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Tax Policy

“Amazon Tax Cut” features in Parliamentary debate

29th April 2021 by Alex Dunnagan

On Monday 19 April MPs met to scrutinise the Finance (No. 2) Bill in a committee of the whole house. In the debate, TaxWatch’s research into “super-deductions” featured prominently, as MPs sought to amend the legislation to ensure some companies were excluded from the benefit of the super-deduction.

The new policy, at a cost of £12bn for this financial year, allows companies to deduct 130% of the cost of “main rate” assets from their taxable profits in the year that they purchase it. We calculated that many large companies with significant expenditures would be able to reduce and perhaps even extinguish their tax bills as a result of this policy. Logistics companies, energy, infrastructure, Amazon, would all likely gain significantly as a result of super expensing.

More details can be found in our report, “The Amazon Tax-Cut”, which was published in March following the announcement of the policy in the Budget.

Speaking in support of these amendments, James Murray MP, speaking on behalf of HM Opposition, raised the issue of the super-deduction benefiting companies who have seen business increase throughout the pandemic, saying:

“The super deduction that we are debating now is designed to help companies such as Amazon, which do not need any help with their investment. It is important that we see this in the context of those companies that have done well throughout the outbreak and are already avoiding much of the tax they should be paying. It is no wonder that TaxWatch has nicknamed this the “Amazon Tax Cut”. This giveaway from the Chancellor could wipe out Amazon’s UK tax bill entirely.”

Dame Margaret Hodge MP highlighted how small Amazon’s tax bill was, and the fact that the super-deduction could see it wiped out altogether, saying:

“In 2019, Amazon’s UK turnover was £13.7 billion, but by claiming that its UK sales took place in Luxembourg it exported its profits and avoided corporation tax. It declared only a bit of profit in the UK, as the shadow Minister said, on its warehousing and logistics activities. Its corporation tax contribution was less than 0.1% of its turnover. Analysis by TaxWatch shows that even that miserly contribution would be wiped out with super deductions. It would write off its investment in IT equipment and machinery against its deliberately understated profits.”

Rebecca Long-Bailey MP reiterated the fact that due to the amount Amazon spend on plant and equipment, they stand to see their tax bill wiped out entirely while the super-deduction remains, saying:

“I would have no problem if such businesses desperately required the relief in order to protect jobs or to invest in our local economies, but let us look at some of the potential beneficiaries. Amazon has benefited from the pandemic, seeing its sales jump by 50%. According to TaxWatch, the company’s latest accounts show that they spent £66.8 million on plant and machinery, £80.4 million on office equipment and £15.3 million on computer equipment in the same year, so the 130% super deduction could entirely account for the pre-tax profits of the company even before any deductions of staff pay awards.”

Responding to the debate on behalf of the government, Rt Hon Jesse Norman MP, the Financial Secretary to the Treasury said that the deduction had been deliberately broadly drawn to ensure that a range of companies could benefit from this “very generous policy” and that avoidance was best dealt with via other means. He said:

“the deduction has been very carefully assessed and includes important exclusions, including as to related party transactions and second-hand assets. It also includes a new anti-avoidance provision, which is designed to give it additional protections….

It is true that this is a country that takes the question of tax avoidance and tax manipulation extremely seriously. The right hon. Member for Barking (Dame Margaret Hodge), who has been a great campaigner in this area, focused on that. Of course I cannot discuss individual taxpayers. No one knows what an individual company’s taxpaying arrangements are. She purported to know—that is her privilege—but I am not in a position to discuss that. None the less, I can tell her that it would be very bad policy indeed for any Government to base tax policy on a single employer or taxpayer. If she thinks that this country has been soft in any respect on tax, let me remind her that we have led the international charge on base erosion and profit shifting, on diverted profits taxes, and on the corporate interest tax restriction. We have put into law a digital services tax and are consulting on an online service tax. That is not the action of a Government who take these things in any way other than very seriously.”

The debate is available on Parliament Live here, and on Hansard here.

Photo by Deniz Fuchidzhiev on Unsplash

Free Ports

23rd April 2021 by Alex Dunnagan

23 April 2021 – Alex Dunnagan

This briefing seeks to offer an introductory explainer as to what Free Ports are and what future they have within the United Kingdom. We ask what these special economic zones have to do with Brexit, and look at how Free Ports (including British ones) have functioned within the European Union.

