Will The UK Budget Reverse The Trend To Increased Corporate Taxation?

Jason Gorringe, Tax-News.com, London

06 March 2001

Margaret Thatcher was perhaps the most famous politician to observe that businesses don't pay taxes, only people pay taxes, but this point is often overlooked in discussions about corporate versus personal taxation.

Writing in the Financial Times today, Ed Crooks says: 'International comparisons from the Organisation for Economic Co-operation and Development seem to support the contention that British companies are relatively over-taxed.'

The article quotes Steve Bond of the Institute for Fiscal Studies: "The sum total of taxes on corporate income has clearly gone up, because of the end of the dividend tax credit - everything else done in terms of giving money back to companies has been substantially smaller."

And Philip Gillett of ICI, chairman of the CBI's taxation committee, says: "Businesses feel a bit aggrieved that most of the extra tax raised by Mr Brown has come from them."

But it's a dubious proposition that the ending of the dividend tax credit was an increase of tax on business. It didn't change the amount of money paid by companies to the Exchequer; it simply removed the privileged position of those financial institutions which were involved in the savings process by reducing the tax credit available to them from 20% to 10%. Surely that's a tax on savers, not a tax on business?

The change had the effect, for the institutions, of reducing the relative attractiveness of shareholdings when compared to other forms of investment. The Chancellor was lucky that the ending of the distortion (which it certainly was) coincided with a seemingly endless bull market, which masked its effects.

The current treatment of dividends is definitely obnoxious, but it is individuals who suffer the resulting double taxation, not businesses. Gordon Brown's dividend stealth has hardly been remarked upon, which is strange in an equity culture: limiting the tax credit on dividends to 10% means that a higher-rate tax-payer paying 40% income tax loses the difference between corporation tax at 30% and the tax credit at 10% = double taxation of 20%. If that's not socialist redistribution, then what is?

As Mr Crooks points out, a major factor in increasing the corporation tax yield has been the replacement of ACT by staged payments of mainstream tax, and it is this, plus the tightening up on what the Treasury is pleased to call tax avoidance, which accounts for the majority of the increase.

There is little chance that Gordon Brown is planning to reduce the impact of taxation on businesses in his Wednesday budget. He will say he is doing so, no doubt, but the reality will be otherwise, as has been the case in every budget he has delivered so far.

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