 30.56% * 77% = 46.53%. If corporation tax were abolished and dividend tax made the same as earned income tax, the tax take would be 45%.

    (It’s not a coincidence that these rates are close: the dividend tax rates are set with that end in mind, based on a smaller company which pays a slightly lower rate of corporation tax.)

    It is not in fact the case that all uk corporate profits are distributed as dividends to uk taxpayers.

  9. Tim’s sort of right in principle, but:

    1) as others have pointed out, the actual tax system is more complicated (although it doesn’t have to be; we could just use the ordinary tax rates for dividends, like we used to until Brown complicated it).

    2) what do we do about tax-free shareholders? Presumably just tax them, probably by a withholding tax on dividends (no real difference, since the underlying profits are taxed anyway).

    3) what about non-UK shareholders? For some countries we couldn’t tax their dividends unless we withdrew from or renegotiated the tax treaty. And that would mean they’d tax dividends paid by their companies, which we’d have to credit against UK tax, so we’d get less tax from UK taxpayers owning non-UK shares.

    4) when the dividend is paid to another EU company that owns at least 10% of the shares, we can’t tax the dividend (until we leave the EU of course).

  10. For Mark Wadsworth, it’s not just land that there’s no deduction for under corporation tax – there’s none for any investment in buildings (apart from trivial bits for some fixtures).

    Whether self-built, bought new or bought second hand – no deduction.

    The old Industrial Buildings Allowance was abolished a few years ago, and even that didn’t cover commercial (office, shop etc.) buildings.

  11. As said before here, the best thing is to tax all income once. And to avoid all the crap, do it as a personal + corporate level income tax and no more. To treat debt/equity equally, either allow deductions for both interests and dividends, taxing them at the personal level, or don’t allow financial deductions at all. Then you’re almost on the way to a cash-flow tax.

  12. Say corporation tax revenue is 43bn, then at 23% that corresponds to 187bn of taxable profits. If 80bn is being paid out in dividends, then if corporation tax were abolished, that could increase to 104bn (the same proportion of after-tax profits, but you might prefer a a different assumption). If all the divs go to uk taxpayers, and the revenue raised on them is roughly the same with and without corporation tax, then the lost revenue from abolishing corporation tax is 23% of 87bn, which is 19bn. Which, as if by magic, is the same as the number Tim came up with.

    The revenue loss would in reality be higher than that to the extent that divs are received other than by uk income taxpayers.

Leave a Reply

Your email address will not be published. Required fields are marked *