There are many good resources explaining what Free Ports are and how they work. For further reading we recommend checking the references from within this briefing. Full government assessments as to the impact of these Free Ports are not yet available.

What are Free Ports?

Free Ports are special economic zones, usually maritime ports or airports.They are specific geographic areas within a country where goods can be imported from outside without being subject to the usual tax and tariff rules of the country in which they are based.

They allow goods to be imported, stored, manufactured, and re-exported, without being subject to the usual paperwork and tariffs. If the goods move out of the designated Free Ports area into the domestic market, however, they have to go through the full import process, including paying any tariffs.1 This effectively creates an additional internal border.

The purpose of a Free Port is to encourage businesses that import and re-export goods, rather than for goods where the final destination is that country.

Companies operating in the special economic zone typically payer lower or no tax. Critics argue that Free Ports are used for money laundering and tax evasion, and can lead to a reduction in workers rights. Further criticisms include the fact that the point where import tariffs are paid are merely deferred for later down the line.

History of Free Ports in the UK

The UK operated several Free Ports as recently as 2012 when the government stopped renewing their licenses.2 These Free Ports were introduced in the 1980’s and included sites in Birmingham, Belfast, Cardiff, Liverpool, Prestwick and Southampton.

Following this, the UK introduced ‘Enterprise Zones’ in 2012. There are now 48 of these operational across England.3 When introduced, businesses locating to these areas were entitled to a business rate discount of up to 100% over a five year period (worth up to £275,000 per business) as well as Enhanced Capital Allowances for the purchase of machinery and equipment.4 Similar policies have been adopted by devolved administrations in Scotland and Wales.

Both these Free Ports and Enterprise Zones were compliant with EU law.

Brexit and EU Free Zones

“The EU is the only place where these [free ports] really don’t exist…” – Rishi Sunak MP, 01 August 2019.5

“[We can] use that opportunity of Brexit to do the kind of things that we’ve been precluded from doing for decades, including free ports…” – James Cleverly MP, 02 August 2019.6

Government Ministers have in the past stated that the EU has stopped the UK from having Free Ports. This is incorrect. There are currently 72 ‘Free Zones’ within 20 EU member states,7 and Britain as an EU member has had Free Ports in the past.

However, as a UN report from 2005 found, “The Commission does allow the establishment of free zones within its territory but its definition of free zone is a very narrow one.”8

The use of these zones is considered a state subsidy, and as such, they are subject to EU state aid legislation.9 This is to ensure fairness of competition within the single market. If a member states Free Ports have particularly aggressive tax rules they can be contested under EU law.10

Issues have arisen in the past where non-EU countries have free ports and then later join the European Union. Professor Catherine Barnard and Emilije Leinarte of Cambridge University have written:

“The difficulty of obtaining an FZ [Free Zone] status can be illustrated by the Shannon FZ in the Republic of Ireland. The Shannon FZ was successfully launched in 1958 but, upon Ireland’s accession to the EU in 1973, the incentives in the Shannon FZ were limited in order to comply with EU state aid rules (e.g. the 0% corporate income tax was increased to 10%).”11

As there are limits on just how “free” Free Ports can be within the EU, it is correct to state that the UK Government will have more discretion over what form these areas take. With the UK outside of the single market, it is no longer bound by EU trade policies. However,it is not clear how the EU-UK Trade and Cooperation Agreement (TCA), which includes a commitment by both parties to maintain effective competition laws, will affect Free Ports. The agreement aims to ensure that “the granting of subsidy does not have detrimental effects on trade” between the EU and the UK.12

What’s happening in the UK

In 2016 a relatively unknown MP wrote “The Free Ports Opportunity”, which was published by the Thatcherite think tank the Centre for Policy Studies.13 That MP, Rishi Sunak, would go on to become the Chancellor of the Exchequer.

This report proved to be highly influential. Boris Johnson gave his backing to Free Ports in in July 2019, prior to him succeeding Theresa May as UK Prime Minister. Mr Johnson called them an “excellent way to boost businesses and trade in regions that Westminster has neglected to pay attention to for far too long.”14

The 2019 Conservative party Manifesto included a commitment to create up to ten Free Ports.15 Following the 2019 General Election and subsequent Brexit, bidding for prospective sites in England was opened. The devolved governments in Wales and Scotland are expected to follow at a later date.

