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  • 16/07/2015Peter Harris1

    A Historical Perspective on UK

    Corporation Tax

    Sad Business School, OxfordJune 26, 2015

    Peter Harris

  • 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

  • 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

    3

  • 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 couples income, facilitating income splitting through companies

    1989 Abolition of close company attribution of excessive retention to shareholders

    16/07/2015Peter Harris4

  • 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

    16/07/2015Peter Harris5

  • 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)

    16/07/2015Peter Harris6

  • 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

    16/07/2015Peter Harris7

  • 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 Revenues 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?)

    16/07/2015Peter Harris8

  • 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

    16/07/2015Peter Harris9

  • 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)

    16/07/2015Peter Harris10

  • 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

    16/07/2015Peter Harris11

    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)