Annual UK Corporate Tax Statistics
HMRC recently released its annual UK Corporate Tax Statistics and it makes for an interesting read. In this Insight article we outline the key points from this recent HMRC statistics announcement.
UK Corporation Tax Receipts continue to rise
Corporation tax is becoming an ever increasingly complex area of tax for HMRC to police with an increasing focus on international tax risks, particularly in the area of transfer pricing. HMRC recognises the importance of identifying and tackling international tax risks and is a leading participant and early adopter in the Base Erosion and Profit Shifting initiatives that are being led by the OECD on behalf of the G20 group of countries and the wider international community. For example, the Country by Country Reporting requirements are increasing the information available to HMRC and supporting its risk assessment processes to help it identify any potential corporation tax liabilities.
The statistics show that Corporation tax liabilities and receipts have risen every year since 2012/13. In 2018/19 CT receipts were £55.1 billion, up 2% on 2017/18 figures. Liabilities similarly increased; up 10% on 2016/17 figures to £55.2 billion in 2017/18. A significant proportion of this would have been attributable to cross-border activities and as such we expect that transfer pricing is one of the areas of focus that is yielding results for HMRC. This is probably partly attributable to multinationals reviewing and amending there transfer pricing positions in response to the UK’s diverted profits tax rules.
Corporation Tax Receipts
Corporation Tax (CT) receipts can be defined as the amount of CT paid by companies to HMRC. The reason for the increase in CT receipts is largely driven by the industrial and commercial sectors, and also from ring fenced oil and gas companies. Receipts from ring fenced oil and gas companies increased by almost 9% to £1.9 billion in 2018/19 following an almost 500% increase in the preceding year, whilst the industrial and commercial sectors currently contribute around 80% of all CT receipts.
Conversely receipts in the financial and life assurance sector have dropped 15% from last year to £10.4 billion from £11.8 billion. Although the sector has increased 92% since 2013/14.
Corporation Tax Liabilities
CT liabilities are based on assessments provided to HMRC by companies, and therefore represent an estimate of the amount of tax companies are due to pay HMRC. Despite a reduction in the CT rate from 1 April 2017, there has been growth in CT liabilities across all sectors. CT liabilities have been largely driven by the financial and insurance sector, with 26% of all CT liabilities arising in this sector (£14.1 billion). This increase can be explained as a result of the following factors:
- An increase in banks’ taxable profits;
- A surcharge of 8% on profits of banking companies levied on accounting periods beginning on or after 1 January 2016; and
- Restrictions on the proportion of banking companies’ annual taxable profit that can be offset by brought forward losses effective from 1 April 2016.
Factors also playing a part in the growth in CT liabilities include, an increase in the number of companies with a tax liability up 4% to 1.5 million, and the proportion of companies with gross taxable trading profit with a tax liability increasing, up to 93%
Unsurprisingly, the largest companies pay a large and increasing amount of CT. In 2017/18, roughly 4,400 companies (less than 0.3%) had liabilities over £1 million. These 4,400 companies contribute over 50% of total CT liabilities at £31 billion.
Capital allowances continue to be made use of, with an increase in the value of claims, following a slight dip in 2016/17. Over the last 6 years, claims have increased by 36% from £72 billion in 2012/13 to £97 billion in 2017/18. One of the most common ways to claim capital allowances are Annual Investment Allowances (AIA). AIA claims have though held constant at £13 billion. Eight sectors account for 80% of the total capital allowance claims, though these sectors only contribute 42% of all companies liable for CT.
Gaining certainty in a complex and fast changing international tax environment
One way to provide businesses with greater certainty about their transfer pricing driven tax liabilities would be to enter into an Advanced Pricing Agreement (APA) with HMRC. An APA is a written agreement which determines the appropriate transfer pricing method to be applied to certain transactions for a set period in advance of the tax return being filed.
Recognised by the OECD as best practice in managing compliance, APAs will also help ensure that a business does not pay tax twice on the same profits. HMRC agreed 27 APAs during the 2017/18 tax year with the average time to reach an agreement being 37 months. APA numbers have shown a marked decline in applications with HMRC taking longer to conclude APAs. HMRC remains committed to its bilateral APA programme and it will be very interesting to see if there has been any change when the 2018/19 figures are published.
Trends suggest that corporation tax receipts and liabilities will continue to grow, leading to a continued focus by HMRC on transfer pricing rules to ensure multinationals pay the right amount of tax on the UK portion of their profits. This makes getting an APA a sensible strategy for dealing with this increased risk.