Corporation tax represents a substantial part of your business’ trading costs. Making sure you are compliant can be a heavy burden, especially with the increase in reporting obligations, robust investigation policies from the tax authorities and harsher penalties for non-compliance. However, there is another issue that must be considered when it comes to corporate tax: is reducing tax ethical?
First of all, let’s take a look at the different approaches to paying taxes; evasion, avoidance and efficient planning/reduction.
Tax Evasion
One of the biggest tax issues is when companies or individuals deliberately attempt to not pay tax where it is due or reduce their tax burden in ways that do not comply with the law. It typically involves not declaring all business income, keeping business ‘off the books’ by dealing in cash or creating non-existent expenses. This is highly illegal and has very serious consequences including financial penalties, criminal conviction and imprisonment.
From 2010, the government has introduced over 100 measures to tackle tax evasion, and other forms of non-compliance, securing and protecting over £220 billion that would otherwise have gone unpaid.
From 2018 to 2019, HMRC recovered a record £34.1 billion in additional tax through activity tackling tax evasion and non-compliance. HMRC publishes the tax gap every year because they believe transparency is important in their work. The tax gap is the difference between tax that should be paid and what is actually paid.
HMRC’s Chief Executive Jim Harra said:
“More than 95% of the tax due was paid in 2018 to 2019. HMRC’s aim is for everyone to pay the tax that is due, no matter who they are. Our role is increasingly about making it straightforward for taxpayers to get it right, first time, while also tackling the minority who deliberately set out to cheat the system. I’m pleased that we’re now able to share more information about who pays what.”
Tax Avoidance
Tax avoidance refers to the legal, but perhaps immoral, way of obtaining a lower tax obligation result that is not intended by the government through the use of financial instruments and other aggressive tax arrangements, such as overseas tax havens. Some argue that avoiding tax is unethical and believe that when companies avoid tax, they are avoiding a social obligation to their country.
This is because countries’ governments set out their tax laws and businesses, and are expected to pay their dues in the ‘spirit of the law’ in order to provide funds for public services such as healthcare and education. Some people say that companies who look for loopholes and ways of reducing their tax are reducing resources and depriving those who need them most.
In fact, according to a survey by Christian Aid, four out of five people said that companies which don’t pay their fair share of tax in the UK of tax made them angry and a third said they would even boycott these companies, especially multinational corporations.
On the other hand, some company directors often make the argument that the more tax they pay, the less they are left with to distribute to their shareholders and to buy raw materials with. They say it also adds to the problem of unemployment, as if they are paying more in taxes, they won’t be able to employ as many workers.
They also argue that the more tax companies avoid, the higher the amount of tax its owners and employees will end up paying anyway. According to them, when companies legally reduce the amount of tax they pay, they are actually doing what the government wants by responding to the incentives they offer.
Tax Efficiency/Reduction
This is an honest approach to applying the taxation law and is different from tax avoidance as there is no intention to abuse the system, instead making use of the different concessions available such as deductions, credits, rebates and exemptions to lessen your tax liability.
At Ryans, we help businesses to plan their tax efficiently. Efficient corporate tax planning can result in potentially significant improvements in your bottom line, whilst still complying with the law and upholding our moral beliefs.
“As specialists in acting for owner managed businesses, we understand the business is quite often just a commercial vehicle and that we must ensure the cash in the business is worked hard and we maximise household wealth. We take time to understand the business and the individuals behind it and suggest tax planning strategies to minimise tax in both a legal and ethical sense.” – Dale Pollitt, Director at Ryans.