In the March 2021 budget it was announced that East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames were successful in their bids to become Free Ports, and that they would begin operations from late 2021.16

The governments free ports prospectus of November 2020 lays out some details as to how the proposed Free Ports would work, and describes how usual customs and tax rules will not apply.17 A few of the measures include:

  • Goods will be classed as offshore for tax purposes, which would allow for imported materials to be processed and re-exported without customs paperwork or tariffs.

  • There is to be Stamp Duty Land Tax (SDLT) relief, along with Enhanced Capital Allowances (ECA), in effect tax breaks, for new plant and machinery assets.

  • Employers would not pay national insurance contributions for staff earning less than £25,000 for up to three years.

  • Business rates are to be waived for five years.

The March 2021 budget confirmed what was in the prospectus, also announcing that businesses operating in Free Ports “tax sites” would also benefit from an enhanced 10% Structures and Building Allowance.

What’s the benefit?

In a February 2020 consultation document, the Department for International Trade (DIT) states duty inversion as one of the four core benefits of a Freeport:

“If the duty on a finished product is lower than that on the component parts, a company could benefit by importing components duty free, manufacture the final product in the Freeport, and then pay the duty at the rate of the finished product when it enters the UK’s domestic market.”18

However, academics at the UK Trade Policy Observatory (UKTPO) at the University of Sussex published research into duty inversion, finding that “introducing Freeports in the UK is unlikely to generate any significant benefits to businesses in terms of duty savings.”19

“The fundamental thing is that the trade benefits of a freeport are almost non-existent,” said Peter Holmes, a UKTPO fellow who co-authored the analysis. “The only benefit might be in some sort of enterprise or urban regeneration zone — but that has nothing to do with the ‘port’ aspect.”20

Rishi Sunak MPs 2016 paper argued that if the UK’s approach performs as well as that in the USA, Free Ports could create more than 86,000 jobs, reconnecting Britain with its “proud maritime history”, and allowing Britain to capitalise on its new post-EU freedoms.

The Centre for Progressive Policy (CPP) pointed out that

“The 86,000 jobs that are forecast to be created in the CPS report is simply the number of people employed in US free zones (420,000) adjusted to the relative size of the UK population, assuming the agglomeration effects enjoyed in the US would apply equally in the UK.”21

Professor Neil Lee from the London School of Economics questions the methodology, pointing out that “The agglomeration literature in the US tends to find relatively large effects. In the UK, everything is closer together so agglomeration is less important”22

A study by Mace Group, an international consultancy and construction company, went even further in its predictions, estimating that trade could be boosted by £12bn, 150,000 high-quality jobs could be created, and £9bn could be added to the UK economy.23

The CPP also raise the question of whether it is net job creation, or a result of displacement. Mace’s study assumes that all 150,000 jobs would not exist if it were not for the Free Ports, and does not factor in that many of the jobs will be the result of jobs being moved from one location to another.

The Trade Union Congress (TUC) has warned about fewer protections for employees, warning that Free Ports are a “Trojan Horse to water down employment protections” in a “race to the bottom”.24

Risks: Tax evasion and Money laundering

The European Union published a report in 2018 titled “Money laundering and tax evasion risks in free ports”.25 The report went on to state that Free Ports are “conducive to secrecy”, and that:

“In their preferential treatment, they resemble offshore financial centres, offering both high security and discretion and allowing transactions to be made without attracting attention of regulators and direct tax authorities”

One issue raised that there is often no time limit on how long goods can remain at Free Ports. Goods can be classed as “in transit” for an indefinite period of time, in which they can gain value, and be traded an unlimited number of times without ever having been taxed.

As well as the fact that goods entering Free Ports are not subject to customs duties, those sold are not subject to Value Added Tax, and no withholding tax is collected on capital gains.

The European Commission introduced a set of new rules in 2020 in order to clamp down on illicit activity at the Free Ports within the bloc. Member state authorities must now take extra measures to identify and report suspicious activities at Free Ports.26

The Financial Action Task Force on Money Laundering, a Paris based intergovernmental organisation, published a report in 2010, which claimed that free-trade zone, which includes Free Ports, present a “a unique money laundering and terrorist financing threat because of their special status within jurisdictions as areas where certain administrative and oversight procedures are reduced or eliminated”.27

In February 2020 Labour MP Tulip Siddiq raised some of these issues, questioning the Treasury28 :

“To ask the Chancellor of the Exchequer, what recent assessment his Department has made of the correlation between the operation of Free Ports and (a) tax evasion and (b) money laundering.”

