Why Can't I Pay Tax Only On My Profits?

by @edent | , , , , , , | 5 comments | Read ~423 times.

King of Google Eric Schmidt has written in The Guardian about how unfair it is that people don't think Google pay a fair share of taxes.

He makes three pretty good points.

  1. Companies only pay tax on their profits.
  2. Politicians shouldn't make laws with loopholes.
  3. International laws need harmonisation.

I agree with his second two points - although no-one is forcing Google to exploit the loopholes that it finds - but I am not sure I agree with the first.

Fairness, so it seems, is hardwired into our brains and our societies. People naturally get very angry when they encounter unfair situations. Even monkeys react badly when they see other monkeys being treated with favouritism.

I think that's what's happening here. As an individual, I don't get to only pay tax on my profits - I have to pay income tax and National Insurance on every penny I earn.

There are, as far as I can tell, only a few exceptions. If I donate money to charity through Payroll Giving or put money in my pension - I get a small measure of tax relief. If I receive rental income, I can offset any interest on a mortgage against it. That's pretty much it.

The tens of thousands of pounds of student loans that I owed did not count against the amount of tax I paid.
It cost me £3,000 to get a train to work and that severely cuts into my "profit" but doesn't count against tax.
I have to live somewhere - but mortgage relief was abolished by the Labour Government in 2000.
Heating, electricity, education, food - these are all legitimate expenses which I cannot offset against the amount HMRC wants to take from me.

I'm sure you can think of dozens of other examples. Expenses which a business can use to reduce their tax liability but which ordinary people cannot. And we haven't even touched on the inability of the average citizen to stuff their loot in an off-shore tax haven!

HMRC produce a great Android app which tells you roughly how the Government spends its money. It also shows you where it gets its money.
HMRC Income-fs8
Business, so it seems, pays a rather modest share by way of corporation tax. I'm sure they pay lots of other taxes and invest in other ways but guess what so do I!

I'll leave it to the armies of lawyers to figure out of Google, Amazon, Vodafone, and the like are acting correctly. But it is undeniable that a large number of people have trouble with large scale tax avoidance not because of its legality but because it is unavailable to ordinary individuals.

Fairness is really hard to codify, it's true. But when a multi-billion pound corporation gets to pay tax only on its profits, and individuals get no such relief, that feels profoundly unfair. And, like the chattering monkeys that we are, it enrages us.

5 thoughts on “Why Can't I Pay Tax Only On My Profits?

  1. If we were to ask companies to pay tax on all earnings, there may be some undesirable knock-on effects. Most new businesses are not profitable in their startup phase. Is it desirable to tax them, making the startup process harder, when 50% of them fail within the first 4 years?

    Most of these companies are contributing in other ways, such as by employing staff, selling products on which VAT applies, paying NI contributions for their staff, etc.

    Just because they are not paying tax on their non-existent earnings does not mean they are paying no tax at all. It may be a small proportion in comparison but it is a drop in the ocean compared to all the taxes which could be taken from potential profits in the long term.

    We should be helping businesses become profitable, not penalising them for failing to do so.

    1. I quite agree. For the avoidance of doubt, I'm not suggesting we tax businesses' turnover or revenue. I'm suggesting that individuals should be allowed the same exemptions as large companies.

  2. Paul Brock says:

    isn't the 10k threshold the equivalent of those exemptions?

  3. paul kenny says:

    Hi Terence, if we don't tax companies or individuals then where will governments get the money to pay for roads, schools, hospitals and all the other services that we take for granted in Europe? I agree that it would be nice if we only paid tax on profits as individuals but it would be subject to wholesale abuse since civil servants, being human, will draft laws that have loopholes and people will come up with ingenious ways to get around the laws anyway. Very rich people already come up with ways to 'incorporate' their assets and avoid taxes. My guess is most people would avoid taxes if there was a legal way around it. This is exactly what Google and Amazon are doing. Seems rational to me. Equally it seems sensible that governments would try to close these loopholes by changing the law and pursuing these companies in court. Which is what they are doing. What irks me is the populist appeals that these companies are not being 'honest' and should pay their 'fair share'. And as for fairness, well, Life is not Fair. It's not nice but it is a fact of life.

    These companies are paying as much as they are legally obliged to. They may be sailing close to the wind in some cases and if they overdo it and break the law they will be forced to pay. And of course governments, being close to omnipotent can sometimes retrospectively change the law e.g. the Indian government and Vodafone.

  4. if you want to deduce the cost of your doing business from the earnings you make then registers as a limited company and file your accounts. Mind you being married to someone who understands accounts, economics and a fair bit about how tax is calculated gives me a certain edge. most of the arguments and discussions I have seen around tax avoidance have me asking why we are not seeing the whole picture before the outrage. Why are we not shown how much business they poured into the UK , Staff Salaries paid, suppliers who generated income through working for those corporates , the NI payments and the Employers NI Contributions as well as the VAT calculations and payments made almost monthly. We have not seen those figures just the one. Its one point of data and I am shocked that so many are reacting to it without the context of the complete accounts and the values.

    The real question should be how come spending in the government has been so rampantly bad that they drive the country into Debt and can find no one to pay for it all. Between the Govt and the Media there is a huge push to be upset about this but I wonder if itsnot just smoke and mirrors that long term will screw us more than it benefits.

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