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.

 

[rpm]

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.

I`m happy with that Ray but when these companies can pay big bucks to the same people the government pay for advise on UK tax laws then there has to be conflict of interest.

 

[stevetheplumber]

I`m happy with that Ray but when these companies can pay big bucks to the same people the government pay for advise on UK tax laws then there has to be conflict of interest.

the trouble with that staement is the top men in the field comand huge wages which the goverment would be crucified for paying to employed staff so they are forced to use the same people as they are free lance but they pay them as consultants and probably pay more
similar situation with medical staff agencies most agencies are part owned by the very people running the health service
to a certain degree there is a similar situation with gas the people who advise the making of the regs are often involved with the training industry who benefit from ever changing rules that every one has to pay to be trained in

 

[rpm]

I know and agree Steve, just saying it`s wrong.

 

[Ray Stafford]

The answer must lie in simplifying the system, so there is little advantage to employing high powered consultants.

 

[rpm]

The answer must lie in simplifying the system, so there is little advantage to employing high powered consultants.

Along the lines of all companies pay the rate of tax that is due to the government of the country in which they trade not where their HQ is registered, then you stop companies buying up other companies in other countries purely for tax avoidance reasons.

 

[Ray Stafford]

Along the lines of all companies pay the rate of tax that is due to the government of the country in which they trade not where their HQ is registered, then you stop companies buying up other companies in other countries purely for tax avoidance reasons.

The trouble is that corporation tax is (rightly) levied on profit, not turnover. Its possible to have a massive trading presence, but make no profit. Equally, its possible to move profits between different jurisdictions in such a way that its incredibly difficult (impossible?) to prove whether it was done for genuine business reasons or just to minimise tax.

The best solution would be to harmonise tax rates across countries, so there was no benefit to be had. However, since being a tax haven is a large part of the economy of some countries, there is little prospect of that.

Another possibility is to move away from taxing profits, and tax some other element of corporate activity - like the payroll or property taxes mentioned earlier. This also has some negative effects - for example, if we have high payroll taxes, it encourages businesses to move still more jobs to countries with both lower wages AND lower payroll taxes.

The chancellor is steadily lowering corporation tax, continuing a trend by chancellors of all political parties. From a peak of 52% in 1983, they will have fallen to 18% by 2019, which I think is the lowest in the G20. Ironically, Britain may actually benefit by companies choosing to pay tax in the UK than in one of the higher tax continental countries.

The actual income to the treasury from 1980 to 2020, will be almost exactly the same - at about 3% of GDP plus or minus 1%. The variations, peaks and troughs in the graph of corporation tax receipts, clearly show booms (lots of profit = lots of tax) and recessions (little profit and falling tax receipts) but many cuts to the actual rate at which it is levied does not seem to reduce the amount it raises in the long run.

 

[voivod]

And another tax avoidance in a roundabout way>
Those tax avoiding companies who pay crap wages....WHY .....because we then HAVE to top up their crap wages with tax credits to make a bad wage a wee bit better ....seems bad you work 40+hrs and hae to really on tax credits .

 

[Ray Stafford]

And another tax avoidance in a roundabout way>
Those tax avoiding companies who pay crap wages....WHY .....because we then HAVE to top up their crap wages with tax credits to make a bad wage a wee bit better ....seems bad you work 40+hrs and hae to really on tax credits .

This is another difficult one. I just don't know where the line should be drawn.

We are a living wage employer* - so even our entry level staff earn quite a lot more than the minimum wage. So if a young childless couple both worked for us and lived in an area with relatively inexpensive housing, they would enjoy a reasonable standard of living.

However, imagine the same couple now have 3 kids, and she gives up work - partly because she wants to look after her own kids and partly because childcare amounts to more than she can earn.

All of a sudden, there is no way that they can survive on his money, even if we gave him another 20% payrise, it wouldn't be enough. Is that the employers fault?

There simply isn't a good solution. If you force up the minimum wage, then inevitably some jobs will be lost. The more you push it up, the more jobs will be lost, because either automation or offshoring will be cheaper. So you benefit those in work, but at the cost of creating more unemployed, and making it much harder for those with marginal skills to find work.



*a proper living wage, not the nonsense that Osborne came up with in the budget

 

[rpm]

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

Saw today that Starbucks UK paid 8m tax.

 

[firemant]

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

Because 100% tax deductible only means that you can reduce the taxable amount by the cost. It does not reduce your tax bill by 100% of the cost (if that is what you meant). So you would still have to stump up the balance . So (for a company with a turnover up to £300k) a £10000 qualifying purchase/expense will "save" the company £2000, but cost £8000.