Business taxation: How to survive

One of the major controversies to have hit the headlines over the past year or two is how major multinationals have managed to pay little or no corporation tax in the UK despite having outwardly successful retail operations here. Millions of ordinary taxpayers have been infuriated that such a situation has been allowed to happen when they are taxed at source, through PAYE.

The problem is that the structures these types of companies set up are actually legal, and it is crucially important to distinguish between what is legal and what is illegal when it comes to dealing with taxation.

Avoidance or evasion?

Tax avoidance occurs when a business organises its operations, quite legally, to reduce or minimise the amount of tax it pays in the UK. Many of these companies use aggressive measures to avoid paying tax, often by rerouting their profits through countries that have much lower tax thresholds. They employ experts who wrap everything up in a myriad of companies, making it hard to ascertain exactly what should be liable for tax in the UK. High net-worth individuals also use similar methods to minimise their tax liabilities to HMRC

Tax evasion is not the same; it occurs when a company or individual deliberately conceals income and profits, perhaps through a series of offshore companies, with the specific intention of not paying tax. This practise is illegal and companies and individuals are liable to prosecution and severe penalties are incurred if found guilty.

Reputational damage

Several large multinationals have recently suffered considerable damage to their reputations as news of their tax avoidance schemes became public. A growing chorus of business leaders who run companies in the UK that pay their fair share of tax have weighed into those that do not. Thousands of people have also taken the decision to boycott companies that engage in these practices, so there is a clear danger to their bottom line. Some have decided to “voluntarily” pay some tax, but others argue that they have broken no laws so ‘what’s the problem?’ Moral and ethical issues do not generally impact significantly on how business is done.

Making correct calculations

UK companies should ensure they have the correct procedures in place to ensure that the correct amount of tax is paid, whether it be from their employees, by way of PAYE, in the form of Corporation Tax due on profits or accounting for VAT and paying the required amount to the Treasury. Employers also need to calculate the correct levels of National Insurance Contributions (NICs) and ensure they have professional accountants and auditors to work on end-of-year accounts. These people are charged with examining issues such as depreciation, capital and research outlay, allowable expenses and various other items to determine the amount of profit or loss and calculate the correct tax position.

Failure to put these structures in place could mean that HMRC will start an investigation, a far more costly exercise in terms of time and potential penalties than getting it right in the first place.

Help and support

HMRC has a huge amount of information about taxation issues on its website; however, in most cases it is better to employ a bookkeeper and/or accountant to keep the business on the straight and narrow. Another option is an umbrella company, which can look after taxation issues on behalf of employers and contractors.

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