Background

The UK’s corporation tax was introduced in 1965 at the same time as the country also saw the introduction capital gains tax. Both taxes were introduced by a Labour government that was anxious to both modernise the UK’s tax system and to remove from it opportunities for abuse that existed in the system that they had inherited from the previous Conservative government.

Corporation tax is a tax that is primarily charged on the income, gains and profits of private limited liability companies and public limited companies (PLCs). It can also be charged on the income of some unincorporated bodies, but this is incidental to its main function.

Corporation tax is, when ranked by revenue, the fourth largest tax in the UK, raising £78.6 billion in the tax year 2022-23, which sum represented 8.8 per cent of all UK tax revenues[1].

Corporation tax is also one of the most abused taxes in the UK. It is estimated by HM Revenue & Customs that at least 13.3 per cent of all corporation tax revenues were evaded or avoided by taxpayers in the tax year 2021-22, with that figure increasing to 29.3 per cent in the case of smaller companies that pay approximately half of all UK corporation tax. Both these figures are on rising trends: this is a tax that appears to be out of control in the UK[2].

Corporation tax rates

When corporation tax was first introduced all companies paid tax at the same rate of around 40% on their profits arising during the course of a year.

In 1973, that changed. Companies that were defined as being small paid tax at a rate that was usually 10% less than that imposed on large companies.

It should be noted that the difference between a large and small company was based upon the level of profit that was generated by a company for corporation tax purposes during the course of a year. As a consequence, a company with a low turnover but with very high profitability could be defined as a large company, whilst a very large company that made a very small profit could be defined as a small company. Groups of companies were treated as single entities for this purpose to prevent abuse. This definition has persisted to date.

As will be noted from the chart below, opportunity was taken when the small companies rate of corporation tax was introduced to increase the rate of tax charged on the profits of large companies, which in the 1970s exceeded 50 per cent.

Corporation tax rates fell steadily during the early years of Margaret Thatcher‘s administration in the 1980s. They then broadly flatlined at between 35% and 30% for more than two decades, until a further steady decline started just before the global financial crisis in 2008, with corporation tax rates reaching their lowest ever level at 19% from 2017 onwards, only recently having been raised again.

It will be noted that from 2015 to 2022 small companies paid corporation tax at the same rate as large companies, i.e. at 19% for most of this period. In 2023 corporation tax rates for large companies have been raised to 25%, but small companies still pay tax at 19%.

Sources: various from data collected by the author over time

In recent years, the estimated amount of corporation tax paid by large and smaller companies, as identified by HM Revenue and Customs to the best of their ability given that these terms had little relevance to liabilities owing during the course of this period, were as follows:

Source: HM Revenue & Customs and author calculations[3]

To put these numbers in context the number of large and small companies and the average tax liabilities that they settled in each of the years noted were as follows:

Source: HMRC and author calculations[4]

As this table shows, in most years more than half of all corporation tax payments in the UK are made by a small number of very large companies. This is because of the massive imbalance in their profitability when compared to that of small and medium-sized companies that pay tax[5].

Problems with the UK’s corporation tax

Corporation tax has been subject to considerable attention from tax specialists, tax justice, campaigners, governments, international organisations such as the Organisation for Economic Cooperation and Development, and journalists over the last two decades as a consequence of the perceived abuses of corporation tax by companies based in the UK and elsewhere, and most particularly the abuse perpetrated by those multinational corporations that have made use of tax havens to reduce their corporation tax liabilities.

As a result of this focus of attention considerable changes to the international aspects of this tax have occurred in recent years including:

1. The introduction of country-by-country reporting[6] by the OECD[7] requiring that multinational corporations report their results to their tax authorities based on the jurisdictions where they make their sales, employ their staff, engage their assets, record their profits and pay their taxes. This makes the artificial relocation of profits between high and low tax jurisdictions harder to achieve.
2. Automatic information exchange from many tax havens to countries like the UK of data on companies located in those places controlled by people who are UK tax resident, again making the use of tax haven locations much harder for tax abuse purposes.
3. The introduction of minimum global corporation tax rates for a limited range of very large multinational corporations by the Organisation for Economic Cooperation and Development in 2024, again reducing the risk of artificial profit relocation to low tax jurisdictions[8].

As a result of these significant changes it is likely that the rate of such abuse has reduced significantly, even if this fact has yet to be acknowledged by many tax justice campaigners. As a consequence, little focus is given to the international dimensions of corporation tax in this report. Existing changes to the international corporation tax system need to take affect and be properly appraised before further recommendations should be made in this area. Instead, attention is given to three particular issues of concern with regard to domestic corporation tax within the UK. These are now considered to be of much higher priority if the obvious failings of this tax within the UK taxation system are to be properly addressed.

Recommended reform to UK corporation tax.

Three major reforms are suggested in this section of the Taxing Wealth Report 2024.

