Why do companies pay tax?

[WaterTight]

Why don't they calculate in advance what is due and spend it all on training/expansion/equipment? Is there a law against this?

 

[rocketmanbkk]

No laws against that.

If a company feels they want to spend ££ on training & equipment etc. Then it's an expense.

If they want to have a puss up & call it a training seminar it's still an expense, although we not its not a real one but that's what Hmrc says.

 

[village idiot]

Why don't they calculate in advance what is due and spend it all on training/expansion/equipment? Is there a law against this?

If they spent it all on training/expansion/equipment, then there will be nothing left to pay the owners/shareholders. So in as much as a proportion can be set aside/used for the areas you mentioned, some has to be set aside to reward those who take the ''risk''.
Companies paying tax is the same as individuals paying tax. There is no difference

 

[oz-plumber]

Because you can only claim the depreciated value of some expenses over a period of time.

Also, not all expenses are 100% tax deductable.

 

[gassafe]

Most clever companies dodge it all anyway, Starbucks probably still pay less tax than me :/

 

[rpm]

Most clever companies dodge it all anyway, Starbucks probably still pay less tax than me :/

Just remember that's the HQ`s, the manager and staff at your local coffee shop all pay normal paye tax like any employee so no point in kicking the windows in at the next Tax avoidance protest march.

 

[Ray Stafford]

Most clever companies dodge it all anyway, Starbucks probably still pay less tax than me :/

A widely held view, but not one that stands scrutiny.

There are a handful of companies, including some high profile names like Starbucks and Amazon who use legal but unpopular methods, not to avoid paying corporation tax, but to pay it in a country with a lower percentage charge.

In order to do this, they have to have a substantial multi-national presence to take advantage of cross border tax-rate changes.

The overwhelming majority of companies in Britain only trade in Britain, so that cross-border option is not available to them. Sure there are some other tactics that can be employed, but HMRC have blocked most loopholes, and there are few sectors which still have much scope for legal avoidance. In most cases, savings are marginal, or move liabilities into different years.

But even coming back to Starbucks, the idea that "they pay less tax than [insert choice of comparator]" is still not true.

Corporation tax is a relatively small proportion of the overall tax burden for many businesses. Even for a down-at-heel south coast plumbers merchants, payroll taxes (employers NI and mandatory pension contribution) plus property taxes (UBR, SDLT etc) come to WAY more money than our corporation tax liability, even in a good year. Bearing in mind the much higher payroll/turnover ratio that Starbucks has, and the vastly more expensive property locations that it pays rates on, I wouldn't be surprised if their corportation tax (assuming that they paid it all in the UK) amounted to less than 1/5th of their total tax contribution.

So whilst its perfectly reasonably to challenge the tax regime that permits them to offshore (and thereby reduce) their corporation tax liability, we shouldn't kid ourselves that they are "paying no tax in the UK". They are paying very substantial tax indeed, its just not corporation tax.

 

[Ray Stafford]

Why don't they calculate in advance what is due and spend it all on training/expansion/equipment? Is there a law against this?

Two parts to the answer.

Training is generally treated as an expense to the current year, and is fully tax deductible. However, expect HMRC to ask questions if your training overhead exceeds a thresshold based on industry averages.

Equipment (on any scale) is normally treated as capital expenditure, and is therefore not fully deductible. There are a range of capital allowances available, but they are limited. You can't just cancel your tax liability by buying endless equipment.

Expansion usually involves some current year expense (deductible) and some capital investments (with limited deductibility). However, assuming you are trading profitably, you are only kicking the tax can down the road. Eventually you will either reach the natural limits of expansion, in which case your business will start to throw off highly taxable cash, or you will sell a very valuable business and incur the capital gains tax. Of course you could trade at break-even or at a loss, but why would you bother?

The second part of the answer is "why would anyone invest their time and money in a business with no reward?" Most people either want to take income (which is taxed as an employee) or dividend - which may be more tax efficient. But dividends come out of POST-TAX situation, so to sustain dividends, you must be making a taxable profit.

There are a range of other business models used by not-for-profit organisations, but their motivation for existing is different.

 

[rpm]

A widely held view, but not one that stands scrutiny.

There are a handful of companies, including some high profile names like Starbucks and Amazon who use legal but unpopular methods, not to avoid paying corporation tax, but to pay it in a country with a lower percentage charge.

Small line between Tax Avoidance & Tax Evasion in my book.

 

[Ray Stafford]

Small line between Tax Avoidance & Tax Evasion in my book.

Sure. Just as there is in many areas of the law. Fortunately we have judges and courts to decide which side of the line a specific company or individual stands.