The tax on companies

Anyone following the news knows that tax and government spending are the main issues facing firms and households in the forthcoming general election. The bottom line: spending is likely to fall and taxation is likely to rise. Whilst most of us can get our heads around income tax and VAT – mainly effecting households - what are the main tax issues facing firms?

A current article in The Economist covers the following points:

Several firms are moving out of Britain, or are threatening to do so because of the impact of changes to company taxes. Whilst company tax is crucially important, it’s hard to get right. Some even go so far as to say that corporate tax should be abolished. After all, the profits of untaxed companies should reappear as taxable proceeds elsewhere in the economy (in the form of higher incomes, perhaps). But, even though corporate taxes in Britain account for only 13% of total tax revenues, no government is likely to take that risk now.

In 2008 the Labour government reduced the corporate-tax rate on profits from 30% to 28%. The real struggle now is shifting from taxing companies globally to taxing them on earnings made in or sent back to Britain. That has been a big change.

The Conservatives have said that, if elected, they will slash corporate tax to 25%. They think that such a cut might repair some of the damage done by recent government moves to Britain’s attractiveness as a place to do business. In December banks were alarmed when a ‘windfall tax’ of 50% on any bank bonuses above £25,000 was announced. In April the top personal tax rate will go up to 50% on salaries above £150,000, and employers’ pension contributions will be taxable for employees earning more than £130,000. Although these measures hit people, not firms, they threaten to add weight to corporate decisions not to locate in Britain, or to move from it.

Britain’s corporate taxes are in fact not all that high, according to a study by the World Bank and PricewaterhouseCoopers, an accounting firm, which looks at the percentage of earnings that companies pay overall.

The Institute of Directors which represents 45,000 mainly smaller businesses, says that, to attract new businesses, it would like a government pledge to reduce the rate gradually to 15% over seven to ten years.

That is unlikely to happen. Offering special incentives is just too tempting, politically, and it may even be helpful in some areas. The Tories will keep at least part of the current system of tax credits for research and development (R&D). On the latest OECD numbers, Britain spends a puny 1.8% of GDP on R&D, less than France (2.1%), Germany (2.5%) or America (2.7%).

So the picture remains complex. Perhaps some small cuts to the main tax on profits may come, but a dizzying array of incentives of tax credits and subsidies will remain….. and the fortunes of many firms will still be strongly influenced by the spending habits of households – and the taxes they pay.