Firstly, the administration of UK corporation tax requires substantial reform. Although there are more than five million companies in corporation in the UK only about half of these submit a corporation tax return to HM Revenue & Customs each year, and a very large number of these report that they make no profit, with no enquiry being made of them as a consequence. There appears to be an extraordinary assumption within the UK tax system that those who have incorporated UK-based companies are inherently tax compliant, and so do not need to report their activities. Nor are they already worthy of much investigation. This is despite the fact that the evidence of tax losses, particularly from smaller companies, very clearly indicates that these companies are widely used for the purposes of tax abuse, as is noted in HM Revenue & Customs’ own tax gap reporting, as noted above. In this case, the Taxing Wealth Report 2024 recommends that:

• Every company registered in the UK be required to submit a corporation tax return each year.
• If it fails to provide that information then those personally responsible for that failure – including all company directors - should be automatically held personally liable for any tax losses arising to HM Revenue & Customs by the company.
• Automatic information exchange should take place between the UK’s banks and HM Revenue & Customs so that information is provided by those banks, and maybe other financial services providers on:
  • Every UK company for which they maintain a bank account.
  • The level of deposits received in that account in an annual period.
  • The company’s bank balance at the close of any nominated accounting period.
  • The names and addresses of those whom the bank thinks runs the company.
  • The address from which the bank thinks the company trades.
• Based on this information, and assuming that the company does not provide alternative data, HM Revenue & Customs will be able to work out the approximate tax liability owed by a company in the absence of other data and then assess that sum upon those responsible for the administration of that entity, who would then be personally liable for settlement. It is suggested that this would massively reduce the scale of tax abuse taking place through the use of UK limit to companies and raise potential revenues of at least £6 billion per annum. The arrangement would also save HMRC considerable time by confirming which companies are also really likely to be dormant and so not worth the effort of investigating.

Secondly, in a related recommendation, it is proposed that the UK’s Companies House should be reformed to improve the quality of the data that it collects from companies in the UK. Although some changes in this respect have been enacted at the beginning of 2024 there is a serious concern, based on behaviour in response to past reforms, that the requirements to file additional information now put in place will be ignored by many companies, their directors and shareholders, and those who represent them, and that information to ensure the taxes collected will not be recovered from those who are responsible to make such payments. This deficiency in company law administration in the UK has been a major impediment to effective tax collection and has facilitated tax abuse in the UK over a significant period of time and does now need to be addressed. It is estimated that the proposed reforms of Companies House will raise £6 billion of corporation tax per annum.

Finally, although there has been a recent, and welcome, re-introduction of the differential in corporation tax rates between large and small companies that current differential remains relatively modest at just six per cent, with many incentives that are available to large companies considerably reducing the effective differential. There are very strong economic arguments for re-creating a differential in these rates of at least ten per cent, which differential existed between these rates over many years throughout the history of corporation tax in the UK. It is suggested that if this differential of 10% was created then an additional £7 billion of corporation tax per annum might be collected in the UK.

Other related reforms

The above being noted, those sections of this report dealing with tax gaps, tax spillovers and the administration of HM Revenue & Customs should also be noted as each has a significant bearing on the administration of corporation tax in the UK. The use of limited companies has almost significantly contributed to tax losses arising from tax evasion and avoidance in the UK, and the under-resourcing of HMRC has facilitated this process. If corporation tax losses are to be properly addressed, then the issues noted in this report with regard tax of administration also need to be taken into consideration.

It is also appropriate to note the recommendation for the reintroduction of an investment income surcharge made in the income tax section of this report as this will impact the use of limited companies in the UK.

Detailed recommendations

1. Reforming the administration of corporation tax in the UK might raise at least £6 billion of tax a year.
2. Increasing the corporation tax rate for the UK’s largest companies could raise £7 billion in tax annually.
3. Reforming Companies House might raise £6 billion of tax a year.

Footnotes

[1] Based on table A5 here: https://obr.uk/download/economic-and-fiscal-outlook-november-2023/?tmstv=1701349270

[2] https://www.gov.uk/government/statistics/measuring-tax-gaps/5-tax-gaps-corporation-tax

[3] https://www.gov.uk/government/statistics/corporation-tax-statistics-2022 table 10

[4] https://www.gov.uk/government/statistics/corporation-tax-statistics-2022 table 10

[5] See https://taxingwealth.uk/2023/09/22/reforming-the-administration-of-corporation-tax-in-the-uk-might-raise-at-least-6-billion-of-tax-a-year/ This information is based on the companies that do pay tax: evidence suggests that HM Revenue & Customs do not know how many should.

[6] First designed and then campaigned for by the author of this report. https://www.internationaltaxreview.com/article/2a690uzo3gga4tnxell34/no-9-richard-murphy

[7] https://www.oecd.org/tax/beps/guidance-on-country-by-country-reporting-beps-action-13.htm

[8] https://www.oecd.org/tax/inclusive-framework-releases-new-multilateral-convention-to-address-tax-challenges-of-globalisation-and-digitalisation.htm