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9th September 2007 A third of UKs big business pays no corporation tax

Article - A third of UKs big business pays no corporation tax

Almost a third of the UK’s 700 biggest businesses paid no corporation tax in the 2005-06 financial year while another 30 per cent paid less than £10m each, an official study has found.

Of the tax paid by these businesses, two-thirds came from just three industries – banking, insurance and oil and gas – while the alcohol, tobacco, car and real estate sectors contributed only a few hundred million pounds.

Altogether, these large public and private companies paid £24.4bn in 2005-06, or just more than half of all the corporation tax paid, according to a National Audit Office analysis of the tax raised from the 700 companies handled by the large business service of Revenue & Customs.

It found that 50 businesses, or 7 per cent of the 700, paid 67 per cent of the tax while about 220 paid none and another 210 each paid less than £10m.

Some tax experts were taken aback by the small amount of tax many of the companies paid. Michael Devereux of the Oxford University Centre for Business Taxation, said: ”It is certainly surprising.”

While a low tax bill does not necessarily mean a company is avoiding tax deliberately, the data raise questions about the strategies large companies use to reduce their bills, and whether the Treasury relies too heavily on too few industries for its overall take.

Bill Dodwell of Deloitte, the professional services firm, said: “That 700 of the largest companies and groups are only paying 54 per cent of corporation tax shows the giant contribution of small companies. It is probably because many are less international and so have different planning opportunities.”

The analysis by the spending watchdog could fuel the debate surrounding the UK’s generous tax treatment of interest costs, which allow highly geared companies to cut their bills.

This aspect of the tax regime has come under scrutiny when used by private equity-backed companies but is also used widely by multinationals with intra-group loans, which allow them to concentrate debt in countries where they can make the most use of the tax relief on interest costs.

John Cullinane of Deloitte said it was significant the three industries that paid the most were unable, for different reasons, to use high gearing to reduce their bills. The dominance of these three sectors also suggests the Exchequer would be vulnerable to a downturn in their revenues.

Explanations for the low tax bills of many large companies include low profitability, the availability of tax losses from previous years, high financing costs and the impact of capital investment and pension fund contributions.

J Sainsbury, the supermarket group, for example, put £110m into its pension fund in 2005-06, which meant that instead of paying corporation tax it received a credit of £3m. In 2006-07, it paid £240m into its pension fund, resulting in a £9m tax credit.

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