Rory Meakin: A fairer, simpler system would get to root of the problem of tax avoidance

Recently, the National Audit Office unearthed public sector bodies dodging National Insurance for employees in Britain. Tax is big news in a way that it never used to be. Barely a day seems to go by without some tax-related news hitting the headlines.

All the problems fundamentally boil down to two key truths about British tax. First, it’s too complicated. Secondly, it’s too complicated because it’s trying to raise too much while carving out special protections for various different groups.

National Insurance is increasingly becoming recognised for what it now really is: a second set of income taxes that tax the same wages and salaries that income tax hits, just with a whole different set of rules to keep it from being simple. But too few realise that the same fundamental problem is at the root of the problems with corporate tax.

Whether it’s Google executing its sales in Ireland thereby creating profit there instead of here, Apple leaving its profits outside the US taxman’s reach or Starbucks UK paying a management fee for sales made using the brand, most people agree that the system we have now doesn’t make sense in a world of multi-national companies, intellectual property and the internet. How much UK tax should companies like Starbucks and Google pay with a fairer system? Are they getting away with paying too little?

Public Accounts Committee chairman, the Labour MP Margaret Hodge, might have said that it is “evil” of Google to fail to arrange its affairs in a way that would result in it paying more tax than it is required to. But she also told a conference recently that “simplification is at the heart of tackling tax avoidance and I blame my party just as much as the current government”.

Many silly things are said about tax, both in Parliament and outside. But Lord Tomlin, a judge on a case in 1936 involving the Duke of Westminster, famously said that “every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”.

For all the sillier comments that have been made, there is genuine and justified anger about a tax system that very few of us really understand, especially corporate tax.

The first point to remember is that companies have never paid a penny in tax ever, in the sense that you or I will pay tax. Only people pay taxes. Whether it is shareholders receiving less in dividends, customers paying higher prices or workers making do with lower wages, companies themselves are just legal entities through which money is passed to and from real people. But when corporation tax is increased or cut, nobody knows exactly how much falls on workers, consumers and shareholders.

Research suggests that workers bear the lion’s share of the burden, but the estimates vary and in real situations it depends on the complicated interaction 
of how mobile shareholders’ capital is compared to the employees’ labour.

So what should be done?

Last year, the 2020 Tax Commission proposed a comprehensive overhaul of the system, with corporation tax and capital gains tax replaced by a new single income tax on distributed income.

In other words, cash leaving companies in the form of dividends, interest and share buybacks would be taxed at the same rate as cash leaving in the form of salaries.

The improvement would be dramatic: equal treatment of interest, dividends and salaries; an end to the complexity of profit, depreciation and allowances; and an end to the corporate tax bias in favour of debt. So how could we get from the mess we’re in now to that?

Our new report, How to fix corporate taxes, shows how with three key recommendations. First, cut corporation tax significantly. Secondly, abolish capital gains tax. Finally, reform capital taxes for the long term. And we set out four practical options on how to go about that. Ministers could extend the tax benefits of real estate investment trusts or partnerships to other companies, or they could implement a trial version of the single income tax either regionally or nationwide but for small businesses only. Any one of those reforms would sow the seeds for more comprehensive changes by showing what can be done. And it wouldn’t be long before businesses that didn’t qualify started to clamour for the same simple and fair treatment.

For the sake of both restoring economic growth and restoring legitimacy to an increasingly discredited system, we need fundamental reform designed to last – not tinkering at the edges.