Britain’s Missing Billions

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Author: Ben Chu

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Yesterday’s public finance figures were a tale of two countries: the public paid more and corporations paid less.

Last month Treasury receipts from VAT and income tax – which we all pay – rose by 6.4 per cent relative to October 2011. But corporation tax receipts – levied on the profits of the largest firms in the land – fell by 10 per cent on the same month a year earlier. In October companies poured £7.8bn into the state’s coffers, down from the £8.7bn they handed over last year.

And this shortfall was not just a monthly aberration. Since George Osborne delivered his Budget in March companies have paid £24.9bn in corporation tax, 9.8 per cent less than the £27.6bn they handed over in the same period of last year.

The trend is an ominous one for the Chancellor. In March Mr Osborne’s official fiscal forecaster, the Office for Budget Responsibility, predicted that corporation tax receipts would grow by four per cent this financial year. But they are presently running about 10 per cent lower.

The shortfall in tax revenues is one reason why many analysts expect that the Chancellor will be compelled to announce further spending cuts and tax rises in his autumn statement on 5 December to meet his “fiscal mandate”. This requires Mr Osborne to put plans in place to eradicate the structural deficit within five years.

The Treasury suggested yesterday that weak corporation tax receipts over the past seven months are largely due to a collapse in North Sea output this year after a gas leak, which means that large energy firms have been paying less tax. There is some truth in this. Output has been disrupted by problems on the Elgin Platform and maintenance work elsewhere.

Yet the Government’s own figures also suggest that corporations are evading and avoiding many billions of pounds of corporation tax. Her Majesty’s Revenue and Customs performs a regular estimate of the “tax gap”, which is the difference between what it believes companies ought to be paying in corporation tax and what the state is actually receiving. In its latest estimate for 2010-11, HMRC put that figure at £4.1bn. Some campaigners, such as Richard Murphy of Tax Research UK, think that the real figure could be £12bn or more.

To put that in context, even the HMRC figure represents a sum that could finance the construction of 300 new schools. It could be used to build 25 new hospitals. £4.1bn would pay the annual salaries of around 153,000 nurses, or 164,000 police officers. It would pay for 430,000 nursery places a year. The money could be used to fund a penny cut from the basic rate of income tax.

According to HMRC large businesses accounted for £1.4bn of this unpaid tax. Multinationals such as Amazon, Google and Starbucks, which have attracted criticism for the low amount of corporation tax they have been paying in Britain, apparently legally, would be included in this category.

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