Should Companies Pay Tax? (Tax 102)

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     The Conservative’s recent manifesto claimed they would, ” raise at least five billion from continuing to tackle tax evasion and aggressive tax avoidance and tax planning.” However, in the Queen’s Speech (May 2015) no new bill was mentioned. Does it matter? What does it mean anyway?

To begin with, we need to look at what the terms ‘tax evasion’ and ‘tax avoidance’ mean. They are not the same. Tax evasion is against the law. It is when your friendly builder doesn’t declare all his earnings, so he is not taxed on them. It’s illegal and if he is caught he can be prosecuted.

Recently, there has been more focus on tax avoidance. This is completely legal and is when you set up your financial affairs so that you do not pay unnecessary tax. In the past, people have considered this to be good sense and most people have done it. For example, if you have your savings in a building society account, you will pay tax on the interest. If you move the savings into an ISA, then you don’t pay tax on them. This is tax avoidance. Most people would think this was good money management, a sensible thing to do.

However, in the last few years we have become aware that some companies are taking this to an extreme. It is still legal but most of us feel that it is undesirable, it feels like cheating. Let’s look at a couple of examples.

The first example is fictitious. Annie decides to set up ‘Annie’s Global Coffee Empire‘. It quickly grows and is very successful, with coffee shops all over the world. There are over a thousand of Annie’s Coffee shops in the UK, they serve delicious coffee and are very popular, everyone drinks Annie’s Coffee. You might expect them to be paying lots of tax in the UK, as all businesses pay corporation tax on their profits. But they are not. When Annie set up her company, she did some cunning tax planning. She set up her head office on a remote Pacific island. An island that has 1% tax. That head office owns all the recipes for the drinks and the brand name. It charges the Annie’s Coffee shops in the UK a fortune for the use of the recipes and the brand name, such that the UK shops do not make any profit at all (but head office, paying just 1% tax makes loads!)

Now, the employees in the UK all pay tax on their earnings, the shops all pay their rates, VAT, etc. However, all the profit, which should be liable for corporation tax, is only taxed on the island because on paper the UK coffee shops earn no profit at all. The parent company makes a fortune from it’s highly priced recipes and brand name, the UK shops appear to make nothing. This is not illegal. Nothing is secret or hidden, their accounts are accurate and open. However, all of Annie’s successful coffee shops pay no corporation tax in the UK at all. This seems unfair.

Our next example is a real one. Associated British Foods own Zambia Sugar (who make Silver Spoon sugar.) They have a big sugar factory in Zambia. Outside of the big, profitable factory, is a small street market. In the market, people can have a stall and sell a few vegetables that they have grown in their gardens. The stall holders pay a few cents of tax as a government fee for having a stall. Some years, they are paying more tax than Zambia Sugar. They contribute more to Zambia’s health and education budget than the big corporation. I do not know if ABF set this up deliberately but again, this seems vastly unfair, whilst being completely legal.

So, what is the answer? These companies are not doing anything which is against the law, they are are not ‘breaking the rules’ but morally it seems wrong. Sometimes there are clever accountants setting up the tax avoidance schemes when the company is set up. Sometimes a country is too corrupt to care (so in some places you find that government officials will charge a ‘set up fee’ when a big business wants to go to the country.)

So what should we as consumers do? Should we boycott products like Silver Spoon sugar? My feeling is that that would be a mistake. Whilst they are not paying tax, Zambia Sugar are hopefully improving Zambia. They will be giving gainful paid employment to thousands of people, do we want those workers to be unemployed, impoverished?

Yet the situation clearly seems unfair. The solution would seem to be in asking for transparency. If companies had to publicly publish a complete list for every country they worked in, clearly stating how much tax they paid in each country, then they would be embarrassed into changing their tax arrangements. No large corporation likes bad publicity. Public pressure can force them to change what they are doing in a way that the law cannot.

We as consumers should be aware of which companies pay tax in the countries in which they work, and which do not. If we switch our coffee consumption from Annie’s coffee to another, tax paying, brand, then that seems right. In those developing countries which need employment, we can be campaigning for greater transparency. We can let these corporations know that what they are doing may be legal but it is not right. There is an ethical element involved and that affects us all.

I have this week seen a coffee company ‘named and shamed’ on facebook for not paying UK tax. Now, I do not know if in fact, this company does not pay UK tax, I have not yet checked. I am uneasy with how quickly we like to criticise big companies, to all band together against a common scapegoat without checking the evidence (which is how the Nazis got to be so successful.) However, even if they ARE paying tax and the facebook friends are wrong, this will still be influencing companies. They will see the mood of the public and will be checking their own stance, eager to confirm that they are a moral tax payer. We do have influence. We need to use it.

A financial article is published weekly at:

The New Tax……

101 Tax (Yuk)


       Here is a first very simple guide to tax in the UK. Due to the proximity of the next election and the possibility of a new mansion tax, I will explain what that might mean.
However, please note that I am definitely NOT promoting any particular party. Tax is just one issue amongst many.

