A Third Of UK's Largest Firms Paid No Corporate Tax, NAO Finds

by Jason Gorringe, Tax-News.com, London

28 August 2007

Almost one-third of the UK's largest businesses paid no corporate tax in the 2005/6 financial year, according to a new report by the National Audit Office.

The government spending watchdog's analysis revealed that of the 700 firms handled by HM Revenue and Customs's large business division, 220 paid no corporate tax in the year in question, while a further 210 paid less than GBP10 million (US$20 million) each.

The study found that these companies paid GBP24.4 billion in 2005/6, just over half of all corporate tax paid in the UK. However, just 7% of the 700 largest companies contributed two-thirds, or 67%, of this. Most of these firms were concentrated in three industries - banking, insurance and oil and gas. The alcohol, tobacco, automobile and real estate sectors contributed only a few hundred million pounds, the report stated.

It has been suggested that low profits in certain industries would partly explain the figures, but another more controversial reason could be that many of these large companies are able to offset the cost of borrowing against their taxable income, to all but eliminate their corporate tax bills. This finding may heighten calls for the government to act against private equity funds, which use high levels of leverage to fund their buyouts, and offset interest payments to minimise tax.

In a report published last month, the NAO concluded that while HMRC has made progress in changing the way it deals with corporation tax for the largest businesses in the UK, there are ways in which it can improve, particularly by focusing on higher amounts of tax at risk. However, it also recognised that dealing with corporation tax for large businesses is complex because most are multinational companies, meaning that the relevant tax legislation is complex, and businesses are entitled to plan their tax affairs to minimise their tax liabilities within the rules.

Nevertheless, this report pointed out that the department could better direct its efforts on higher value risks, and could progress enquiries more quickly. In February 2007, it was carrying out 4,700 enquiries but nearly 1,700 were five years old or more, and 58% of its open enquiries were expected to produce less than one per cent of the total additional tax yield generated from compliance activities.

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