You’ve heard the old Benjamin Franklin adage: “In this world nothing can be said to be certain, except death and taxes.” This most certainly applies to your personal life, but sometimes it can be easy to neglect your tax requirements if you are the owner of an SME (small to medium sized business).
We regularly see news stories highlighted in the media about mega corporations and translational enterprises receiving what appear to be massive tax breaks – and even getting away with paying nothing at all. It can seem incredibly unfair that these businesses, often profiting in the billions each year, are paying less annual tax than your small, family run business. While this is indeed frustrating for anyone, it is of the utmost importance to your business, your success – and your reputation – to stay on top of your taxes.
It can help to assuage your irritation if you understand why the big corporations are paying so little – and if you learn about what happens when they get caught.
How do the big corporations and banks get away with paying so little?
If you are like most people, you have probably seen the myriad headlines exclaiming that big business and banks are getting away with the financial equivalent of ‘murder’ – paying little to no taxes on their massive revenues. In December of 2015, Reuters published a report that showed that seven of the largest banks in London reported paying only a combined amount of £21 million GBP in corporation tax in the year 2014.
21 million. Does this massive number sound like a lot of taxation revenue? It shouldn’t. The seven multinational banks profiled generated 2014 revenues of £21 billion GBP in the UK alone, achieving profits of around of $5.3 billion USD and employing 33,000 people. This means that banks such as JP Morgan, Bank of America Merrill Lynch, Deutsche Bank AG, Nomura Holding and Morgan Stanley paid less than .01% taxes on their annual revenue. Sound fair now? If you are like most of the general public, this figure might shock and/or anger you.
Reuters reached out to Her Majesty’s Revenue and Customs (HMRC) to try to glean more information about this touchy subject; they were turned away based on taxpayer confidentiality rules.
How are they getting away with this?
When you stop to realise that the average UK small business pays between 20% and 40% taxes on their revenue, you might find yourself hopping mad at the above figures. Why are these huge fat cats getting such massive breaks while you are sweating and working long hours, only to see your revenues slashed by the taxes you pay on an annual basis?
The answer, as it normally does, lies with money. Big business and large multinational banks can afford to hire the best of the best when it comes to taxation lawyers, accountants and bookkeepers. They are trained to find the biggest and most lucrative loopholes that are designed to keep their clients’ money in their accounts – and out of the hands of the countries in which they are located.
Tax accountants and high priced lawyers know how to best direct their clients’ profits into offshore accounts, multiple enterprises and strategic bookkeeping. As Metro UK reported last year, big corporations and banks will often create and utilise many different corporate entities that operate within their larger, overall company. In lay terms, this means that a purchase or order, though initiated in the UK, might be ‘completed’ in a different country.
The beginnings of change – a new era of corporate honesty
As the online sharing culture continues to thrive and grow, more and more large corporations are being named and shamed by the public based on their terrible taxation reputations.
As everyone’s favourite search engine and email provider, Google has recently agreed to pay more than £130 million GBP in back taxes to the UK government, in addition to promising to bear a higher tax burden going forward. The agreement was signed last month (in January 2016), and signals a sea change in the way that Google – and hopefully other – big corporations operate in the UK.
A Google spokesperson stated, ““We will now pay tax based on revenue from UK-based advertisers, which reflects the size and scope of our UK business.”
The importance of corporate tax dollars to the UK economy
While we always seem to be looking for a loophole or a way to lower our personal and business taxes, sometimes everyone needs to take a step back and remember that this revenue is incredibly important to our government on both a local and national level. Corporate taxes pay for business grants, infrastructure, training and the quality of life that helps to attract the best talent in the world to this country.
While your SME may not be able to afford the top rated lawyers who will help you skirt the taxes you would otherwise owe, try to remember that the money you pay each year is deeply important to your own success.
Remember – if you avoid taxes like Google did for over a decade, the UK government may not be willing to go so easy on you – being slapped with a massive bill could cripple your business and spell the end of your company.
In order to ensure that you are always on the right side of the law, you should consult with an accountant and/ or bookkeeper on a regular basis, and have them help you to do your year-end tax return. If you ever find that you have additional concerns, or if you are in any way worried that you have done something wrong or even illegal, you should immediately consult with a taxation lawyer and attempt to get back on the right side of the law.
While large corporations seem to be getting away with an illegal – and even immoral – lack of taxes, remember: your SME is still required to pay on time and accurately every year.