The tax contribution made by UK businesses gets a regular airing, given we effectively now have two annual Budgets if you include the Autumn Statement. Yet despite the Treasury frequently tinkering with Corporation Tax rates there seems little appetite to make sweeping changes. And that’s a shame, because a rethink isn’t just needed – it seems crucial to solving many of society’s problems.
Corporation Tax levels have actually bounced around more than you might think. First introduced in the 1965 Finance Act the tax rate was a hefty 40%. Today, it’s roughly half of that with the latest update to the policy being the application of a sliding scale between 19% and 25%, depending on a company’s annual profit levels.
Discuss any aspect of taxation and the conversation usually centres on fairness. Of late, crucial elements of equity such as personal allowance and fiscal drag have hit the headlines as many households try to cope with the cost-of-living crisis.
Income Tax and National Insurance are usually the most scrutinised taxes as they directly affect millions of individuals. But at a time when the role of business in relation to complex societal issues is in the spotlight – from involvement in public service delivery to environmental impact – we should question whether current Corporation Tax is fit for purpose.
That means posing some fundamental questions, including:
- What is the the purpose of a business in terms of the national interest?
- What social benefit does a company provide?
- Should firms be rewarded for positive impact, and likewise penalised for negative social outcomes?
Corporation Tax and the social contract
Corporation Tax isn’t alone in being a problematic part of our taxation system. But its limitations are symbolic of the changing nature of the social contract that exists between government, business and citizens.
That social contract currently exists to provide the foundations of a fair and fully functioning society: security and justice; healthcare; education; welfare; defence; and infrastructure among them. Boiled down, provision of those key pillars represents the ‘value for money’ we receive from public services as taxpayers.
But we should also expect the same contract with companies. In return for being well run and profitable, corporations should treat and reward employees well – and ensure their community values their presence.
Yet as with any tax, if it’s deemed unfair or contains loopholes some of those subject to the rules will – where legitimately possible – try to not pay. So, when we hear the refrain “Why don’t we just charge big business a lot more tax?”, that won’t work either.
In which case, what will? How do we reach a level of business taxation that makes sense, is fair and ultimately ensures all companies can have a real, positive impact on society?
Giving firms credit where credit is due
One answer lies in setting out a new ‘social impact’ metric as the basis for future business taxation. Since companies have a variety of impacts – positive and negative – on local communities, the measurement system should consider:
- Business model
- Company culture
- Community contribution
- Local infrastructure needs
Local authorities could be mandated to identify key areas where their communities need additional support. For example, this could be housing, homelessness, sanitation, youth and adult services, crime, and so on – issues I bet you’re aware of in your local area, wherever you live.
A business could be scored against each of the criteria. Critically, their impact might be benchmarked against the local authority’s identified services that need support.
Many firms are already on board with the idea of formalising their impact on society, thanks to changes to governance rules and the emergence of B Corp and similar accreditation. Making your mark in this way can be a differentiator that offers competitive advantage. Implementing the measurement system outlined above would further codify corporations’ impact into something more tangible – and could be directly applied to taxation.
Better-performing businesses, which thanks to the new metrics would be able to demonstrate a positive impact on society, should receive Corporation Tax credits. In turn, that means they’ll retain more of their cash to continue invest in the services, products and actions which are providing the best outcomes.
Followed to its logical conclusion, such investment would take some pressure off purely public-funded services: health, social care, the police, and others.
Reward for better corporate contributions
There are other changes we can make. In my opinion, company directors and controlling shareholders should be made far more accountable for the societal consequences of their firm’s actions than is currently the case.
We shouldn’t stifle entrepreneurship, of course, or stunt the ability to make a profit. But if business leaders are personally invested to take actions that deliver net benefits to society, the tax system is more likely to bear fruit. Directors could be further incentivised with additional personal tax credits.
Put simply, the current tax system does not distinguish between a £100k-profit business that ends up causing £150k ‘damage’ through pollution, increased local reliance on health services, and so on; and another firm that turns a profit of £75k but isn’t responsible for any negative outcomes.
Corporation Tax might not be reformed any time soon – especially with political parties unlikely to want to rock the boat with the powerful business lobby in an election year. But change is something we should all more closely consider in a bid to build a sensible, equitable taxation system. That would offer an alternative to Friedman’s Shareholder Theory in the form of a social equivalent: meaningful contributions for a fairer society.
To find out how ADL can help your business with Corporation Tax planning, tax efficiency in general, as well as business succession, book your free e-consultation with us now.