This article was first published in the March 2014 UK edition of Accounting and Business magazine.
Employers’ national insurance contributions (NICs) have now overtaken corporation tax as the largest tax borne by FTSE 100 companies. The latest annual total tax contribution survey of companies covered by the 100 Group – which represents the finance directors of the FTSE 100 and several large private companies – shows that NICs now account for 27.5% of the total tax costs of the largest public and private businesses operating in the UK, while corporation tax accounts for 25.9%.
Looking at the overall tax picture, the total tax contribution (TTC) made by 100 Group companies in 2013 – the total of taxes both borne and collected – increased by £0.5bn, driven upwards by higher employment taxes, VAT and excise duties. The TTC of 100 Group companies totalled £77.6bn in 2013, consisting of £23.1bn in taxes borne and £54.5bn in taxes collected. The breakdown is shown opposite.
Survey data provided from respondents and put together by PwC is extrapolated to provide estimated totals for the 100 Group as a whole. PwC’s methodology encompasses all 25 taxes borne, from corporation tax to the bank levy, and all taxes collected, including PAYE and tobacco, alcohol and fuel duties.
Publication of the report and a drive to get it covered by the mainstream media reflects the determination of large UK companies to defend their corner in the face of regular recent attacks about the levels of corporation tax paid. The 2014 report also for the first time contains data on some of the most significant adjustments to accounting profits to explain why tax paid is not simply the tax rate applied to reported profits. ‘Being able to demonstrate how the tax system works in practice has never been more important,’ say National Grid FD Andrew Bonfield, chair of the 100 Group tax committee, and PwC tax partner Andrew Packman, in their introduction to the report.
Explaining the largest companies’ wider contribution to the UK economy has become another key role of the report. Bonfield and Packman add: ‘Employment, investment and innovation are the life-blood of our economy.’ Data collected on employment, capital investment and research and development expenditure has therefore also been gathered (see panel) to show how the UK’s biggest businesses help to keep that economic lifeblood flowing.
Falling corporation tax
100 Group companies are estimated to have paid £6bn in corporation tax in 2013, down 25.7% from 2012. A more general decrease in profitability among participants accounted for 5% of the reduction. More significantly, lower oil and gas revenues accounted for 65% and the reduction in the corporation tax rate accounted for 30%. The main rate was cut from 26% to 24% for 2012/13 as part of a longer-term policy commitment. Given that the main rate is due to fall to 20% from April 2015, the corporation tax contribution can be expected to shrink further in future.
‘By cutting the corporation tax rate, the government is becoming less dependent on profit-related tax,’ says Kevin Nicholson, head of tax at PwC. ‘This creates a more stable tax base. Measures like the lowering of the corporation tax rate and additional incentives for innovation are about attracting more investment to the UK, and we are seeing signs that this is paying off.
‘The reduction of corporation tax is about making the UK competitive and boosting economic growth across the whole country. The 100 Group represents businesses across all sectors and all regions of the UK, and their increased overall tax contribution is an indication that these policies are working.’
The 100 Group survey delivers some punchy statistics: for every £1 of corporation tax paid, the largest UK companies currently pay £2.86 in other taxes. Chas Roy-Chowdhury, ACCA head of taxation, says: ‘Corporation tax is just the tip of the iceberg. The UK has a complex tax system across the board, and FTSE 100 and other large businesses are also exposed to it. With so much attention focused on tax avoidance, this report is helpful to put in perspective just how much large businesses in the UK contribute through taxes. This report not only shows the value of taxes big business contributes, it also gives an important, fuller picture of the many tax liabilities the corporate world contends with.’
The shift to NICs as the largest chunk of the corporate tax bill reflects the 1.3% increase in employee headcount within 100 Group members and their rising salaries (up 2.5% on average). Incremental changes to employment tax rates have also had an impact. In 2011/12, for example, both employers’ and employees’ NI increased by one percentage point, though this was counteracted in part by an increase in the primary and secondary thresholds.
How big an impact other taxes have on businesses – both in terms of direct taxes borne and taxes collected – is revealed by the fact that the TTC has risen even in a period of falling corporate profits. ‘The total tax contribution of Britain’s biggest businesses increased in the year to March 2013, despite challenging economic conditions at that time,’ confirms Pearson CFO Robin Freestone, chairman of the 100 Group. ‘Government’s rebalancing of business taxes away from corporation tax appears to have played a role in helping to incentivise increased levels of UK employment, as well as investment and R&D. These are now helping to stimulate UK economic activity and growth.’
Despite their rising TTC, 100 Group companies are keen to explain why the rate of corporation tax they pay differs from the statutory rate. The survey data reveals the key factors. Pension contributions reduced the rate of tax paid (on accounting profits) by 5.9%. While capital allowances on investment reduced the rate by 9.4%, this was offset by depreciation of 10.8%. R&D spend reduced the cash tax rate by 0.5%.
The willingness of those surveyed to provide such data indicates their understanding of the need for more openness. Participants were asked for their opinions on a number of tax-related matters, including the need for transparency. The vast majority (73%) agreed that greater tax transparency from multinational companies is needed to inform the debate on how much business contributes in taxes.
Three-quarters of the companies surveyed believe that the Confederation of British Industry’s code of conduct will help lead to a better understanding by the public of company tax policies and an improvement in the level of trust. This code – or statement of tax principles – was issued in May last year with a view to advancing the debate on the responsible management of tax by UK business. It aims ‘to enhance co-operation, trust and confidence between HMRC, UK business taxpayers and the public in regard to the operation of the UK tax system’, and promote the efficient working of the tax system. The principles address tax planning as well as transparency and reporting.
Referring to the TTC survey, Katja Hall, CBI chief policy director, says: ‘Despite the public perception and media debate on business and taxation, the vast majority of businesses pay, and want to pay, the right amount of tax.’