Tax: Searching for the right answer

The Government has responsibility to set the tax rules and businesses have responsibility to the pay the right amount of tax in accordance with that. That is something most reasonable people can agree with, but unfortunately the complexity of the real world means there are often honest disagreements over the interpretation of tax laws.

“Determination of taxable profits is not a precise science”

The determination of taxable profits is not a precise science and there will often be a difference in good faith between HMRC’s view of the tax due and a company’s view. Such differences of interpretation should be expected and the final result is usually determined through detailed discussions between HMRC and businesses on the application of the relevant law to their individual business models, particularly those which are new and complex. When this happens, it should be viewed positively.

The clarity the outcome provides sets a precedent for how the current tax law should be interpreted. In turn, clarity on the tax law and how it applies in certain cases is an essential ingredient to encouraging business investment, whether by UK-based companies or foreign companies investing into the UK.

Yields from settlements are increasing

As a result of robust engagement by HMRC’s Large Business Service over the last decade, yields from settlements have been increasing. This is largely due to the adoption of more sophisticated risk profiling. Furthermore, from HMRC’s perspective, such a settlement is always based on interpretation of the law and the right amount of tax in accordance with that and not, for example, on a ‘split the difference’ basis as is sometimes assumed.

Nor can “back of the envelope” calculations do justice to the complexity of the settlements. This is particularly the case if those calculations ignore the realities of the rule of law. For example, some commentators arrive at a higher number by dividing the tax outcome by a profit number, to give an effective tax rate. But that ignores the fact that the law says that tax is attributed to the countries where the economic activity (or “substance”) occurs, not the accounting profit.

Taxable profits are not an exact science

The sheer complexity of the tax system means companies have to make decisions even where laws are unclear. This very often makes it difficult to establish the one, scientifically ascertainable ‘right’ amount of tax owed. The vast majority of businesses seek only to reach a clear and certain outcome in the taxes they pay, while satisfying stakeholders that they have taken account of all provisions in the tax system made available by law, such as reliefs and allowances, so that they do not pay more than they are legally obliged to do (if they did, their shareholders might have something to say on the issue).

“A tax environment which does not encourage businesses to grow would translate into fewer jobs, less opportunity, and lower tax receipts”

Against that background it is vital that the government and all stakeholders that operate within the tax system understand that a predictable tax environment that is governed by the rule of law underpins economic prosperity. A tax environment which does not encourage businesses to grow would translate into fewer jobs, less opportunity, and lower tax receipts. That would not be good for the UK economy nor UK workers. In conjunction with that the CBI welcomes the important moves currently being taken by governments around the world to update the international tax rules to ensure the amount of tax paid by multinational companies correctly corresponds to economic activity in that country.


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