Britain will only grow again when it can shrug off its tax burden

If the government really wanted to boost the economy, it should be taxing companies less, not more, says Matthew Lynn

There are few more controversial issues in British politics right now than the tax paid by big companies. Just about every week another big multinational corporation gets roasted in parliament and the papers for not paying enough corporation tax. The complex geography of the corporate finance department the double Dutch and the Irish sandwich, along with the Luxembourg or Cayman Islands subsidiary are becoming familiar to most of us.

There is no doubting that some of the anger is genuine. At a time when living standards are stagnant, when wages are struggling to keep up with inflation, and when public spending is under pressure, people see that household names such as Google or Apple are paying very little, and believe there is one rule for big companies and another for them.

But the real problem is not how little tax business pays it is how much. A report from PricewaterhouseCoopers (PwC) this week revealed that the taxes paid by retailers had risen by 65% in the last seven years. That is just the tip of the iceberg. While the economy is flat and sales are getting squeezed, companies have to pay more and more tax every year. If the government really wanted to boost the economy, one of the easiest ways would be by taxing companies less not more.

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The headlines are all about corporation tax. But that is just one of the vast number of taxes that companies pay, and often the hardest to collect. Companies only pay corporation tax on their profits, and it doesn't take much imagination in the finance department to re-shuffle the books so that profits are racked up in countries with lower taxes than Britain. Nor do big companies necessarily make big profits. Amazon, which has attracted a huge amount of criticism for its tax planning, hardly makes any money at all, largely because it invests so much in growth, and is so ferociously competitive on price that it doesn't leave itself much of a profit margin. Last year it made a loss of $39m on sales of $61bn. It is hard to see why it should be paying a lot of tax on that.

The real taxes companies pay are business rates, national insurance and VAT. And they are going up all the time. The PwC report laid out in forensicdetail how taxes on the retail sector have risen relentlessly over the last few years. Since 2005, the total tax burden for Britain's largest retailers has risen by 65%. For every £1 they pay in corporation tax, they pay another £2.40 in business rates and national insurance contributions.

Rates are the biggest cost. Between 2008 and 2010 the amount charged by councils jumped by 30%. Rates are going up again this year, and are still being charged on the 2008 value of commercial properties but 2008 was the market peak and the value of many retail and commercial premises has fallen substantially since then. The sums can be enormous. Paul Turner-Mitchell, a retailer who campaigns on the issue, cites the example of a shoe shop in the Metro Centre in Gateshead paying £160,000 a year in rates. At that level, it is virtually impossible to stay in business. The huge bills are the main reason why so many high streets are now boarded up rising taxes have hit shops a lot harder than competition from the internet.

It is not just retail that is suffering. PwC found a 39% increase in total taxes paid since 2005 across the 100 largest companies in its survey. National insurance costs more and so does VAT. Few companies can get away with raising prices when VAT goes up and simply have to pay the extra outof their existing turnover. And yet the economy is hardly any bigger now than it was in 2005. The average business is paying almost 40% more tax on sales that have not grown at all.

There is much talk about getting the economy moving again. We hear about how the banks should be encouraged to lend more to small businesses and the Bank of England has come up with imaginative schemes to channel funds directly to companies. But it is hard to justify lending more to firms struggling to stay afloat profitable ones don't find it too hard to borrow money. It will be tough to secure more lending until the economy is in better shape.

Likewise, there is much discussion about increasing skills levels, encouraging entrepreneurs, or devaluing sterling even further to boost exports. But none of it will have much of an impact in the short term.

The best thing the government could do for most businesses whether big or small is to tax them less. True, corporation tax is coming down. The headline rate has been cut from 28% to 24%, and is scheduled to fall to 20% by 2015. That is a good start. But it is only one of the levies businesses pay, and usually not the main one. A lot of firms are not making enough profit to worry about it anyway. It would make more sense to reduce business rates and cut national insurance.

Britain will only start growing again once companies start expanding and the evidence suggests that the tax bills they have to pay are preventing them from doing that.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.