The case for Windfall Taxes

Andrew Higginson, Senior Adviser, Shore Capital Markets

 

As a young Finance Director, learning his craft in the 1980s and 90s, the lessons on Corporate Taxes were clear and consistent. The Government writes the rules, it’s our job to stay within the rules, but with tax rates high, it was our duty to minimise the tax paid for the benefit of our shareholders.

On the other side of the tax table sits the Government. By and large, Governments and the officials who manage and administer our taxes prefer the status quo. As an example, the case for reforming Business Rates, a property tax with its roots back in the Poor Law of 1572, is overwhelming. As a tax on retailers in the internet age, it is patently past its “sell by” date.

However, it is well established and easy to collect. The bureaucracy of Government finds it much easier to stick with what it knows, so despite a consensus that change is overdue, unsurprisingly, any decision to reform keeps getting deferred.

The same is true of international, inter-Governmental tax treaties. Honed and negotiated over years, decades in many cases, they are hard and slow to change, and easy to hide behind when Governments are urged to respond to tax avoidance.

These hard fought and complex treaties, ironically, provide comfort for individuals and Corporations organising themselves to avoid taxes. Complicated and costly arrangements around tax residency, debt structures, intellectual property ownership and more can all be made knowing that efforts to counter the avoidance will be slow in coming, requiring international cooperation and years of negotiation by the Governments they are out-witting.

Society’s attitudes towards many things have changed profoundly during my forty years in business, almost always for the better, but business’s attitude towards Corporate Taxes remains unmoved. It’s time to change.

The moral case for change is a simple one, in my view. With fair and reasonable tax rates (the UK Corporation Tax rate is 19%) any business that takes money from UK customers should contribute to the schools, hospitals, roads and services those customers need, by paying their share of taxes. Far too many are not.

The in-built inertia of Governments and their existing tax arrangements leads to another anomaly. The lazy demand for those who DO pay tax, to pay more. How much easier to increase the rate paid by those already making their contribution than chase down those who do not.

Let me be clear. Corporations and wealthy individuals avoiding tax are not acting illegally. Avoiding tax is not breaking the law.

In an increasingly global economy, it is relatively simple to move profits from the UK to low or no tax jurisdictions. Set up inter-company loans to a UK subsidiary, deduct the interest from UK profits to pay less tax, take the interest income in a low/no tax jurisdiction – simples.

There are more elaborate schemes that I have heard of. British companies that have moved their brands offshore to earn royalties and margins with low/no tax. Major multinationals with British staff, serving British customers, relocated with their families to, and flying in from, Switzerland. This allows profits from the UK to be earned offshore.

To paraphrase Sir Alex Ferguson, who lost a player he wanted to a London club, there are only two reasons a Corporation would choose Switzerland over the UK. One is the scenery, and the other is the tax breaks. And I don’t think they are interested in the scenery. (For Sir Alex, what London offered a player that Manchester didn’t was architecture and nightlife, and he didn’t think the player was interested in architecture!)

As a simple suggestion, a Windfall Tax could take any particular Corporation’s global profits, calculate the proportion of its business that comes from the UK, and apply UK Corporation Tax to that proportion of its profits as a windfall. That way, the Corporation would have the moral satisfaction of contributing to our economy, as well as taking from it.

We will need to raise taxes to pay for the extraordinary costs of the Covid crisis. The easy cry is to raise taxes on those that already pay. The better choice is to target those who don’t, and Windfall Taxes should be the Government’s weapon of choice.