Big companies should pay as little tax as they can get away with

It was the last thing busy shoppers battling their way through the snow needed on the last weekend before Christmas. Across the country, tax protestors staged flash demonstrations against companies they believed were avoiding paying their fair share in taxes. Marks and Spencer's Oxford Street store was closed for 30 minutes as a hundred protesters staged a sit-down demonstration. Topshop, Boots, HSBC and Vodafone have also been targeted.

Some credit must go to UK Uncut, the online campaigning group that had led the fight against corporate tax evasion. It has used Facebook and Twitter to organise instant events, and has brilliantly stage-managed its protests to create as much media impact as possible. It has been slick, smart and effective. Yet most of the companies targeted have remained silent. When they have responded, they have mouthed a few pointless, jargon-filled platitudes about how they have a duty to their shareholders to be as tax-efficient as possible. Indeed, they do have a duty to their shareholders. It is to fight back with steely determination against these campaigns and to argue the case for lower, not higher, corporate taxes. If they don't, they will find themselves getting bigger and bigger bills from the Inland Revenue and it is their shareholders who will suffer the most from that.

The protestors have certainly made their case well. They have targeted Sir Philip Green's Arcadia Group which owns Topshop, BHS and other chains on the grounds that Sir Philip has avoided British taxes by paying dividends to his wife. She just happens to be based in Monaco rather than this country. Vodafone, according to the campaigners, managed to negotiate down a £6bn tax bill to just £1.25bn by doing a deal with the Revenue. Likewise, HSBC is accused of negotiating 'sweetheart deals' with the Revenue, designed to keep its corporate tax bills low. Boots, meanwhile, is being targeted because its parent company, Alliance Boots, is now domiciled in Zug, Switzerland, where corporate taxes are a lot lower. And when companies pay less tax we all suffer, argues UK Uncut. We either pay more taxes ourselves, or public services are cut more than they otherwise would be. It's a clever campaign. The corporations on the front line need to smarten up their response fast. Here are three arguments they should run with.

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One, corporations don't actually pay any tax, people do. Firms are inanimate objects it is meaningless to describe them as 'paying' taxes. You might as well argue that it is your house that pays the council tax. All corporation taxes ultimately get passed on to a person. It might be shareholders in the form of lower dividends; customers in the form of higher prices; suppliers in the form of tighter margins; or workers in the form of lower wages. Company taxes are just a device by governments to try to disguise how much money they are taking from us.

Sure, governments may believe that everyone should pay higher taxes to protect public services. But they should be honest about it, and say precisely how much extra should be paid, and by whom. That's better than dishonestly pretending the cash can somehow be raised without anyone feeling any pain.

Two, corporations need to make the point that Britain is a global business hub, or it is nothing. Even though the coalition government has pledged gradually to reduce our corporate tax rates, they are not low by international standards.

Big firms pay 28% in corporation tax. In Ireland it is just 12.5%. In Singapore it is 17%. In Poland it is 19%. Even in high-tax France and Germany it is only marginally more. There are already plenty of companies that have moved their headquarters out of Britain to escape high corporate tax rates the pharmaceuticals company Shire, for example, or United Business Media. Giants such as Diageo and Unilever have made noises about leaving Britain as well. The tax protesters are strangely silent on this point perhaps it's because they don't have an answer.

Lastly, the problem with the UK's public finances is not corporate tax avoidance. It's a dysfunctional welfare system. Corporation tax raises £43bn in Britain annually, about 8% of the total tax revenue raised. Even doubling it won't make much difference to a budget deficit of £160bn. When all the different benefits paid out by the government are added up, the total comes to £183bn, according to the Centre for Policy Studies. That is a quarter of all government spending. It is a system of such complexity and warped incentives that it has kept millions of people in idleness while importing millions of East Europeans to do the jobs that the British don't want to do. It would be far better to protest about Vodafone using Polish workers, rather than training people from Swansea or Darlington to do the same job. But there is no conceivable way in which raising more in corporate taxes can fund a public sector that has run out of control.

In truth, the arguments of the protesters are a self-indulgent mess. But they are winning the propaganda battle largely because big business is too gutless to take the argument back to them. If big business ends up paying higher taxes as a result, it only has itself to blame.

This article was originally published in MoneyWeek magazine issue number 518 on 23 December 2010, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.