Amount of money received through corporation tax enquiries into large businesses falls to its lowest level in six years

The amount of additional corporation tax HMRC has collected through tax investigations into the largest businesses has fallen to its lowest level since 2006-7, says Pinsent Masons, the international law firm. 

HMRC’s “Large Business Service” collected an extra £3.17bn in tax in 2012-13 (year ending March 31) as a result of compliance activity relating to corporation tax, an 8% drop from £3.44bn the year before – and 25% drop on 2010-11. Extra revenue gained from challenging large businesses over how much corporation tax they pay peaked at £4.1 billion in 2010-11. 

The amount of corporation tax paid by large businesses has become a highly contentious issue after it was revealed that some major corporates – such as Amazon, Google and Starbucks – had been paying little or no corporation tax at all. 

HMRC’s Large Business Service deals with the UK’s 770 largest businesses. 

HMRC has been under pressure to recover additional money from businesses partly to help close the gap in public finances but also to show that the UK Treasury and HMRC have not been allowing bigger businesses to escape their tax obligations. 

The number of businesses investigated by HMRC’s “Large Business Service” unit over underpaid corporation tax in 2012-13 was 405, down 9% from 444 in the previous year. 

Jason Collins, Head of Tax at Pinsent Masons, says: “The lower yield from these investigations into big businesses and their corporation tax bills may be seen by some as a poor result for HMRC. Certainly some single interest groups that have been critical of the amount of tax paid by big businesses are going to be disappointed and of course the Treasury needs to increase the tax take where it can.” 

Reforms to corporation tax rate could be the reason behind low amount of money collected by investigations

Pinsent Masons, however, says that criticism of HMRC’s falling compliance take in this area may be unfair. Jason Collins says that a fall in compliance take may be caused by reforms to corporation tax that make the avoidance of corporation tax less important and less attractive to businesses. 

Reforms to corporation tax in 2008 and 2010 have both simplified corporation tax and started to lower the burden of corporation tax. 

Jason Collins says: “When the corporation tax rate was 30% many businesses were going to great lengths to work around what was seen as an unfairly onerous tax bill. However, as the rate has been lowered, the tax simplified, and lower tax rates promised for the future, the need to avoid this tax has been reduced.” 

“It is frequently argued that lower taxes and simpler taxes should lead to lower levels of tax evasion and avoidance activity and inevitably that means lower tax investigation yields.” 

The current corporation tax rate of 24% will be slashed to 20% by 2015, significantly lower than the 2007 rate of 30%. This will mean the UK will have amongst the lowest level of corporation taxes of any major economy.

Jason Collins says that lower tax investigation yields are less likely to be because of a relaxed approach to big businesses. 

Jason Collins says: “Anyone who has seen HMRC at work whilst investigating a company will know that they do not pull their punches.  HMRC has done a lot of field work over the last decade to reduce the size of the market for aggressive corporate tax planning”

Additional corporation tax take from HMRC’s tax enquiries into large businesses* 

* Figures in graph rounded up