A New Approach to Corporation Tax – but for How Long?

The present political climate poses challenging decisions for directors of public companies and their tax advisors. The traditional role of those who provide tax services to larger companies has been to minimise Corporation Tax liabilities or eradicate them all together even if this involved some quite aggressive avoidance schemes.

Now that some very large household names have been exposed as serial tax avoiders while everyone else is having to pay more to the Exchequer, consumers of their services have resolved to hit them where it hurts – in their pockets via boycotts. Although affected companies like Starbucks can huff and puff by saying that they may not invest any more in the UK, the fact is that they would still prefer to get 80% of something rather than 100 % of nothing.

Of course, it is the job of large public companies to maximise after tax profits and dividends for their owners i.e. the shareholders. Given that most shares are held by the country’s pension funds, any payment of Corporation Tax represents a transfer from those who belong to a pension scheme to those who don’t.

The real problem is that companies nowadays are extremely protective of their brand image which the marketing people insist is essential for attracting and keeping loyal customers. Anything that tarnishes a company’s brand is therefore considered anathema so large companies are going to have to seriously consider whether it is worth paying a reasonable amount of corporate taxes on their profits and regard it as part of their advertising and marketing spend.

Top accountancy firms have tax departments that can advise their client companies on ways of arriving at pretty much the exact tax liability that they want to end up with so one can imagine that, in future, finance directors will be guided by their board colleagues after listening to what the marketing people have to say.

The elephant in the room, of course, is the political establishment, especially in Europe, which is hell bent on finding ways of ensuring that companies, particularly the big multinationals who find it easier to escape corporate tax in any one country, pay their fair share, even if it means replacing traditional corporation tax with something different which, like VAT, is far more difficult to avoid.

Companies might therefore be well advised to avoid entering into any long term commitments with regard to Corporation Tax as it now stands in case, as seems likely, the whole area of taxation on business profits both here and on the Continent is restructured over the next few years.

For more information on Corporate Tax issues visit http://www.bakertilly.co.uk/services/tax/corporate-tax.aspx