The answer given by Steve Barclay MP was:

“The UK plays a key role in tackling cross-border illegal activity and this is not going to change. UK Free Ports will be innovative hubs that boost trade, attract inward investment and drive productive activity across the UK. HMRC have been closely involved in their design to ensure that everyone pays their fair share of tax towards funding our vital public services, while boosting growth in all regions of the UK.”

Conclusions

Free Ports are nothing new. The UK has had them before, and could continue to have them whilst still a member of the European Union. What is new is the ability for the UK to establish Free Ports that deviate further from the European standard, and no longer have to comply with EU State Aid rules.

Assessments as to how much Free Ports can benefit the UK economy vary widely. It is impossible to produce accurate assessments yet, as full details are yet to be revealed.

There are however legitimate concerns that Free Ports will simply cause existing businesses to relocate to Free Ports, rather than stimulate the growth of new business, and that Free Ports can be used to facilitate tax evasion and money laundering. The EU has recently begun clamping down these special economic zones. As to whether UK Free Ports will be susceptible to such abuses we simply don’t know, but the risk is very real.

This briefing is available in PDF form here.

1 Trade: Free Ports and free zones, Institute for Government, 10 February 2020, https://www.instituteforgovernment.org.uk/explainers/trade-FreePorts-free-zones

2 Trade: Free Ports and free zones, Institute for Government, 10 February 2020, https://www.instituteforgovernment.org.uk/explainers/trade-FreePorts-free-zones

3 What are Enterprise Zones?, Enterprise Zones, https://enterprisezones.communities.gov.uk/about-enterprise-zones/

4 Enterprise Zones Research Briefing, House of Commons Library, 21 January 2020, https://commonslibrary.parliament.uk/research-briefings/sn05942/

5 Today Programme, 01 August 2019

6 BBC Radio 4 Breaktast Interview, 02 August 2019

7 Free zones which are in operation in the customs territory of the Union, as communicated by the Member States to the Commission, Europa.eu, 06 April 2020, https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/customs/procedural_aspects/imports/free_zones/list_freezones.pdf

8 Free Trade and Port Hinterland Development, United Nations Economic and Social Commission for Asia and the Pacific, 2005, https://www.unescap.org/sites/default/files/pub_2377_fulltext.pdf#page=86

9 Research Briefing: Free Ports, House of Commons Library, 17 November 2020, https://commonslibrary.parliament.uk/research-briefings/cbp-8823/

10 EU State Aid rules and WTO Subsidies Agreement, House of Commons Library, 16 September 2020, https://commonslibrary.parliament.uk/research-briefings/sn06775/

11 Free Zones, UK in a Changing Europe, 07 October 2018, https://ukandeu.ac.uk/free-zones/

12 UK-EU Trade and cooperation Agreement Summary, Gov.uk, December 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/962125/TCA_SUMMARY_PDF_V1-.pdf

13 The Free Ports Opportunity, The Centre for Policy Studies, November 2016, https://www.cps.org.uk/files/reports/original/161109144209-TheFreePortsOpportunity.pdf

14 Tory leadership race: Members begin voting for next PM, BBC News, 05 July 2019, https://www.bbc.co.uk/news/uk-politics-48881266

15 2019 Conservative Party Manifesto, https://www.conservatives.com/our-plan

16 Budget 2021, pg 58, HM Treasury, March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

17 Freeports Bidding Prospectus, HM Treasury, November 2020 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935493/Freeports_Bidding_Prospectus_web_final.pdf

18 Freeports Consultation, HM Government, February 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878352/Freeports_Consultation_Extension.pdf

19 Tariff inversion in UK Freeports offers little opportunity for duty savings, UK Trade Policy Observatory, 28 July 2020, https://blogs.sussex.ac.uk/uktpo/2020/07/28/tariff-inversion-in-uk-freeports-offer-little-opportunity-for-duty-savings/

20 Freeport advantages for business are ‘almost non-existent’, Financial Times, 02 August 2020, https://www.ft.com/content/7ee9e853-bea6-4797-9119-f7e20cdae3c0

