This letter was in the Guardian this morning. It is from the senior partner of a firm of London lawyers employing more than 150 staff:
There is a simple way of addressing tax avoidance by companies (Editorial, 19 February). Profits in the hands of an accountant are an elastic concept. Revenue and Customs battles to stop companies deflating profits in this country and inflating them offshore — Barclays' use of tax havens is but a wider part of corporate tax avoidance. The irony is, of course, that these companies regularly boast of their corporate social responsibility programmes, when the two most fundamental elements of corporate responsibility — paying their low-paid staff properly and paying their taxes — are frequently flouted.
As you comment, "limited liability is a terrific privilege". What is more, it is virtually free. Companies House charges £30 to establish a company and £15 thereafter for the annual return. If governments are serious about raising revenues, they should consider taxing the privilege of limited liability. The private sector turns over approximately £1tn a year. A large proportion of this will be through limited liability companies. The government should levy a turnover tax on the privilege of limited liability, calculated at varying rates depending on the social usefulness of the organisation. Hence companies producing pornography could be charged a higher rate than those providing social care. Corporation tax yielded approximately £40bn last year. A turnover tax for the privilege of limited liability levied at the rate of 4% of gross turnover should bring in a minimum of £30bn a year. This would be simple to assess and simple to collect. It would allow corporation tax rates to be reduced and, of course, the limited liability tax would be a tax-deductible expense in calculating profits, hence corporation tax receipts would go down in any event, but this would be more than compensated by the revenues generated by the limited liability tax.
In addition, the chancellor should legislate to withhold the right to carry forward losses to offset against future profits for the purposes of calculating the corporation tax for those banks which have been bailed out by the taxpayer. For the taxpayer to have borne the cost of saving the banks, but for those very losses to be used to reduce the banks' corporation tax liabilities in the future, is a double blow to the exchequer and an insult to the taxpayer.
Stephen Lloyd
Senior partner, Bates Wells & Braithwaite
Turnover taxes might be regressive in some cases, and I would not make them tax deductible. But it is excellent to see other professionals biting the bullet and coming out against tax abuse.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Introduction of a charge for limited liability is an interesting idea and I can see the appeal – limited liability is a real bargain at the moment. It’s certainly thinking outside the box but could it be potentially difficult in application?
What upsets me about that piece is the phrase ‘socially useful’. Aren’t all businesses that provide employment more or less useful to society?
@Chris
Is drug running socially useful?
Or prostitution?
Or even gambling?
Please engage brain…
How about a % restriction of debt interest allowable as a deduction in a limited liability company or group? (ref Germany, US http://www.taxresearch.org.uk/Blog/2011/02/21/progressive-tax-blog-explains-the-reforms-needed-to-uk-tax-to-beat-boots-and-friends/
)
Probable beneficial effects on volatility/risk and hopefully even out swings in the real economic cycle. It would also seem to converge more with the EU which should simplify life for EU companies.
Abolish corporation tax. Replace it with turnover tax as a payment for limited liability. Income tax of 50% deducted at source from dividend payments when companies pay. Lower rate tax payers can then claim tax refund according to their circumstances (after grossing up dividends receieved). Tax deducted at source not reclaimable by institutions/other companies unless they too pay dividends.
If you think the best way to encourage inward investment and growth in the UK is to slap a 4% tax for limited liability then you are sadly deluded.
We know the problem with limited liability – it lets shareholders off the hook – but over the past century it has also provided literally hundreds of billions in wealth. It is the trade off we make.
And I notice Mr Lloyd signs off from “Bates, Wells and Braithwaite” when in fact “Bates, Wells and Braithwaite LLP” would be more accurate!
@Harry Lloyd
Oil has also generated vast wealth
It does not mean it has to be underpriced
If limited liability is underpriced we can correct the externality
@Harry Lloyd, “We know the problem with limited liability … but over the past century it has also provided literally hundreds of billions in wealth.”
And those hundreds of billions have ended up in fewer and fewer pockets. Real wages have barely increased in UK and US for the last 40 years, instead we’ve been tempted onto the debt wagon to make ourselves feel better about the theft of our labour by capitalists and landowners.
@Harry Lloyd
4% !!! I was thinking of 10% (but no corporation tax). Turnover harder to manipulate than profit.
Also, in tandem, every time a company pays a dividend to foreign or domestic shareholders it pays the same amount over to HMRC as income tax deducted at source. This is equivalent to a 50% tax rate on dividend income a relevant part of which lower rate taxpayers can reclaim if their personal circumstances permit. No refunds for receiving companies or institutions though.
All very simple and would eliminate some of the more notable tax avoidance schemes, such as paying dividends to a spouse domiciled in a tax haven.
Turnover Tax? May be regressive? It’s a great idea for lawyers, most of whom do not operate through limited companies by the way (!!) , because
they have high Gross margins. But ever heard of manufacturing companies?-in case you don’t know they have High Turnover, Low Gross margins -you would kill most of them off, they are struggling as it is.
Stephen, surely taxing turnover would penalise low margin business and provide a huge bonus for high margin business? Or am I misunderstanding the whole concept?
