Cutting tax

Accountants have to keep up with changes to corporation tax so they can help their clients - The Gateway gives you the latest
Commercial awareness

Tax has been a hot topic in the months since the coalition came to power. The Government has been focused on reducing the UK's budget deficit - put at £7.1 billion at the end of 2010 (ONS) - and so in general has not made the tax cuts you'd normally associated with a centre-right government. In fact, there's been some notable tax hikes since the New Year, for example, the rise in VAT by 2.5 per cent to 20 per cent and last week's bumper bank levy.

Directors' cut?

But how is the Government planning to tax companies in the coming years? Will they too be facing increased charges as the UK (with luck) climbs out of the economic problems caused by the financial crisis?

The answer is no. In fact, Chancellor George Osbourne is planning to cut corporation tax from its current rate of 28 per cent down to 24 per cent by 2014. The government is also planning to bring in some significant changes to the way in which large corporates with overseas branches are taxed. They are ditching the requirement that companies should pay tax on money made by their foreign branches - the current situation is that they pay to the UK tax authorities the difference, if any, between the UK rate and the rate charged by the country in which the branch is located. Companies will still be able to deduct the expenses of running foreign branches from the tax they pay in the UK.

These changes look pretty sweet for UK big business, and many on the left argue that it's unfair for them to be granted such tax breaks while the UK's economy struggles and many taxpayers face greater job uncertainty and rising living costs. Pressure on the Government to claim a greater proportion of the revenue of large British corporations in tax and to crack down on practices such as the use of tax havens is growing. The campaigning group UK Uncut has hit the headlines recently for its protests outside key outlets of big high street names such as Topshop, Boots and Tesco.

But some might say that such cuts to fiscal charges on big companies are, seemingly paradoxically, in the interests of UK plc and British taxpayers. Reducing the tax burden of these corporations will arguably help them to keep their businesses healthy, so making sure they can keep employing their large numbers of staff, purchasing supplies from other UK companies and generally boosting the nation's economy.

Avoidance tactics

As they're experts on the current fiscal rules, companies will always turn to their accountants for ways to reduce the amount of tax they pay. It's crucial that those interested in tax - and anyone looking for a career in business or finance should be - understand the difference between tax evasion and tax avoidance. Tax evasion means escaping tax by fraud. Tax avoidance, on the other hand, means using various legal strategies to reduce the amount of tax you pay. Big corporation and the tax accountants who work for them often stress the distinction between them - tax mitigation is a now popular and less pejorative term often used for tax avoidance - though the likes of UK Uncut might argue that they're effectively the same. But tax authorities certainly see them as distinct and allow companies to rearrange their affairs to lessen their tax burden, but will keep a careful eye on companies to make sure the boundary between the two, which can be blurred, is not crossed.

This rearrangement of a company's affairs is where tax accountants come in. What kinds of steps might an accountant advise to reduce a company's tax burden? They will of course not use the fraud or deception which tax evaders might employ. They'll instead suggest moving assets between different companies, taking advantage of differences between tax laws in different countries, changing the nature of the legal entities which hold the companies' taxable assets or altering the gearing of a company, that is, the ratio between its debt and equity finance as interest payments and dividends are taxed in different ways.

And they'll be thanked for their efforts! Far from being a side issue or a technicality, tax considerations are often major drivers of the ways in which large corporate transactions such as takeovers or bond issues are structured and put into effect.

Continue learning below