21 Freeport free-for-all should focus on good jobs, Centre for Progressive Policy, 11 February 2021, https://www.progressive-policy.net/publications/freeport-free-for-all-should-focus-on-good-jobs

22 What is the extra mileage in the reintroduction of ‘free zones’ in the UK?, UK Trade Policy Observatory, February 2019, https://blogs.sussex.ac.uk/uktpo/publications/what-is-the-extra-mileage-in-the-reintroduction-of-free-zones-in-the-uk/#freez28

23 Freeports are an essential ingredient of levelling-up, Mace Group, 05 August 2020, https://www.macegroup.com/perspectives/200806-freeports-by-paul-kelly

24 Brexit – why free ports are a race to the bottom on workers’ rights, TUC, 13 February 2020, https://www.tuc.org.uk/blogs/brexit-why-free-ports-are-race-bottom-workers-rights

25 Money laundering and tax evasion risks in free ports, European Parliament, 17 October 2018, https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_STU(2018)627114

26 EU clamps down on free ports over crime and terrorism links, The Guardian, 10 February 2020, https://www.theguardian.com/world/2020/feb/10/eu-clamps-down-free-ports-zones-crime-terror-links

27 Money Laundering vulnerabilities of Free Trade Zones, Financial Action Task Force, March 2010, http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf

28 Free Zones: Money Laundering and Tax Evasion, UK Parliament, 27 February 2020, https://questions-statements.parliament.uk/written-questions/detail/2020-02-27/22013

Amazon pickup and returns centre

The Amazon Tax-Cut

4th March 2021 by George Turner

Coming in at an enormous £12bn for 2021/22, the Chancellor’s announcement of a “super-deduction” on purchases of capital goods by businesses was one of the largest spending items in the Spring Budget. In fact, it was one of the largest single-year tax giveaways ever enacted by a government. According to the Office of Budget Responsibility’s policy costings database, you have to go back to the 2007 Budget when the basic rate of income tax was cut to 20% to find a tax change of a size comparable to the super-deduction.

With such a significant policy change we are asking how the proceeds of this tax cut will be distributed. Initial analysis by TaxWatch demonstrates that a company like Amazon UK Services would have their tax bill entirely wiped out by the new rules. The tax cut may also be a boon to capital intensive sectors such as infrastructure that have largely been protected from the worst impacts of the pandemic and that are required to spend large amounts on capital goods regardless of the incentives available to them.

Super expensing

Under the plans announced by the Chancellor, companies will be able to deduct 130% of the cost of “main rate” assets – more than the cost of the equipment itself – from their taxable profits in the year that they purchase it. This reduces substantially the amount of tax payable in the year the deduction is made. Main rate assets are defined as “plant and machinery” by HMRC, which has a broader meaning than is found in corporate accounts. It includes “items you keep to use in your business, including cars”, some fixtures and fittings and the demolition of existing plant and machinery.

Under normal accounting rules companies deduct a percentage of these costs in each year, so the cost is spread over several years.

The full expensing of capital expenditure (i.e. a 100% deduction on capital expenses in year one), has been a long term policy ask for some sectors and promoted by a number of think tanks and lobby groups in recent years.1

Who benefits from super expensing?

Super-expensing is a policy that overwhelmingly benefits larger businesses, because the UK already has a full expensing regime for smaller capital expenditures called the “annual investment allowance”. This was raised temporarily to £1m in 2020, but is usually £200,000.

The benefits of the expensing is also differentiated across sectors because companies in different sectors use and spend capital in different ways. For example, a factory will buy much more plant and machinery than a management consultancy firm where staff costs make up a higher proportion of the total costs of the firm. According to HMRC figures on capital allowances, the sectors with the largest capital allowances are manufacturing, retail, and information and communication. These three sectors accounted for a third of all capital expenditure in the country in 2017-2018, the last year when figures are available.

Sector

Gross trading profit (£m)

Capital allowances claimed (£m)

Manufacturing

42,151

14,430

Wholesale and Retail Trade, Repairs

53,582

11,476

Information and Communication

38,634

10,463

Table 1: Capital allowance claims by sector (Source: HMRC Corporation Tax Statistics 2020)

Many sectors that are big spenders on capital goods will have been largely sheltered from the worst impacts of the pandemic. For example, energy utilities, water companies, supermarkets and logistics companies which have all continued to provide essential services have large capital expenses. Think of all of the delivery trucks that have been bought over the last year.

