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TWEd points out that the UN has suggested that the UK’s austerity policy is in breach of its Human Rights obligations.

Introduction

This is a tax website, and readers might be forgiven for wondering why the UN, Human Rights (as a formal title, rather than a broad concept) and the Conservatives’ austerity policies might be relevant.

They are relevant because the UN has criticised the UK’s tax policy, in the light of its austerity measures, and the government’s Human Rights obligations.

Corporation Tax

If we might just review the recent history:

• Companies have been vilified for choosing to operate in a way that means that they pay less tax. For instance, by paying tax in offshore, low-tax jurisdictions, on profits basically earned in the UK. As a tax practitioner, I appreciate that this is a huge over-simplification. But that is essentially the “Profit-Shifting” part of “Base Erosion and Profit Shifting” or “BEPS”. The UK is ostensibly a willing party to the OECD’s measures to combat BEPS.         
  
• Despite talking tough on tax, the Chancellor has reduced the top rate of Corporation Tax in the UK from 28% down to 20%, with further reductions planned.          
  

(The vast majority of UK companies, however, will so far have seen little or no benefit from these reductions, since they apply only to companies making substantial profits. The “small” companies rate has stuck at 20% for roughly 20 years. Now that the “large” and “small” company rates have amalgamated, they will decrease together, in future.)    

• The implication is that the Chancellor was primarily motivated to attract / retain big companies such as multinationals. He has happily admitted as much in his Budget speeches. While significantly increasing personal taxes on company dividends.     
  
• But these reductions do not appear to have resulted in a substantive rise in overall Corporation Tax yield to the Treasury. In fact, in its May 2016 “HMRC Tax & NIC Receipts”, HMRC seems to offer the reduction in Corporation Tax rates as a reason why yield has fallen as a proportion of GDP:

 “CT receipts as a proportion of GDP have steadily declined since the mid-1980s… …Reductions in the main rate of CT have also affected receipts; the rate fell from 26 per cent in 2011-12 to 20 per cent in 2015-16.”          

• It may of course be too soon to tell, as it may take years for new business to transfer to the UK and/or for their taxable UK profits to grow. I am assuming that the Chancellor would hope to increase overall Corporation Tax receipts as a result of lowering the rate, rather than simply engineering that it wither on the vine.  

In summary, therefore, the UK has criticised companies for trying to reduce their tax bills, while doing its best to lower companies’ tax bills. But when the Chancellor cuts rates, he is making the UK competitive, not a tax haven of the sort that tax-avoiding companies might choose.

The Chancellor has this week announced that Corporation Tax rates may fall to 15% or ideally less, as part of plans to build a “super-competitive economy”. And, presumably, still not a tax haven. Or a super tax haven.

There is no date yet for this apparent pledge. And one wonders if our current Chancellor will be in a position to make good on his aspiration. Perhaps the threat to slash taxes is part of the UK’s Brexit negotiations – “be nice to us or we’ll pinch all your wealthy companies”. It may not be well received in mainland Europe.

UK Tax Policy and Austerity

Given that most of the press is now fixated with “Brexit”, some may not have noticed that the United Nations Committee on Economic, Social and Cultural Rights has issued what appears to be a quite damning report on the UK government’s approach to taxation – this lifted from its Concluding Observations: (the full background may be found here):

“Tax policies

The Committee is concerned about the adverse impact that recent changes to the fiscal policy in the State party, such as the increase to the inheritance tax limit and to the Value Added Tax, as well as the gradual reduction of the tax on corporate incomes, are having on the ability of the State party to address persistent social inequality and to collect sufficient resources to achieve the full realization of economic, social and cultural rights for the benefit of disadvantaged and marginalized individuals and groups. While noting the efforts that the State party and notably its Overseas Territories and Crown Dependencies are undertaking to tackle tax avoidance and cross-border tax abuse, the Committee is concerned that financial secrecy legislations and permissive rules on corporate tax are affecting the ability of the State party, as well other States to meet their obligation to mobilize the maximum available resources for the implementation of economic, social and cultural rights…

Austerity measures

The Committee is seriously concerned about the disproportionate adverse impact that austerity measures, introduced since 2010, are having on the enjoyment of economic, social and cultural rights by disadvantaged and marginalized individuals and groups. The Committee is concerned that the State party has not undertaken a comprehensive assessment of the cumulative impact of such measures on the realization of economic, social and cultural rights, in a way that is recognized by civil society and national independent monitoring mechanisms…”

IHT – Really?

