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Page 1: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

16/07/2015Peter Harris1

A Historical Perspective on UK

Corporation Tax

Saïd Business School, OxfordJune 26, 2015

Peter Harris

Page 2: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Why was CT introduced in 1965? Classical element introduced by separate tax on

companies – excess profits duty, corporationtax, national defence contribution and profits tax

Refund of dividend tax credits when corporate profits protected by investment and capital allowances, also foreign income (net-UK rate system)

Kaldor (dissent in RC 1955) becomes Labour special advisor

Wish to encourage capital to be put to productive use – penalise passive investment

Rush to pass legislation after Labour election 1964

16/07/2015Peter Harris2

Page 3: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main landmarks: 1960s and 1970s

1965 Classical system with dividendwithholding tax and FII, reduction incorporate tax rate, taxation of capital gains atsame rate as income

1969 Group relief replaces subvention payments 1973 ACT, increase in corporate tax rate but

small profits rate, reduction of capital gains High tax rates (CT 52%, marginal 85%) 1970s Inflation (stock relief and capital

allowances)16/07/2015Peter Harris

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Page 4: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main landmarks: 1980s

1980s Lowering of corporate tax rate together with individual income tax rates (CT 35%, marginal 40%)

1987-88 Unification of tax rates on income and capital gains

1988 Abolition of aggregation of couple’s income, facilitating income splitting through companies

1989 Abolition of close company attribution of excessive retention to shareholders

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Page 5: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main landmarks: 1990s

Rise of financial instruments andimpossibility of capital/revenue distinctiongiving rise to importance of accounts

Rising pressure on discriminatory nature of imputation system; foreign income dividends 1994

1995 Request to investigate tax simplification 1997-99 Abolition of refundable dividend tax

credits and ACT system, instalments and self-assessment

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Page 6: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main landmarks: 2000s Outsourcing leading to sheltering of income

from services in companies and IR 35 response Tax Law Rewrite, increasing size of tax law and

divorcing corporate and individual tax bases Increasing difficulties in interface between

accounting rules and tax law rules EU issues and rise of BEPS Increase in foreign shareholders aggravates debt over

equity bias 2008 capital gains tax rates separated from income

tax (not for corporates)

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Page 7: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main landmarks: 2010s

Lowering of general corporate tax rate without individual income tax rates, rise of passive corporate tax shelter (CT 20%, marginal 45% + NICs)

EU and competition prompts move to largely territorial system

Office of Tax Simplification (good luck!) Kick-back against BEPS, largely source based Devolution and EU referendum

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Page 8: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Comparing CT 1965 with CT 2015

Length, length and length and more fragmented – 44 sections vs. thousands (words are cheap, anti-abuse rules are easy, structure and discipline are harder)

No obvious attempt at coordination of policy (contrast 1955 RC influence on CT)

No effective check on Revenue’s propensity to propose ever more fragmented and uncoordinated rules

Disconnection from income tax now complete (why, why and why?)

More outward looking (though not much more) Less favouring of business over investment -- employment

penalised (why, why and why?)

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Page 9: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Main forces of reform (or lack thereof) Politics, politics and politics (e.g. dividend relief, zero

starting rate, IR 35, lower CT rate favours rich) International competition, globalisation and

information age, movement of tax base to “less” mobile factors (especially employment)

Perceived abuses (rigid belief that taxpayers abuse legislative intent, which is not effectively expressed)

Lack of will to engage in structural reform and lack of belief that tax law can be drafted in a way that minimises abuses

EU and Devolution

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Page 10: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Current strengths & weaknesses Supports the income tax (though hardly) Some consistency with accounts (though hardly),

which supports auditing An obvious tax base (at least to the rest of the world) Revenue (compare tables in 1982 Green Paper)? Competitive (as advertised)? Distorting (obviously)? Massive tax shelter problem (is this a necessary slight

of hand in favour of the foreign and the rich, or both -- compare Scandinavian dual income taxes)

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Page 11: A Historical Perspective on UK Corporation Tax · A Historical Perspective on UK Corporation Tax Saïd Business School, Oxford June 26, 2015 Peter Harris. Why was CT introduced in

Final thoughts: the moderndilemma

Historically taxation of company income was a temporary surrogate for personal income tax, i.e. a truly source based tax (tax at source)

In the face of globalisation and investment fragmentation, that may not be a feasible or holistic philosophy

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CT is a persistent tax in search of a new philosophy (rise of the exempt shareholder)

CT is fundamental as long as income is the touchstone of fairness in the tax system (and it still is… at the moment)