However, there are industries that have been seriously impacted by the pandemic that also have high capital expenditure, for example, the airline industry. The impact on the retail sector of the pandemic has been highly differentiated between “non-essential” and “essential” retail.

Supercharging super-expensing

Multinational companies have a particular opportunity to take advantage of the new capital expensing rules. Profit shifting is the practice where profits are removed from the UK by a multinational company which in turn reduces their UK tax liability. However, many multinationals that engage in profit shifting still have significant costs in the UK. If a multinational company has significant capital expenditure in the UK it will be able to claim the new capital allowances reducing its already minimal profits and perhaps extinguishing its tax bill altogether.

For an example of how this works see our report on Netflix, which described how the company has managed to claim tax credits on its film production costs whilst moving revenues overseas.

Amazon

Amazon is a prime example of a company which has benefited from the pandemic. The company provides a direct to home delivery service at a time when shops have been forced to close and people have remained indoors. As a result, the company has seen its sales explode by 50% as a result of Covid-19.

It also spends significant amounts of money on capital goods, including lorries, vans, and warehouses.

Amazon’s European operations are based in Luxembourg, and it is not known how much in corporation tax that company pays in the UK. It is more than possible it pays nothing in corporation tax all in the UK, as the company has a net tax credit position. Amazon are also keen to stress that they do pay other taxes in the UK such as business rates and employment taxes. None of these would be impacted by the new super-deduction.

Amazon UK Services Limited, the UK service company that provides warehousing and delivery services for Amazon’s UK operations, made pre-tax profits of £102m in 2019 and had a corporation tax liability of £6.3m, largely due to the way some employees are paid in shares. According to the accounts of the company they also spent £66.8m on plant and machinery, £80.4m on office equipment, and £15.3m on computer equipment in the same year. If expensed at 130%, this would entirely wipe out the taxable profits of the company before any deductions for staff pay awards.

Amazon UK Services Ltd

2019

2018

Total

Turnover

£2,959,248,000

£2,345,057,000

£5,304,305,000

Profit before Tax

£101,941,000

£75,381,000

£177,322,000

Tax

-£6,328,000

-£1,060,000

-£7,388,000

Profit for the year

£95,613,000

£74,321,000

£169,934,000

Tangible Assets – Additions

Plant and machinery

£66,875,000

£196,930,000

£263,805,000

Office Equipment

£80,421,000

£30,805,000

£111,226,000

Computer Equipment

£15,346,000

£10,574,000

£25,920,000

Total

£162,642,000

£238,309,000

£400,951,000

130% of Total

£211,434,600

£309,801,700

£521,236,300

Logistics companies

Amazon is not the only company that has profited from the pandemic. The logistics sector has seen revenues increased with more parcels moving around the country. The data below shows that companies like DPD and Hermes would be able to make substantial reductions in their pre-tax profits over the next two years due to to the super-deduction if 2019 levels of capital expenditure were maintained or increased.

DPDGROUP UK Ltd

2019

2018

Total

Turnover

£1,028,134,000

£972,811,000

£2,000,945,000

Profit before Tax

£135,093,000

£142,472,000

£277,565,000

Tax

-£23,659,000

-£24,336,000

-£47,995,000

Profit for the year

£111,434,000

£118,136,000

£229,570,000

Tangible Assets – Additions

Plant and machinery

£11,424,000

£2,309,000

£13,733,000

Motor Vehicles

£29,739,000

£217,000

£29,956,000

Office equipment

£2,252,000

£1,121,000

£3,373,000

Computer equipment

£3,248,000

£3,515,000

£6,763,000

Total

£43,415,000

£3,647,000

£47,062,000

130% of Total

£56,439,500

£4,741,100

£61,180,600

Hermes Parcelnet Limited

2020

2019

Total

Turnover

£860,037,000

£749,457,000

£1,609,494,000

Profit before Tax

£46,213,000

£36,092,000

£82,305,000

Tax

-£8,142,000

-£6,789,000

-£14,931,000

Profit for the year

£38,071,000

£29,303,000

£67,374,000

Tangible Assets – Additions

Plant and equipment

£12,469,000

£13,861,000

£26,330,000

130% of Total

£16,209,700

£18,019,300

£34,229,000

Energy and infrastructure

Energy companies need to make huge investments in capital every year in order to keep the lights on. Many of these investments are not discretionary and therefore would be be made regardless of any incentives available. To the extent that super-expensing rewards companies for investments they would have made anyway then the policy represents a cash giveaway with little benefit to the public.

