UK Companies do not pay a higher proportion of value added in tax

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The FT has prominently reported that:

Large British companies pay more in corporate taxes on the wealth they create than their competitors in Germany, France and Switzerland, a UK government study has found.

The annual value-added scoreboard, published Monday, shows the 185 top wealth-creating companies in the UK handed over 12 per cent of the added value they created in taxation last year.

The German companies among the 750 top European wealth-creators paid 6 per cent of their value-added in tax, while the French and Swiss companies in the league table paid 8 per cent.

There’s one trouble with this report. It’s wrong because it is absurdly simplistic.

The report, rather oddly, comes from the little known Department for Innovation, Universities and Skills. That’s not a centre of either accounting or economic expertise, I’d suggest. And it’s methodology is decidedly strange. Note that it says in the report summary that:

Overall, the UK185 companies are more efficient at creating Value Added than the UK800 as measured by the ratio of Value Added to the costs of employment and depreciation. They are also more efficient than their peers in the E750.

But this is an absurd measure. It means that any country with a concentration of companies in sectors with low employment ratios and physical capital employed will perform well. We have both. Finance is one and dominates much of the top of the FTSE. This employs little physical capital and relatively low labour to turnover, and have enormous profit margins in proportion to turnover: hence apparent high value added. The other sector with low employment ratios to turnover is the extractive sector where very often the number of people employed are quite small. Again, we have a real concentration of them.

What we don’t have are UK companies making things. They have high ratios of labour and depreciation charges to turnover, of course.

So, this report merely says that here in the UK we’re good at digging dirt (usually not in the UK) and money dealing: we’re not good at making things. It’s a weird definition of added value. But to base a tax analysis on it is even more absurd: of course these companies have high tax bills in relation to apparent labour value added. They are, after all, dealing companies in effect: one group deals in money, the other in natural resources. Their profits aren’t related to value added but to speculation. That’s why they apparently pay more tax.

This is an absurd argument. Anyone relying on it is crazy.

But you can guarantee they will.