{"id":24567,"date":"2014-04-16T09:41:24","date_gmt":"2014-04-16T08:41:24","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=24567"},"modified":"2014-04-16T09:41:24","modified_gmt":"2014-04-16T08:41:24","slug":"more-on-corporation-tax-as-a-tax-on-transactions-and-the-opportunities-it-gives-to-design-a-better-tax-system","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2014\/04\/16\/more-on-corporation-tax-as-a-tax-on-transactions-and-the-opportunities-it-gives-to-design-a-better-tax-system\/","title":{"rendered":"More on corporation tax as a tax on transactions – and the opportunities it gives to design a better tax system"},"content":{"rendered":"

I \u00a0wrote a blog yesterday <\/a>suggesting that despite the impression given by law and practice direct taxes, such as corporation tax, are not in fact taxes on profits, as is implied by their description, but are in fact taxes on specific transactions. \u00a0The inevitable adverse reactions were received, suggesting that I had, \u00a0as usual, got everything wrong. \u00a0Since this is, \u00a0however, the inevitable reaction of those with a vested interest in the existing system on every occasion that was to be expected, but in practice the comments \u00a0made suggested to me that if anything my theory is closer to the truth than I had expected.<\/p>\n

As example, let's just look for a moment at the potential sources of revenue for a UK company. This diagram helps:<\/p>\n

\"Screen<\/a><\/p>\n

\n

The revenue of the company, by no means all of which will be reflected in its turnover, \u00a0but all of which will, eventually, contribute to its profit, can come from a wide variety of sources, some of which are noted above. And, \u00a0as this \u00a0simplified diagram notes, quite a range of those revenue sources can, even though they give rise to what are described as realised profits (that is, cash in the bank) \u00a0give rise to no UK tax liability.<\/p>\n

I stress, that is not because the profit is outside the scope of tax: it is because the source of income is outside the scope of tax. \u00a0So, for example, \u00a0dividends received by one UK company from another UK company are not taxed, \u00a0and this now applies to intra-group dividends received from companies outside the UK. \u00a0Similarly, \u00a0the proceeds of sale of significant shareholdings by one company in another company are not subject to any tax, even though they can give rise to significant capital gains. \u00a0Most tellingly, revenue now earned by an overseas branch of the UK company is also outside the scope of UK tax.<\/p>\n

Many of these \u00a0exemptions ( or loopholes, if you like, for that is what they are) are recent innovations and \u00a0only a very few ( such as the receipt of dividends from other UK companies) \u00a0have any obvious theoretical justification. \u00a0The distinction between realised and unrealised gains is also new: \u00a0this aberration, which has \u00a0fundamentally undermined the \u00a0reliability of all \u00a0financial statements, \u00a0basically dates from the adoption of\u00a0International Financial Reporting Standard \u00a0 as the de facto accounting standards for the UK in 2005.<\/p>\n

The reality is that when corporation tax was introduced \u00a0I think it was, as the law describes, intended to be a tax on profits. \u00a0The fact is that this is no longer the case: \u00a0we now have a tax on specific transactions undertaken by companies, less the costs that are allowed by law to be offset against them. \u00a0That is something very different indeed \u00a0but what it does do is open the opportunity for those with an interest in tax policy design to ask some very relevant questions. \u00a0These include \u00a0the very obvious ones, such as why have we chosen to exempt those types of income for the currently untaxed, and should we reform that approach? \u00a0Likewise, the opportunity to ask about the costs that should be offset \u00a0against \u00a0taxable revenues is now very clearly within the scope of policy debate.<\/p>\n

Once the linkage between profit \u00a0and tax is broken, as I think it has been in the case of corporation tax, and to some extent income tax, \u00a0them we need to look at the whole basis of tax design again. \u00a0It is something I intend to do \u00a0because the opportunities that this opens for the taxation of what might be described as 'bads' \u00a0whilst exempting those transactions that we think to be of benefit to society \u00a0is one that is too important to miss.<\/p>\n

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I \u00a0wrote a blog yesterday suggesting that despite the impression given by law and practice direct taxes, such as corporation tax, are not in fact
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