To illustrate the point, we took a look at National Grid, which runs the UK’s electricity grid. The company makes enormous investments in plant an equipment every year, which will now qualify for super-expensing.

National Grid

2020

2019

Total

Turnover

£14,540,000,000

£14,933,000,000

£29,473,000,000

Profit before Tax

£1,754,000,000

£1,841,000,000

£3,595,000,000

Tax

-£480,000,000

£339,000,000

-£141,000,000

Profit for the year

£1,265,000,000

£1,502,000,000

£2,767,000,000

Purchases of plant property and equipment

Plant and equipment

£4,583,000,000

£3,635,000,000

£8,218,000,000

130% of Total

£5,957,900,000

£4,725,500,000

£10,683,400,000

Deferred taxation

It should be noted that increasing first year capital allowances is not all a one way street. Although the new rules will allow companies to write off the full cost and more of capital purchases in the year in which the expense is made for tax purposes, companies will not make the same deduction for accounting purposes. Instead the cost of these items will be expensed gradually over time.

Because the expense will have already been claimed against tax, then it will not be expensed again when the company deducts the expense from accounting profits in future years. This will lead to an appearance of higher tax rates in future years as items are depreciated, profits decreased and no future deduction is made for depreciation against tax.

However, this is the result of a timing difference and does not change the fact that companies will be able to deduct more from their taxable profits than they actually spend on capital goods.

Avoidance

Capital allowances have often been the target of avoidance schemes in the past, with banks seeking to use financial engineering to transfer capital allowances between companies to gain a tax benefit (see for example the case of Barclay’s Mercantile vs Mawson (Inspector of Taxes). It is therefore important that HMRC keep a close watch on the growth of any avoidance schemes resulting from the announcement in the Spring Budget.

Conclusions

The policy of super-expensing represents a huge cash giveaway to some large businesses operating in the UK. Although there will undoubtedly be some companies which need the support to help them recover from the pandemic, the relief is untargeted and will result in a substantial tax cut for companies which have done well throughout the Covid-19 crisis.

It will also benefit companies who were planning to make capital expenditure regardless of the incentives available, and potentially super-charge tax avoidance schemes which seek to exploit the new benefit.

As such, it is debatable whether this is the best use of public money to stimulate post pandemic recovery.

This research was featured in The Financial Times, The Guardian, and The Times, among others. It was also quoted in the House of Commons.

Photo by Bryan Angelo on Unsplash

1 See for example the Adam Smith Institute’s campaign against the so-called “factory tax” https://www.adamsmith.org/about-factory-tax

Corporate Tax Facts

2nd March 2021 by George Turner

2 March 2021 – George Turner

What is Corporation Tax?

Corporation Tax is a tax on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations. It is not a tax on revenue.

Profit is the amount left after the cost of doing business is deducted from the revenues a business earns. As such, Corporation Tax does not act as any barrier to companies trading. Taxable profit can differ from profits reported by companies in their annual accounts (accounting profit).

How is taxable profit calculated?

In order to calculate taxable profits, trading profits are added to other taxable income and net capital gains.

A company can then deduct capital allowances, which are allowances based on the cost of buying capital goods such as plant and machinery. Trading losses from previous years can also be set against current profits.

Companies can make further deductions allowed under tax law, for example, tax credits generated by research and development expenditure, and deduct losses made by other companies in the same group (group relief). The various deductions permitted mean that across all companies the total chargeable profit is 2/3rds of trading profits.

Source: HMRC, Corporation Tax Statistics 2020, page 6.

 

How does the UK’s Corporation Tax rate compare to other countries?

The rate of Corporation Tax is currently 19%, which is the lowest it has ever been in the UK and one of the lowest in the G20. Rates have fallen steadily since the 1990s. Since 2010 they have fallen from 28% to 19%.

The European average rate is 20%, but this includes a number of very small economies with very low rates. The average European rate when weighted by GDP is 24.6%. The G7 average rate is 27.2% (27% weighted by GDP). The OECD average rate is 23.5% (26.3% weighted by GDP)

 
Source: The Tax Foundation, Corporate Tax Rates Around the World 2020, page 7

How much would increasing Corporation Tax raise?

