BBC corporation tax horror story!

Earlier this week, I appeared on Radio 5 to talk about tax avoidance. The news hook was a speech by Ed Miliband on the supposed problems of Google’s low corporation tax payments. Of course, before the interview, I ‘googled’ the issue.

Many of the top stories were about Amazon and Google from the BBC and the Guardian. The stories reported the corporation tax paid by these companies as a proportion of their UK turnover. For example, a BBC story read: ‘Amazon, which had sales in the UK of £3.35bn in 2011, only reported a “tax expense” of £1.8m. And Google’s UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m.’

It should be said that one story by Alex Hern in the Guardian was excellent. As Hern wrote: ‘The thing is, companies don’t pay tax on sales, but on profits. And Amazon is a company with a very strange attitude to profit: it doesn’t seem to like it. In the year 2012, it made a worldwide loss of $39m, even as it had sales totalling $61bn…Amazon’s strategy is to aggressively cut margins everywhere it can, in an attempt to grow into the biggest retailer the world has ever seen. That means that, even as its sales rise and rise (because where else is cheaper to shop than Amazon?) its profit stagnates…Amazon pays barely any taxes because it makes barely any profit.’

This is, indeed, true. Amazon’s profit margin in a normal year (2012 involved exceptional writedowns) is around one per cent as it provides exceptional value to customers. Tax is paid on profit and not turnover. The BBC and most Guardian stories about Amazon get the tax base wrong by a factor of 100. This would be more or less analogous to the BBC reporting UK unemployment rates as a proportion of the world’s working age population.

Turning to Ed Miliband, specifically, he said in his speech: ‘I can’t be the only person here who feels disappointed that such a great company as Google, with such great founding principles, will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain, it’s fair that it should pay just a fraction of one per cent of that in tax.’ As it happens, according to the BBC story above, it pays tax of nearly two per cent of turnover but that is beside the point. Ed Miliband made no mention of Google’s profits in the speech whatsoever. Companies pay national insurance contributions in respect of their employees – as well as income tax and employees’ national insurance which raises the cost of employment – and they pay VAT on the value added in turnover. They pay corporation tax only on profits.

In the Radio 5 interview, I mentioned that the BBC – the source of much of this confusion on the basis of a profits tax – had a turnover of £5bn and paid no corporation tax (its turnover is much more if you include the value of the free spectrum). In fact, that turns out to be not quite true. The BBC paid corporation tax of £22m (0.4% of its turnover) last year. Even if you express tax as a proportion only of commercial turnover (which is debatable – after all a pound of turnover is a pound of turnover), the BBC paid tax of about 1.2% of turnover. In other words Google pays more tax on its turnover than the BBC by a factor of nearly two.

But, these figures are irrelevant – even in respect of the BBC.

Legitimate points can be made about whether Google should pay more tax on its profits. Members of Parliament have passed the laws and HMRC administers them. If MPs wish to change the laws, or feel that the government agency charged with administering them is not enforcing them properly, the power to change the laws lies with the politicians.

Amongst all this talk of corporation tax expressed as a proportion of turnover, it should be mentioned that there is a head of steam building up behind a reform to corporation tax that would lead it to being charged on profit but apportioned according to turnover in different countries. This would be a disaster. It would lead to huge corporate complexity as internet-based firms shifted their activities to ensure that turnover was registered in low tax countries. It would also lead to disintermediation of the retail chain in high corporation tax countries such as the USA. It would completely distort economic activity in a way that was very damaging. Much more sensibly, as suggested by Milton Friedman, shareholders – that is company owners – could be taxed on the attributed profits per share owned. They would be taxed in whichever tax jurisdiction they happen to live. Avoidance would become more difficult but evasion would become easier – because individuals are harder to track down than companies. This is the way debt interest is taxed and, arguably, it should form the basis for corporation tax. This is unlikely to lead to more UK tax being paid by US-owned companies, though company owners might end up paying more tax overall.

But, whatever the outcome of this debate (better enforcement of existing rules or the development of new rules), it is extraordinary that our public service broadcaster is the source of such misinformation on this subject. It is not surprising, of course, but nonetheless regrettable. And the BBC, as can be seen, is casting stones when guilty of the same ‘sin’ of which it accuses others.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

10 thoughts on “BBC corporation tax horror story!”

  1. Posted 24/05/2013 at 14:17 | Permalink

    It can be even more difficult and dangerous than you suggest.

    What would happen if Google closed down all its physical operations in UK?

    Google could then simply market and provide its services over the Internet from another country (e.g. Ireland) and take payments from outside the UK as well.

    Google would then pay no taxes whatsoever in UK.

    Is this what our friends in the Labour Party, The Treasury, The BBC and The Guardian really want?

  2. Posted 24/05/2013 at 16:32 | Permalink

    What makes me most angry is that the Labour politicians who are leading the charge on this will either have voted in favour of all these loopholes between 1997 and 2010, or else done nothing in that period to close them.

  3. Posted 24/05/2013 at 16:36 | Permalink

    The BBC nevers allows the facts to get in the way of its aggenda. This is true of economics, business and science (anything to do with climate is a good example). It needs to be turned into a subscription-only service – and those who like its output can buy it.

  4. Posted 24/05/2013 at 16:41 | Permalink

    The Guardian is the last organ to be commenting on corporate tax avoidance.

  5. Posted 24/05/2013 at 16:49 | Permalink

    You want a tax to be taxed?

    The BBC’s coercive and regressive taxes (in the form of the “license fee”) are raised on pain of imprisonment.

    You then want someone to tax that tax?

    As John McEnroe said..

  6. Posted 24/05/2013 at 17:47 | Permalink

    A good point.

    Why on earth is a government body (and the BBC is) being taxed when it itself raises all its dosh as a tax.

  7. Posted 24/05/2013 at 18:27 | Permalink

    The thing is that all of the sales that Google or Amazon makes, in the main come from personal income that has already been subjected to tax. The tax comes not from the company, they can only be an intermediary between those who pay money for the products and the government, that then takes the tax. Put up the companies tax and the company will raise prices to claw back the profits, so that takes more money from the only people who can in fact pay tax, those whose personal income is already subjected to income tax! I have not done that a clearly as I would have hoped but you get the drift.
    We need to have a very, very open discussion about what tax and levies are and where they come from. I think if you took out all tax, except income tax (UK Taxes) I could pay 70% income tax and still be no worse off.

    I posted this on the commentator website about Apple not paying tax originally.


  8. Posted 24/05/2013 at 19:01 | Permalink

    The BBC of course knows as much about corporate finance as it does about running large IT projects… (and losing the odd £100m)

  9. Posted 26/05/2013 at 18:44 | Permalink

    I am at a loss to see why companies are required to pay tax at . No taxation without representation. Companies can’t vote. Profit is the reward for successful economic activity – why punish it? Government uses the usual highway robbers excuse – I need the money.

  10. Posted 02/06/2013 at 19:37 | Permalink

    @London Calling – Scrapping corp. tax in the long run may turn out to be a very sensible idea, but only if dividends were then treated as what they are – income. Having a lower rate for them creates all sorts of tax evasion and isn’t exactly great for the distribution of income.

    Focusing on Amazon is one thing – Google, however, does make a massive profit. For them to claim that they don’t sell anything in the UK is ridiculous. Google’s profits will be proportional to the VAT collected on sales to UK individuals and businesses. I can see reasons why the corp tax regime doesn’t follow this logic, but there must be a better system than the non-system that currently exists.

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