@Greg
So it needs high rates on anti-social activity with high margins
Like much of current banking which does not, incidentally, carry VAT so has ample capacity for such a tax
“Profits in the hands of an accountant are an elastic concept” thrown from the glass house of a lawyer
And truth, justice, guilt, culpability, responsibility, reasonableness, (along with hundreds of other ideas far more damaging to society than imprecise measures of profits) in the hands of a lawyer are elastic concepts
@Greg
No, Greg you aren’t misunderstanding, solicitors are in high margin businesses and Mr Lloyd is a solicitor.
Richard Murphy,
Actually banking is not a high-margin activity. It is just volumes which produce such profits (or losses).
Roger Rabbit,
Spot on.
@Harry Lloyd
Wrong
Read a set of bank accounts
Depends on what you define as turnover
I’ll use the accounting definition – and then they’re very high margin
Stephen Lloyd says,
“The government should levy a turnover tax on the privilege of limited liability, calculated at varying rates depending on the social usefulness of the organisation.”
Great, can we put a turnover tax of 100% on lawyers?
@Greg
Point taken. My advocacy of a turnover tax is not the smartest idea I have supported. However, I do think an alternative to profit should be found as a basis for taxing corporations. Profit, even tax adjusted profit, is a slippery animal because it is open to manipulation such that the profits appear in the lowest taxed jurisdictions.
I stand by the idea of deducting tax from dividend payments at the top rate of tax at the time of payment. This is to ensure that shareholders receive their dividends net of tax. The onus is then on the shareholders to claim a refund if they believe they have suffered too much tax on their dividend income. There is very little tax avoidance on PAYE, a system which results in employees receiving their salaries and wages net of income tax and National Insurance. I suggest that similar principles of PAYE should be applied to dividend income so that tax avoidance/evasion may be minimised.
There are two concepts of a “company”. The first is a “company” of shareholders who have combined together to share risks and rewards; the second is the notion of a company as a separate legal entity having a life of its own independently of its shareholders.
I suspect that it is these two quite distinct notions of “company” that makes the subject of corporate taxation more difficult. Corporation tax is a tax on the legal entity whereas dividends are a tax on the shareholder notion. We currently try to tax both notions and so the cry goes up that shareholders are being taxed twice, ie, once on corporate profits and then again on distributions.
One way round this problem would be to abolish corporation tax altogether and recover the lost tax revenue through a dividend tax that is levied in the way I have suggested above. Shareholders with low incomes could then make use of their personal allowance and the tax bands to reclaim any over payment of tax suffered at source. The onus would be on them to prove to HMRC that they have been over taxed. Low paid shareholders under this system would receive tax refunds in accordance with the principle of equity.
The justification for a default 50% tax rate on dividends, which many will argue is high, is that shareholders enjoy the benefits of limited liability and the other advantages of incorporation. Moreover, shareholders have not earned the income, they are mere financiers; it is the company as a separate legal entity that has done the earning (ie the managers and workers).
The above system is simple and fair. All dividends by a UK registered company would be subject to a simultaneous payment to HMRC of an identical amount. Foreign investors would suffer UK income tax deducted at source. A zero corporation tax rate should not deter inward investment into the UK and indeed may encourage it.
@Richard Murphy
Dear Richard,
Enjoy your half term.
I am not sure what you mean by “current banking which does not, incidentally, carry VAT so has ample capacity for such a tax”.
As you know, VAT is designed to be a tax on the end consumer. VAT is not a tax that is intended to be suffered by commercial activity (unless it is specifically decided that certain types of commercial activity is the end consumer). VAT is a “consumption tax” and the consumers that suffer the tax are mostly real human beings.
In respect of the exempt activity of banks (which is a significant proportion of total activity), banks are the end consumer and cannot recover the attributable input tax. Also, as you know, this means that in order to make the same net margin, banks will factor in the profits they make passing on the cost of VAT to us, the individual consumers (as do other exempt classified business activities).
What do you suggest, that banks charge VAT on their products? VAT on interest? VAT on overdraft charges? Make the individual consumer, that is us, pay more? Have you ever tried to work out how VAT could apply to financial matters such as loans? It is really difficult, that is one of the reasons why VAT doesn’t apply to such supplies.
Or are you suggesting/indicating that in addition to banks being the end consumer for VAT purposes in the majority part of the activities undertaken, the banks pay an additional tax? If so I am not sure how not carrying VAT has any bearing on this. Imposing an additional tax on banks is separate, surely, from the banks bearing input tax as a cost in the P&L. Or am I missing something?
Kind regards
Augustine (as you know: in ominibus caritas)
Levying VAT on banking services would be another means of compensating taxpayer’s for the support given to the banks and for which they are very ungrateful as well as responsible and well targetted revenue raising.
Financial services are consumed by clients/customers every bit as much as holidays or drink. Given that, it’s hard to see what the big deal is, apart from legislative capture, over whether financial services should be exempt or charged at the full rate any more than energy, telecommunications or booze.
Were VAT introduced, and to help ensure that avoidance would be less of an issue, it would be important to charge VAT on the real value of the service (i.e. the gross transaction value – the amount loaned, guaranteed, facilitated) rather than the “service” element.
Levying a sector based charge on limited liability to cover losers when Ltds/PLCs/LLPs go bust is a sound idea.
PS — has anyone noticed just how nasty is the Tax Payers Alliance?
@belgraviadave
To understand the TPA check out ‘The Other Taxpayer’s Alliance’ which blows them apart