Accountancy Age ran a story today in which it claims that the UK, far from being a high corporation tax country, is in fact one of the lowest in the G8. The idea that it's a high tax country is a myth.

THE UK has the second lowest corporate tax burdens in the G8, research has shown.

A study by UHY Hacker Young, released today, shows that only Russia imposes lighter corporation tax on businesses. It also has the lowest business tax burden among the major European economies, with only Estonia, Romania, Ireland and occasionally the Netherlands imposing lower rates.

The story is based on a press release from accountants UHY Hacker Young:

Our tax professionals studied tax data in 21 countries across its international network, including all members of the G8 as well as key emerging economies. Tax professionals based in each country calculated post-tax profits for businesses making annual statutory pre-tax profits of US$100,000, US$1 million and US$100 million.

The UK has the 16th highest tax burden out of 21 countries for businesses with annual pre-tax profits of US$100,000; the 14th highest tax burden for businesses with annual pre-tax profits of US$1 million; and the 12th highest tax burden for businesses with annual pre-tax profits of US$100 million. The tables (below) rank countries from highest tax burden first to the lowest tax burden last.

The G8 countries Corporate tax payable per country in US dollars (highest to lowest)

Tax payable				Tax payable				Tax payable
(assuming pre-tax profit of US$100,000)				(assuming pre-tax profit of US$1 million)				(based on statutory pre-tax profit of US$100 million)
Germany	$32,450	32%		Japan	$419,900	42%		Japan	$41,990,000	42%
Italy	$31,400	31%		USA	$340,000	34%		USA	$35,000,000	35%
Japan	$31,106	31%		France	$333,333	33%		France	$34,397,363	34%
France	$23,350	23%		Germany	$324,500	32%		Germany	$32,450,000	32%
USA	$22,250	22%		Italy	$314,000	31%		Italy	$31,400,000	31%
Russia	$20,000	20%		UK	$238,337	24%		Canada	$29,187,384	29%
UK	$20,000	20%		Canada	$223,781	22%		UK	$26,000,000	26%
Canada	$15,500	16%		Russia	$200,000	20%		Russia	$20,000,000	20%

This seems to be a slam-dunk for their hypothesis and music to the ears of all left-wing tax campaigners. Indeed, the usual suspects were lauding UHY's claim today.

Unfortunately, the press release is wrong. It's made some total howlers which invalidate UHY's claim.

Statutory profits vs taxable profits

The biggest howler of all is their claim to have analysed 'statutory pre-tax profits' in their work. They've done nothing of the sort. I've confirmed with UHY via e-mail that they have in fact used 'taxable profits', not 'statutory pre-tax profits'. OK, this sounds like boring, geeky sophistry, but it's actually really important. Here's why. Companies don't pay corporation tax on their statutory pre-tax profits. They pay it on their taxable profits. And the numbers are rarely the same.

In a lot of countries, the statutory pre-tax profit is used as the starting point for calculating taxable profits. There are then a series of adjustments as required by law. So, for example, in lots of countries depreciation of fixed assets is disallowed (ie added back to profit) and, in its place, other forms of relief are given. In the UK, capital allowances are given instead. Another common disallowable item is directors' entertaining. And another is penalties. Both of these derive from public policy arguments. Sometimes the timing of deductions can vary. So in some countries you are required by accounting standards to provide against unsaleable inventory at the point at which it's obvious it cannot be sold. But the tax authorities may not give you a deduction until the inventory is physically destroyed, which may be in a later accounting period. Not all adjustments are disallowable deductions. There are various other allowances and deductions that exist in the tax system but are not part of the accounting system. For example, R&D tax credits may provide relief at up to 175% of the accounting deduction.

Taken together, these adjustments determine the breadth of a tax base. Where there are relatively few adjustments to the statutory profits in arriving at taxable profits, the tax base is said to be broad. And where there are lots and lots of adjustments, we say that the tax base is narrow. You don't have to be Marcus du Sautoy to realise that a broad tax base means you can have a lower tax rate to generate the same amount of revenue as you would with a narrow tax base and a higher tax rate.

Now I'm told that the UK has a fairly broad tax base compared to the others. But that's neither here nor there. UHY's analysis only considers the rate of tax applied to the tax base. Because they fail to take account of the breadth of the tax base of each country their work is fundamentally and fatally flawed. It should be substantially rewritten to make it clear that an understanding of the breadth of the tax base is vital to determining whether a country's tax system is considered high tax or low tax.

Tax takes place in an international context

Secondly, they've also failed to take account of the international context of tax. So, for example, a significant worry about the UK tax system (until recently, at least) was its 'controlled foreign company' regime, which sought to tax the profits of certain subsidiaries under UK tax rules rather than accepting that, because those taxes were earned elsewhere, they should be taxed only in their host country. You'll observe that taxing profits that weren't even earned in the UK as if they had been is the ultimate form of tax base broadening!

Corporation tax is not the only complaint

Thirdly, by looking only at the headling corporation tax rate, they've ignored a whole raft of other concerns businesses have with the UK tax regime. Because there are other taxes and administrative burdens. The most obvious, of course, is employer's national insurance. But there are other concerns, such as VAT, the overall regulatory landscape, HMRC service standards, mandatory pension contributions, etc. These all serve to define how 'competitive' one country is compared to another and may well determine where a company decides to locate its head office.

Other bits and pieces 

There are other parts of their press release that are funny, or sad, depending on your point of view.

• It's frankly extraordinary that a UHY tax partner would find it 'surprising' that the US has a higher tax rate than the UK. The US has had a federal corporation tax rate of 35% for yonks. Roy Maugham should hang his head in shame, not least because he claims 'international business services' as one of his areas of expertise. (HT Tim Johnson).
• The US rates they quote in the article are those that are applied to so-called 'C corporations'. Most smaller businesses would be much more likely to have the 'S corporation' structure, which is more akin to our LLP form (again, HT Tim Johnson).

Overall, this is a grossly irresponsible bit of reporting from UHY Hacker Young. Their work simply does not support the very charged language they use in their press release. Accordingly, they perpetuate their own myth - that complaints from multinational companies about the competitiveness of the UK tax regime are unjustified. It's also disappointing that Accountancy Age saw fit to basically reproduce the press release in full without doing their own due diligence. We look forward to UHY Hacker Young's clarification of their article.

A big thank you to US tax guru and fellow chartered accountant Tim Johnson for first identifying the methodology used in the UHY press release.

People who read this post also read:

• Goldman Sachs and the timing of tax payments
• UHY Hacker Young plus tax policy equals total unmitigated disaster
• Banks and total payments to HMRC
• Eoin and corporation tax paid by big companies
• Taxing the Ritch

Filed under: Taxation with tags accountancy age, capital allowances, controlled foreign companies, corporation tax, r&d tax credits, roy maugham, tax base, tim johnson, uhy hacker young