News & Articles
8th September 2008
It's time to end the battle between Business and the Revenue - Kit Malthouse
With yesterday’s announcement of the latest companies leaving London for a sunnier tax climate, and news that even HSBC is thinking about a move overseas, the already desperate calls for lower corporation tax are likely turn into screams.
But in all the melodramatic shouting, a simple truth is lost: companies don’t pay tax. We pay it for them. For companies, tax is really just another overhead that gets included in the price of the things they sell. Like all competitive businesses, in order to minimise the price the customer pays, Tesco, for instance, bears down on all its overheads, including its tax bill. Any tax it does have to pay is simply factored into the price it charges shoppers so as to preserve its profit margin and return on capital. In fact of every £1 we spend in Tesco about 10p is paid by them to the Government as VAT and corporation tax. With the rest they pay all of their suppliers and staff and then retain about 4p as profit. If taxes go up, so will their prices in order to maintain their bottom line at 4p.
The war of attrition between a company and the taxman begins at birth: As the brave entrepreneur steps out of Companies House, clutching a precious certificate of incorporation, the monster wakes. The very next day the first of many brown envelopes arrives. In it, a form demanding information about the newborn company: what it will be doing, who is in charge, and of course how much money the government can expect. No thanks or congratulations, of course. For many new entrepreneurs it is the first letter they receive, heralding the start of a lifetime of skirmishes, headaches and resentments. And it’s an expensive battle, employing many thousands of accountants and lawyers: billions are wasted by the government and business continually trying to outwit each other, while the Treasury is locked in a desperate Texas auction with other countries on what rate to set. And to cap it all, like mercenaries on the battlefield, Cayman, Jersey and their ilk skulk around the fringes, exploiting the corporate misery.
But given that corporation tax effectively functions in the same way as VAT, the question arises: why do we charge corporation tax at all? Why don’t we just lump the two together, call it all VAT, and collect it the same way? VAT first appeared in the UK in 1973 as a condition of our entry into the then EEC. Replacing Purchase Tax and Selective Employment Tax (don’t ask), its introduction heralded the start of a shift from direct to indirect taxation that has continued in fits and starts to this day. VAT is now the third biggest source of revenue for the government after income tax and national insurance.
Our European neighbours rely much more heavily on VAT. In Denmark and Sweden the rate is 25%, in France 19.6% and Germany 19%. There is pressure for harmonisation across the union and a general view that VAT in Britain will have to rise anyway. This presents us with an opportunity: What would happen if we were to phase out corporation tax in favour of higher VAT? Shifting the tax burden from production to consumption would have three effects: First, all that money and all those people currently wasted on compliance would be redeployed, with billions of pounds and thousands of people redirected to investment and production. Second, the UK would become the country of choice for business to settle in. Corporations from across the world, fed up with having to hide in Lichtenstein and Cayman would relocate to the UK, bringing with them even more jobs and investment. If you don’t believe me, ask the Irish, who have built a European “tiger” economy by cutting corporation tax. Third, underlying prices would fall. Corporation tax would no longer form part of the cost base, so Tesco could drop its prices even further and still maintain its 4p profit. In addition it would not be shouldering the huge cost of dealing with the Inland Revenue, and that saving could go to reducing prices too. The price increase caused by a rise in the VAT rate on its non-food products would be more than offset by the savings made overall, and in a competitive environment, Tesco would pass these savings on to its customers.
But surely VAT is a regressive tax? As such, it falls unfairly on the poorest. Not necessarily. Certain essential items that are already VAT free, including food, children’s clothes, The Times, would of course remain so, and would fall in price. Those individuals with higher consumption would pay more. But in truth none of us would notice the difference.
“Ah!” you might say, “but what about the cash economy?” Well you have a point, but this overlooks one crucial development: cash is dying. In March Marks & Spencer stopped accepting cheques. Within my lifetime, I fully expect them to stop accepting cash too. Cash is dirty, expensive to handle, hard to count accurately and open to theft. Lots of businesses already exist without it. Easyjet, Amazon, iTunes: all are completely cashless businesses. In London, public transport is now 80% cashless as the Oyster smartcard takes hold – and there are plans afoot to use the same technology for small payments in shops. Westminster Council is rolling out cashless parking across the centre of the capital. Online banking is now used by more than a quarter of UK account holders to make routine payments and this week it was reported that some mobile phone companies are actually charging customers more for cash payments to compensate for the handling costs.
Whichever way you look at it cash is on the way out, and this means VAT could be on the way in, replacing corporation tax, and bringing peace in the destructive war between corporate Britain and the taxman.
Kit Malthouse is Deputy Mayor of London 8th September 2008