Britain should abolish corporation tax

The script is becoming very familiar. A big company finds itself under scrutiny over how much tax it pays. When the answer turns out to be "not very much", there is a chorus of disapproval.

Vodafone is the latest name to be caught out. Last weekend it found itself accused of depriving the Treasury of tens of millions in revenues. In the last tax year, its corporation tax payments in Britain fell to nothing from £140m a year earlier. That is despite the fact that it is one of the biggest companies in Britain, with one of the best-known brands.

Vodafone is hardly alone here. A string of recent revelations have shown how little corporation tax big global firms now pay. Most of the big American internet firms, such as Amazon, Google and Apple, have found themselves in trouble for paying hardly any British taxes, even though they have huge businesses in this country. So have companies such as Alliance Boots, which operates the high-street pharmacy chain, and others that have moved their head offices to other countries.

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No doubt we'll hear of more in the next few months. After all, this makes an easy story for the media. Pick on a big company, preferably one that everyone has heard of. Check how much corporation tax it pays from its British accounts, then compare that to its sales and point out just how little it is paying.

The cries of outrage that follow are predictable. We've heard a lot about how corporate fat cats are paying nothing in tax while the rest of us pay more and more. We hear plenty about how cuts in public spending could be avoided if only the likes of Vodafone and Google could be made to pay their fair share.

The trouble is, this is all nonsense. Corporation tax is a stupid tax. There is no reason at all why companies should be expected to pay it if they can legally avoid doing so. In fact, Britain would be better off getting rid of this tax altogether, rather than harassing companies that legitimately decide they'd rather do something else with their money than help out the British government. There are two reasons why corporation tax doesn't make much sense and the bigger the company, the less sense it makes.

First, it is very difficult to collect. One of the first principles of any sensible tax is that it should be very hard to avoid as well as being clear, transparent and fair.

Corporation tax doesn't pass any of those tests. The more globalised the economy becomes, the harder it is to collect. Many companies shift their base to Ireland where the tax is much lower. Others create holding companies in Luxembourg or Switzerland, where generous tax reliefs are available.

With a huge company trading in dozens of countries, it is not hard for clever lawyers and accountants to get together and find ways of switching profits from one place to another so that the tax bill drops dramatically.

Worse, the more business gets done online, the harder it gets. When you bought a book from a local branch of a book chain, it was easy to say where it was sold and where the tax should be paid. But an e-book may well come from a server in Luxembourg. The same is true of any web-based transaction it is simple to transfer these transactions to a country with lower tax rates.

It should be no great surprise then that the amount collected from corporation tax has been falling steadily. In 1996 it brought in the equivalent of 9.7% of Britain's GDP. This year it was only 7.6%. In truth, corporation tax is rapidly becoming a tax on companies that don't want the public relations trouble that comes with minimising their tax bill. But that is hardly a fair basis for a tax system.

Next, it is a mistake to think that companies actually pay tax anymore than your TV pays the TV licence, or your house pays the council tax. A company is an inanimate object. The tax is paid by the shareholders, the directors, the staff and the customers in the form of lower dividends, lower wages and higher prices. Money doesn't sit around in company bank accounts, for the simple reason that companies don't need to eat or find somewhere to live or look after their children. If they didn't need to pay corporate taxes, then dividends or salaries would be higher, or prices would be lower or probably a mixture of all three.

In reality, corporation taxes are a form of disguised personal taxation because the tax ends up being paid by individuals. These taxes are easy for governments to levy because it doesn't feel like anyone is actually paying them. But surely it would be better to tax people directly, rather than through companies at least that way people would know how much they are paying and could vote the government that levied them out of office if they didn't like it.

Rather than try to harass and intimidate companies into paying a tax they can fairly easily avoid if they feel like it, Britain would be better off taking a really radical step. How about becoming the first major economy to abolish corporation tax altogether?