     At the moment, there are three main types of tax. This will possibly increase to four types if Labour win the election. No one enjoys paying tax but probably it is worth understanding the different types so you can have a view about which are essential and which are unfair.

Tax on Earnings
This is tax on anything that you earn, including your salary, capital gains (if you sell something and it makes a profit), interest on your savings.
In some ways it seems a fair tax. The amount you pay goes up depending on how much you earn and most people pay it.
However, it can be unfair because some people manage to avoid it, to cheat the system (which means the rest of us have to pay more, because those people still use the roads, NHS, police, etc.) If you are an employee, then you have no options at all, the tax is removed at source – in other words, your employer kindly (!) removes it from your pay packet before you are given your salary. So, someone who works in a shop will be given their monthly pay minus the income tax. Someone who is self employed has more opportunity to be clever and cheat the system. The nice old builder who says, “Pay me cash, it’ll be cheaper for you,” is possibly not declaring those earnings and therefore not paying tax on them. Wealthy people with clever accountants can also avoid paying by hiding their investments in offshore accounts. The government doesn’t see them and so does not remove tax from the interest.

Inheritance Tax
This is a one-off tax on everything you own at the time you die.
Again, this seems reasonably fair. If Bob works hard his whole life and is a jolly clever chap, why shouldn’t he enjoy a nice amount of cash? However, we might not feel that Bob’s son also deserves to have an easy life just because his Dad was talented, so the government can take a slice of the wealth and use it for the rest of us.
However, it does feel rather a personal tax, especially if you are the person who was related to dear old Bob. Plus, if Bob worked hard and wants to leave a valuable painting to his son, is it fair that the son has to sell it just so he can pay the inheritance tax? Should people be allowed to keep heirlooms within their family or should they be sold to pay tax? There is also the point that it does not seem to actually generate much cash for society. It certainly used to be the case that the admin costs involved in collecting inheritance tax were pretty much equal to the amount of tax collected. So actually, no one benefits. It is interesting that UKIP plan to abolish this tax if they come to power.

Consumption Tax
This is a tax on everything that you buy. It includes VAT (currently 17½%) and stamp duty (tax when you buy a house.)
This seems quite a good tax. Everyone pays (apart from a few dodgy builders who tell you there is no VAT if you pay cash) and no one can cheat. It is easy to collect and everyone pays.
The unfairness comes in when you consider that everyone pays the same amount. So the poor old lady and Bob the millionaire, both pay the same amount of VAT when they buy a washing machine.

     So, there we have the three main types of tax that are currently in use. The are a pain to pay but are mostly fair. We all hate paying them but we all know that if we want roads, police, schools, health service, etc, the money has to come from somewhere. Now we come to the new tax that Labour are proposing:

Mansion Tax
This is a tax on an asset, something you already own. The proposal is that every year, if you own a house above a certain value, you will have to pay an extra tax on it. You will still pay the normal taxes when you buy it and when you sell it, this is a tax for just owning it.
Firstly, this will probably be popular. It will initially only affect very rich people (who we are all a bit jealous of) and most of us will only benefit from the extra revenue.

      However, is it fair? It only targets one type of asset:houses. You can be wealthy and own other things, like jewelry, paintings, land, even pensions (I’ll come back to that one) and you will not have to pay the tax. There are other assets which cannot possibly be taxed, like being beautiful or healthy or living in a fantastic location and unless they generate income, you will not be taxed on them.

      Let’s come back to pensions. (If you haven’t read my article on pensions, read it now.) Now, government workers all receive defined benefit pensions. This is a HUGE asset. When they start to receive the pension they will pay income tax, just like when someone sells their mansion they will pay tax, but in the meantime it is a highly valuable asset which they own. Just like a house. Strangely, no politicians are suggesting that anyone should be taxed just for owning this hugely valuable asset of a valuable pension. Even though some other people (those not on defined benefits pensions) have invested in their home, expecting that when they are older they will sell it and use the money as part of their pension.

     The new tax will cause house prices to be distorted (because who will want to buy a house that is just inside the amount where they have to start paying the tax? Remember, it is every year, not when the house is purchased.)
It is also unfair. No one is suggesting that other assets should be taxed, that if you own a valuable painting you should have to pay tax every year while you own it. Sometimes, things that are unfair are worth fighting against, even if we are not affected.

      Once the new tax has been introduced, it will not be difficult for governments to lower the threshold when they do the budget. At the moment, the house price they are suggesting is huge, way above what most of us could afford. However, what will stop that from creeping downwards? How long before most people in senior positions, our doctors, head teachers, managers, who have worked hard and invested their savings in a house, will start to lose those savings? It is called a ‘mansion tax’ but if someone lives in London it might actually be an ‘apartment’ tax.
We do not know if there will be a cap on the tax or if someone who lives for many years in these houses could eventually end up owing more than the house is actually worth.

       Personally, I am very unlikely to ever be able to afford a house that will be charged the mansion tax. However, I do not like the thought that a tax could be introduced which is blatantly unfair. It is just not very British……