Saturday, March 5, 2011


Following the report earlier this week on the Welsh Conservatives' Economic Commission proposal for lower corporation tax for Welsh business, the following comment was received by an individual who wishes to remain anonymous. I have received permission to replicate the comments below

It is worth reading and adds to a debate we should have had years ago.

"Lowering corporation tax in Wales could open the floodgates for English companies to set up a brass plate here as they do in most other low tax jurisdictions - for example Barclays. The Treasury will never buy in to this simply due to the tax avoidance this will create wuth English companies "moving" to Wales and the subsequent loss of CT across the UK as a whole. Whilst you could introduce complex legislation against this, it would be impossible to administer.

What I'm proposing is a system which is simple and transparent to operate, avoids tax avoidance, should not reduce overall UK tax take, is fairer, will directly stimulate new jobs and bring in to the Welsh economy the type of new high technology jobs that Wales needs.

Let's deal with fairness first. Companies receive benefits from the UK in return for tax. Not as much as individuals of course - they can't get benefits or healthcare, but you get the gist. So there's an argument that companies should pay a fixed rate of tax depending upon their size in terms of numbers of staff - not their profits. Companies already pay tax on that basis through NI.

Here's how a new tax system for Wales could work.

Company A, a call centre, employs 100 workers and earns a profit of £1m. Let's keep it simple and say that they currently pay £280,000 CT.

Under the proposed rule they would not pay tax on the first 100 workers * variable X, where x is the exemption per worker, let's say £5,000 = 0.5m. This leaves a profit of £0.5m on which they would pay tax at say 40% = £200,000.

For company A, taking on more staff is subsidised by the reduction in corporation tax by £2,000 per employee.

We also have an upper limit of corporation tax, again based on employees, which I think is is inherently fair, whereby no further CT is payable after an amount based on a variable figure Y * the number of employees. Let's give variable Y the value £100,000, the amount which each employee contributes to profit.

Company B, a pharmaceutical manufacturer, employs 1,000 workers and earns a profit attributable to this operation of  £1bn per year. This would not be unusual, and is why Ireland and Puerto Rico are the two top locations for these types of companies.

Their tax is as follows:

Lower limit = 1000 x £5,000 = £5m. No tax is payable on this amount.

On the remaining £995m profit, there is an upper cap on CT of £100,000 x 1000 workers = £100m. The company therefore pays CT of £100m, an effective tax rate of 10%.

Where companies are located both in England and Wales, for reasons of simplicity and tax avoidance, it's a simple matter of apportioning profit according to the number of employees with a tax address within or outside Wales. HMRC knows who people work for, and where they live so there's very little scope for fudging this (for example by a Bristol company claiming all their employees in Bristol were employed, and worked from, their small Welsh office).

Large, high added value, high technology companies would almost certianly come to Wales under such a regime, as they currently do to Ireland (which despite the Irish economy is on track to have it's best year for inward investment since 2003).

In addition, such a regime would encourage back-office financial services to locate substantial parts of their operation in Wales rather than London, providing a much needed redistribution of wealth. Finally, such a move would encorage companies to declare their overseas income in Wales rather than overseas - perhaps even Barclays.

I read a report three years ago suggesting that 70% of Ireland's growth was due to inward investment - all driven by tax - and that Ireland's corporate tax take as a result did not decline, but nearly doubled. Of course companies will publically state any number of reasons other than tax as to why Ireland is such a great liocation - who would want to state this to the ire of both the IRS and the American public? And so the myth continues as to high skills availability etc etc rather than tax being the reasons for Ireland's success.

The big question for HMRC - exemplified by the pharmaceutical company example above is whether it is better to accept a reduced tax take of £100m (plus all the NI and employee tax) or get nothing as they wouldn't establish here.

I don't have the resources - or the financial skills - to do all the various permutations, but values for the variables could be set at levels that were currently fiscally neutral as far as Wales is concerned - and hence show no overall reduction of CT paid from Wales to HMRC."