Ending corporation tax relief for big bank bonuses could raise £1.7bn a year

Brendan Barber, TUC General Secretary

Ending corporation tax relief for pay and bonuses worth more than 10 times average annual earnings (£26,200) could raise around £1.7bn a year if applied to the banking and financial services sector, according to a new TUC report published today (Monday).

The TUC report Bonus Season uses data from the Labour Force Survey to show that over a third (36 per cent) of employees earning more than £250,000 a year in the UK work in banking and finance.

The report then uses HMRC data to estimate that around 81,000 people have incomes of over £262,000 (10 times average annual earnings) that come primarily from employment, including 29,000 people in banking and finance.

The report finds that total pay on earnings above £262,000 - which the TUC believes should be disallowed as a deductible expense for corporation tax purposes - is around £6.8bn a year.

Ending corporation tax relief on earnings over £262,000 in the banking and finance sector would raise £1.7bn a year - vital revenues towards paying back the deficit created by the financial crash, says the TUC.

The report also estimates that extending the scrapping of corporation tax relief for top pay and bonuses over 10 times average earnings to all UK companies would raise around £5bn a year.

With the government effectively cancelling out its own levy on bank balance sheets by cutting the rate of corporation tax from 28 per cent to 23 per cent by 2014, the banking and finance sector is no longer making a proper contribution towards paying off the deficit it played a key role in creating, says the TUC.

A previous TUC report The Corporate Tax Gap showed that banks already pay well below the headline rate of corporation tax and that that the scale of bank losses at the height of the crash has allowed them to knock £19bn off their future tax bills, despite an £850bn bailout from taxpayers and the Bank of England.

The fact that banks are back recording big profits and handing out billions of pounds in bonuses proves they can easily afford a new tax on big bonuses, says the TUC.

The TUC believes that making earnings more than 10 times average annual earnings liable for corporation tax would not only raise revenue but also tackle growing pay inequality by encouraging companies to spread pay across the workforce, rather concentrating it on those at the very top.

As well as calling for top pay to be liable for corporation tax, the TUC believes the following changes would help tackle the growing pay divide between top executives and the rest of the workforce:

* Bring a much-needed dose of economic reality to executive pay decisions by introducing worker representation on to remuneration committees.

* Make executive pay more transparent by publishing the ratio between top pay and both median company workforce pay and the lowest paid members of staff.

* Tackle the closed shop of non-executive directorships (NEDs) by forcing companies to advertise positions externally.

* Make rates of pay increase for directors reflect those of other employees, with an explanation given in the remuneration report should this not be the case.

TUC General Secretary Brendan Barber said: "Irresponsible banks played the biggest part in causing the crash. But while the rest of us are still paying a heavy price, banks have gone back to business as usual with eye-watering bonuses for their top staff. It is only right that they share these with the rest of us, and making the top bonus pool liable for corporation tax means they would pay a little more towards clearing up the mess they made.

"We should not forget they have enjoyed a level of state support no other industry could dream of, including an £850bn bailout from taxpayers and the Bank of England.

"Scrapping corporation tax relief for earnings over £262,000 will help pay off the deficit and tackle the growing pay divide that has seen a tiny minority of super-rich individuals receive inflation and performance-busting pay rises while everyone else suffers real terms wage cuts.

"The Chancellor should use his budget to end the privileged status that the financial services sector enjoys at the expense of everyone else by announcing a this new tax on excessive pay and bonuses, as well as taking proper steps to reform our failed executive pay culture."

Corporation tax cuts do not create jobs, says TUC

Brendan Barber, TUC General Secretary

Low corporate tax rates reduce revenues but fail to create jobs, according to a new TUC report published today (Saturday). The TUC report Corporate tax reform and competitiveness, written by chartered accountant and tax specialist Richard Murphy, warns that recent tax reforms and ongoing reductions in the headline corporation tax rate will reduce vital tax revenues without any significant benefit to ordinary taxpayers.
The report cites data from OECD countries to show that the UK enjoys an extremely competitive tax rate. More than 90 per cent of UK businesses pay the small business rate of 20 per cent while the effective corporate tax rate for large companies is currently estimated by PriceWaterhouseCoopers to be 23.2 per cent, far lower than the OECD average of 26.5 per cent.
Previous TUC research has estimated that the effective corporate tax rate is lower than 23.2 per cent and has been falling by 0.5 percentage points a year for the last decade. It is likely that many multinational corporations are now paying a lower rate of corporation tax than UK small businesses, says the TUC.
The report also compares corporate tax and employment growth rates between 1997 and 2010 across OECD countries and finds no strong correlation between low taxes and high employment or GDP growth.
The study suggests that at a time of constrained public finances, the economic benefits are not significant enough to justify tax cuts of the scale that the government has embarked upon, particularly given the UK’s already low corporate tax rates. Cutting corporation tax to attempt to stimulate growth is a poor economic strategy, says the TUC.
The report highlights recent changes to tax policy that have encouraged further tax avoidance and the channelling of profits away from the UK.
The last government agreed that in exchange for tougher Controlled Foreign Company (CFC) rules, from April 2009 any dividends paid by foreign subsidiaries to UK parent companies would not be subject to UK tax. But while the tougher CFC rules have not yet made it into law, the new rules on dividend payments have weakened the UK tax base by encouraging companies to move profits out of the UK, says the TUC.
With corporate tax receipts expected to fall as a proportion of the total tax take from April 2012, and the estimated 15,000 job losses across HMRC making it even harder to monitor the flow of profits from the various subsidiaries of multinational companies, growing tax avoidance could undermine the government’s deficit reduction targets and put further pressure on spending cuts, the TUC warns.
TUC General Secretary Brendan Barber said: “The government has been seduced by employer calls for more corporate tax cuts. But while everyone wants to pay less tax, from multinational corporations to ordinary taxpayers, the argument that simply cutting corporation tax will fuel jobs and growth does not stand up to scrutiny.
“UK corporate tax rates are already extremely competitive. And while some people, including the Chancellor, have talked about emulating the Irish economy’s aggressive low tax policies, its current woes suggest this is not a sustainable economic model.
“Big business has been steadily cutting its effective tax rate every year for the last decade, even though headline rates were fixed for much of this period. Despite pledging to crack down on tax avoidance, recent reforms and huge job losses at HMRC mean that tax dodging opportunities are now greater than ever.
“The more that big businesses and the super rich avoid paying their fair share, the more ordinary taxpayers will have to pick up the tab though tax rises and reduced public services.
“The government must stand up for hard-pressed workers and enforce a fairer tax regime and a fairer and more sustainable approach to securing economic growth.”