HMRC estimates that a 1% increase in Corporation Tax (to 20%) from 1 April 2021 would yield £2bn in 2021–22, £3bn in 2022–23, and £3.4bn in 2023–24.1.

This compares to an estimated £5.4bn by 2023 for raising the basic rate of income tax by 1%.1

It is important to note that the UK Government uses what is called a “Computable General Equilibrium” model to calculate the impacts of tax policy changes on revenue. This model takes into account any theoretical impact that a policy change may have on investment or wages and the consequences that may have on revenue.2

How much does Corporation Tax contribute to the Treasury?

 


Source: HMRC, Annual Report and Accounts 2019-2020, page 21.

After income tax, National Insurance Contributions (NIC) and Value Added Tax (VAT), Corporation Tax is the next largest source of tax revenue from taxation. During financial year 2019 to 2020, HMRC collected total tax revenues of £636.7 billion. Corporation tax yielded £53.0bn, compared to income tax (£194.2bn), NIC (£141.9bn) and VAT (£137.4bn).

Who pays Corporation Tax?

Companies that are liable to Corporation Tax account for 1/3rd of total businesses in the UK.

Of the three main legal forms of businesses in the private sector (sole proprietorships (also known as sole traders), ordinary partnerships, and companies) only companies are liable to Corporation Tax.

At the start of 2020 there were 3.5 million sole proprietorships (59%), 414,000 ordinary partnerships (7%) and 2.0 million actively trading companies (34%) in the UK.3 Almost half of the actively trading companies had no employees.


Source: Department for Business, Energy & Industrial Strategy, Business population estimates 2020, page 6

Of the approximately 2.0 million actively trading companies4, only 1,533,570 paid Corporation Tax in 2018-19. Of these 1,024,000 had a liability of less than £10,000 and 732,000 had a liability of less than £5,000.

Fifty five percent (or £30.2 billion) of the total Corporation Tax liability was paid by the 4,500 companies that contributed over £1 million each. In contrast companies that had a liability of less than £10,000 each contributed just 6% (or £3.4 billion) of the total Corporation Tax liability.


Source: Department for Business, Energy & Industrial Strategy, Business population estimates 2020, page 6.

The Corporation Tax and Covid-19

There is a lively debate around whether or not it is desirable to raise Corporation Tax rates during a pandemic, with fears being raised that increasing tax rates would hinder economic recovery after the pandemic.

These views are founded on economic theories about how the government regulates the economy. The overarching theory is that governments should not seek to remove money, or deflate the economy at the time when demand is depressed. Instead, governments should be seeking to stimulate demand, which they can do through government spending or tax cuts.

However, demand is not the only economic issue facing the country and Corporation Tax does not exist in a vacuum. It is perfectly possible to increase Corporate Tax rates whilst also stimulating economic demand through spending and tax cuts elsewhere.

As a tax on profit, companies that have suffered losses during the pandemic are shielded from the increase in rates, and companies that have done well from the pandemic contribute more. In fact, companies that have made losses in this year will be able to offset those losses against future tax charges.

Capital allowances also mean that a company can invest in plant and machinery without being hit by Corporation Tax and mitigate against theoretical pressures on wages caused by increases in Corporation Tax rates.

As a result, the economists at the International Monetary Fund have argued that in order to promote inclusive growth following the pandemic countries should set Corporate Tax rates at “reasonable” levels. With the UK having one of the lowest rates in the world, this would suggest there is room to increase rates.5

Page updated 02 March 2021

 

1HMRC, Direct effects of illustrative tax changes, 22 January 2021.

2HMRC and HMT, Analysis of the dynamic effects of Corporation Tax reductions, 5 December 2013

3 Department for Business, Energy & Industrial Strategy, Business population estimates 2020.

4In this categorisation, companies include both corporate entities that are liable to corporation tax, such as Public Limited Companies, Private Limited Companies and public corporations and nationalised bodies in which the working directors are classed as employees and Limited Liability Partnerships whose partners are liable to income tax on their profits. The number of companies liable to corporation in 2018-19 is, therefore, fewer than the 2.0 million actively trading companies.

5R. de Mooij et al, Tax Policy for Inclusive Growth after the Pandemic, IMF Fiscal Affairs, December 2020


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