Since corporation tax is often in the news, we will say a few words about what it is. Corporation tax is a tax levied on companies and associations. We will start by saying how and why it is levied on associations.
Let’s say a social club has a thousand members. The law regards this as an association of a thousand people, something like a partnership, but not as a separate legal person. If somebody sues the club, then they are suing all the members, and indeed they can pursue every last member if the court awards compensation to them, and if the valuation placed on the club itself is insufficient.
However, if the club makes a profit while in competition with a publican running a public house, then both the club and the publican will need to pay tax. The publican just pays income tax. In the case of the social club, the Revenue do not send out a thousand tax demands, but instead they make the club pay another type of tax called corporation tax.
A company can also make a profit and have lots of shareholders, so the company is made to pay corporation tax as well. The rules on corporation tax are utterly different from the rules on income tax. The income tax year end is April 5th, but a company can choose its own year end. Income tax often has to be paid up front, while most small companies don’t pay corporation tax until nine months after the year end. Income tax payers get a personal allowance, but companies do not. On the other hand, income tax payers must also pay National Insurance, often as merely an additional tax, while companies do not.
If a company is left with profits after tax, then it can distribute some of these profits to its shareholders as a “dividend”. These dividends need to be included in the shareholder’s personal tax return, and are subject to another tax called dividend tax.
A company can also pay a salary to its directors, or make pension contributions on their behalf. Deciding the best mixture of salary, dividend, pension and other forms of reward is usually done under advice from the company’s accountant.
This offers scope for optimisation as an accountant like me would put it, or manipulation as a politician would put it. Big companies can employ an army of accountants and tax advisers to work out how to minimise their tax bill while rewarding their staff and shareholders. In some cases the accountants are so successful that the company ends up paying nothing.
We can apply the “coffee shop rule”. This says that if I buy a cup of coffee in a local family-run independent shop, and I buy the same cup in the branch of a multinational chain, then the tax-take per cup should be roughly the same. If it isn’t, then I would be inclined to blame the Revenue for their failure to collect taxes, although their hands can be tied by European Union law (shortly to disappear). I have to declare an interest here, because I might want to produce accounting software in competition with multinationals.
Politicians like to moralise about fair taxes, though they rarely tell us what a fair expense claim looks like. Actually all we have is the letter of the law, and moralisations are just pointless because six hundred MPs could have voted for that law for six hundred different motives. Year on year, the letter of the law tends to become ever longer, so the tax manuals that accountants work with become ever thicker. This actually means that society becomes more and more beholden to accountants over time, which isn’t a healthy situation.