One thing that really bugs me is tax avoidance. I used to think it was a great idea until one day, whilst having an inner groan at the constant lack of cash in public services I realised that avoiding tax is, in fact, incredibly unethical and irresponsible. Taxes, whether you like them or not, are there to pay for all those things society needs. They pay for our health service, the roads, street lights and so on.
Just like as individuals we pay income tax, companies pay corporation tax – a tax on profits. Many corporations, including big household names, employ tax avoidance schemes utilising subsidiary companies in tax havens like Luxembourg. These schemes allow them to pay as little tax as possible on the massive profits they earn.
Billions of pounds are essentially being kept out of Government hands and in the pockets of wealthy shareholders, denying society of much needed cash to improve public services. So I was glad to read today that such practices have been outlawed.
Ever the sceptically minded, though, I can’t see it making a huge impact. Corporations spend hundreds of thousands on accountants to build these complex structures designed purely to avoid paying tax simply because the returns are so huge. Put simply, they’ll find another way because the financial benefit of doing so is so great.
But what’s the solution? Then I thought back to the income tax. With individuals, we are charged income tax at 20% (unless you’re lucky enough to be in the higher-rate tax band) with the benefits system helping those who don’t earn as much to get by. Corporations and individuals both earn money and have to use that money to pay their operational (or living) costs. Anything left over is then a bonus. However, we are taxed differently – corporations pay tax on anything left over while individuals pay on everything we earn (let’s ignore the untaxable allowance for simplicity). So why not tax corporations on everything they earn and then kick-back a little bit for every pound they don’t make a profit on?
It’s a nice idea, I think, but whether it will work in practice is something for the accountants and economists to battle out. My first thought is that avoiding that method would just be a case of making your accounts look like less profit was made. Probably not a hard thing to do. Yet, for big companies with lots of shareholders that would probably be a bad thing as the one thing shareholders want most out of their investment is a good profitable company.
I’d love to here thoughts on this idea, especially people who will be more well-versed in accounting than me.