I don’t know how many of you reading this run a small business, but here’s how tax works.  

Over the course of a year, you try to earn enough money to pay wages and cover overheads (business running costs). In my business, these are things like computers, phones, accounts packages, advertising, website hosting and so on.

If a good trading year comes along, your income outstrips your overheads leaving a surplus of money. This is known as profit and it is declared to the HMRC. The rate of corporation tax is 19%. So, to simplify things, if you have made a £10k surplus (profit) in the year April 2020 to April 2021, you owe £1.9k to the revenue.

Infrastructure

This is paid the January after your annual accounts are posted. So, the 20/21 corporation tax is due in January 2022. This money goes into a pot that covers the cost of things like roads, schools, hospitals, and large infrastructure projects such as HS2, fibre broadband roll-out and Trident.

Some of these projects are controversial but they do create jobs and businesses. This means more tax income for the treasury to invest in further projects. If the treasury has money coming in to spend on big and sustainable projects, it is an economic winner.

However, what it needs is the income. So, when you pay your tax (let’s be honest, no one likes paying it) you are doing your bit to push the economy along. With the economy growing, your investment will ultimately help to create more spending. This means your business gets more work. Great, isn’t it?

The Non Payers

Sadly, not everyone wants to play the corporation tax game. The small businesses that don’t, get heavy fines and can even face imprisonment. The big businesses that don’t pay it, have found legal loopholes to avoid such an inconvenience. They do this via complex operations based in offshore tax havens in places such as the Caymen Islands.  

It is quite hard to explain how it works as I don’t fully get it myself. However, it is a bit like this. Imagine a company that has made £100 million in UK profits after overheads are covered. They would be due to pay £19 million tax to the HMRC. Instead, they invoice that amount as consultancy fees from a place where there is either no tax system or a far lower taxable rate. Hey presto, they have saved themselves from paying millions into UK infrastructure.

For many years, big businesses all over the world have been doing this, starving their respective economies. There has been various attempt to bring it to a halt, but they are powerful, and they lobby government. In many places, particularly in the UK, these people are in government. Rishi Sunak might seem a nice chap, but he is not chancellor for the £120k a year salary. He is married to a billionaire.

Time to Reform?

If you do a checklist of all the people in government and where they are getting funded from, you will see that legal corporation tax avoidance is out of control. It is costing the world economy trillions and leaving national public services in bits whilst they become wealthy beyond calculation. How much money do these people need?

Yesterday, Joe Biden, the US president, attempted to make one small step for mankind with regards to big business. He made a proposal to the G7 nations to support a global minimum on corporation tax. The G7 are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. All of them agreed to support the proposal except one. The UK.

Sit down at you desk or on your sofa and ask yourself one question?

“Why would our government do that?”