I am not sure I can concur that the so-called increases to IHT bands are going to have much of an effect. The standard Nil Rate Band has surely lingered around £325,000 for long enough to have dragged more people into IHT? The new Residence Nil Rate Band is relatively targeted, and may do no more than keep up with house price inflation, in some places. Referring back to May 2016 “HMRC Tax & NIC Receipts”, it seems that IHT yield has indeed increased, although that may be more attributable to a ‘bounce’ following the recession. (Last decade’s, which I am not sure has yet left us; shall we have another, just so we can be sure we were actually out from under the last one?).  Whatever: IHT still accounts for less than 1% of annual tax yield to the Exchequer.

VAT

VAT, however, still comfortably accounts for more than 20 x the IHT yield to the Exchequer. And, while there are numerous exemptions, VAT still attaches to a substantial part of standard household expenditure. In other words, it is not avoidable simply by not being wealthy. Again referring to May 2016 “HMRC Tax & NIC Receipts”, VAT yield has risen by 37% in 2015/16 against 2010/11 – note the rate rise to 20% kicked in, in 2011/12. Not all of that extra £31.5Billion VAT yield in 2015/16 will have been from plasma televisions and chocolate.

Corporation Tax

Austerity measures themselves are not really my area of expertise. But to my loose mind, it loosely follows that, if (amongst other things) the Chancellor’s decision to lower Corporation Tax rates is not raising more revenue for the Exchequer, then one obvious measure to alleviate austerity to some extent, would be to reverse the policy of reducing Corporation Tax rates. Perhaps an over-simplification too far. And then again, perhaps not. I am, again, assuming that austerity measures comprise a means, rather than an end.  It may perhaps be arguable that reducing Corporation Tax has resulted (or will result) in higher tax yield elsewhere. But if (say) UK individuals are losing more personal income to tax, is that a fair trade? (Unless it can also be proven that those taxes are being levied on higher personal incomes).

Dig for Victory!

Far from holding back, the Chancellor seems determined to dig deeper, with a pledge (aspiration?) to cut Corporation Tax to 15% and ideally less. I am not sure what are the consequences for ignoring the UN in this regard. Perhaps this is yet another burdensome regime from which the UK should unshackle itself? (I mean Human Rights legislation, not Corporation Tax!)  We have already heard the government grumble about Human Rights legislation, and also threaten to launch something independent, but “better”. One has to ask: better for whom? Even my naïveté has limits.

At least, now that the main rate is dropping below 20%, the vast majority of UK companies – those smaller ones – will start to see some benefit. But I rather think that most family companies, etc., would much rather see a reversal of the Corporation Tax rates if it were coupled with a reversal of the new dividend regime. In the Summer 2015 Budget, the Chancellor framed being able to afford Corporation Tax cuts in terms of increasing Income Tax on dividends. But the increased Income Tax will raise billions before the cuts in Corporation Tax kick in.

My suspicion is that multinational entities will have seen substantial benefits already, even though Corporation Tax yield to the Exchequer has not risen. Personal tax and NICs, however, have swelled substantially.  I have suggested before that individuals are more ‘captive’ than large companies. And, while personal tax on corporate profits (through dividends) is set to rise significantly, this will apply only to UK taxpayers: non-residents may enjoy UK dividends essentially tax-free. (Or, at least, free of UK tax).  Having a tax regime that punishes domestic taxpayers while promising ultra-low rates to international business? Now, where have I seen that before..?

It may require many years before we see the wisdom – or lack of it – in the Chancellor’s policies. I have my own views on what he will be remembered for. I doubt my list would tally with his. Even in the abstract world of tax, there are only so many “reforms” and “simplifications” that the planet’s diminishing rainforests will stand.