UK corporation tax receipts surged to a record high during the past financial year despite the main rate falling from 30 per cent in 2008 to 19 per cent today.
Linking tax cuts to higher revenues is a theory once derided by George H W Bush, the former US president, as âvoodoo economicsâ. But if that is not the cause for the bumper receipts, what are the factors responsible?
UK economy has grown, and profits with it
Official public finance data, published on Tuesday, found the UK government had raised ÂŁ56bn from corporation tax during the 2016-17 financial year, a 21 per cent increase from the previous year.
In part, this is because the government has changed the date of when corporation tax payments appear in the figures in a way that has flattered this yearâs tax take. However, on a purely cash basis receipts increased by a still impressive 12.6 per cent. The Office for Budget Responsibility, the governmentâs fiscal watchdog, expects them to increase even further as more small companies pay their tax.
Some of the increase can be explained by rising corporate profits. According to the Office for National Statistics, the net rate of onshore companiesâ profitability reached 12.7 per cent in 2016 â the highest level since 1999. Profitability has successively risen from a rate of 8.8 per cent in 2009 during the recession following the financial crisis.
Matt Mealey, a partner at EY, the professional services firm, said the fall in the value of the pound after the EU referendum had played its part in boosting profitability because it had helped exporters who earn revenues in foreign currencies but whose costs are priced in sterling.
In 2013, the Treasury tried to estimate how much of the cost of the corporate tax cuts would be recouped as a result of increased growth. It predicted the rate cuts would push up profits, wages and consumption, which would all tend to bring in extra taxes. As a result, it suggested the cost of the corporate tax cut in lost revenue would fall âby between 45 per cent and 60 per cent in the long termâ.
Banks are paying more corporate tax
Banksâ corporate tax payments have increased markedly since their low in 2011-12. Andrew Packman of PwC, the professional services firm, said: âAs the banksâ profitability recovers, we are expecting very significant increases in the tax paid by banks.â
Tighter restrictions introduced in April 2016 on carrying forward losses to offset profits has pushed up receipts by an amount the government has estimated at ÂŁ330m.
The figures also include ÂŁ1.1bn paid by banks following the introduction of the 8 per cent surcharge on their profits in January 2016. But takings from the bank levy, which is based on lendersâ balance sheets, declined from ÂŁ3.4bn to ÂŁ2.9bn in the year to 2017 as the government reduced the rate.
Weak investment spending
Companies can offset some of their investments against their profits to reduce their tax bill. The idea is to give them a tax incentive to make more investment. For this reason the OBR has a rule of thumb that a 1 per cent increase in business investment leads to ÂŁ50m less in tax receipts.
But business investment fell by 2 per cent in 2016, according to the ONS. This was good news for the public finances, which received more in corporation tax revenue, despite being bad news for the overall economy.
The impact of a global crackdown on âbase erosion and profit shiftingâ agreed in October 2015 is likely to have swelled tax receipts. Businesses have been unwinding complicated structures that shifted profits to low-tax countries, such as âhybridâ structures that took advantage of differences in different countriesâ tax rules.
In the year to April 2016, HM Revenue & Customs intensified its investigations into multinationalsâ cross-border deals, pushing up their potential exposure by 60 per cent to nearly ÂŁ4bn. They are also likely to have collected significant revenues from accelerated payment notices, which require tax avoiders to pay disputed tax up front before the dispute over the legality of the avoidance scheme is settled.
The âGoogleâ tax
The tax take from big companies is also likely to reflect new legislation â the âGoogle taxâ â that was introduced to stop companies diverting profits overseas. Formally known as the diverted profits tax, it was originally expected to bring in ÂŁ270m last year. The revenues have been included in the corporate tax receipts.
Britainâs attractiveness to global companies
Since 2010, the UK government has tried to show Britain is âopen for businessâ by gradually cutting the corporate tax rate to 19 per cent â with plans to cut it further to 17 per cent in 2020. A number of companies, including McDonaldâs and Starbucks, have moved headquarters or other parts of their operations to the UK.
But the uncertainty over what a final Brexit deal will look like has also had an impact on the UKâs appeal, particularly for multinationals with headquarters outside the UK. A recent survey conducted by KPMG, the professional services firm, pointed to a possible net outflow of business operations from the UK.
