Is the HMRC boss a fool?

Last week the CEO of HMRC appeared in front of the Public Accounts Committee and, if The Telegraph is quoting her correctly, suggested that companies could be forced into paying more tax by consumers changing their behaviour.

Whilst I have no doubt that companies will react to changes in customer behaviour (it’s either that or die), do the vast majority really care about the tax arrangements of the company they are buying goods and services from?

It might well be a good thing if the public did so but Lin Homer’s belief that it should be used to shame companies into paying more tax is, I think, misguided and shows a shocking lack of basic knowledge by the person in charge of gathering taxpayers money.

I missed this story at the time but @PrincessOfVP brought it to my attention by inviting me to read her blog post on the subject of Death and Taxes. I left the following comment on her blog but felt that what passes for my readership would appreciate it as well.

Whilst, like yourself, I’m not an accountant or economist my considered opinion is that Lin Homer is a fool.

The CEO of HMRC should be well aware that companies are legal constructs and do not pay tax. As Allister Heath put it in the Telegraph on Wednesday:

Your car doesn’t pay road tax, your house does not pay council tax and your television doesn’t pay the licence fee. You do. Obvious, right?

This is what is known as Tax Incidence and this knowledge has been with us for several centuries. In general terms it means that burden of the tax ultimately falls on those who have to pay it.

For companies (who have to deal with Corporation Tax and Employer’s NI) tax incidence tells us that these taxes will fall on three groups: their employees in the form of lower wages; their shareholders via lower returns (dividends) and consumers by higher prices. The exact breakdown varies by company, economy etc but each group will bear a percentage of the burden.

In avoiding as much tax as possible companies are reducing the amount in indirect taxes that those groups pay and, given that the biggest investors in listed companies tend to be pension funds, helping fund the retirements of many millions.

If we boycotted these companies and thus reduced their revenues they would be likely to reduce their headcount which means fewer people in employment, less money collected in payroll taxes and a reduction in investor returns.

Which is why I think Lin Homer is a fool.

Obviously, if you think I’m wrong, you are welcome to tell me so in the comments. :)

9 Comments

  1. Tom says:

    Is it ok if I comment to tell you that you are NOT wrong? By the way, I am happy to pass for part of your readership.

  2. ChrisM says:

    This is a point so obvious that when I first heard it made, I instantly grasped it. However, it still amazes me the number of people that wilfully still believe companies can pay tax, even when it is explained that only people pay tax. I have tried to convince many people of this over the years – some of them quite smart – but they still don’t “get it”. I think it shocks a lot of people because they believe that in companies there is a source of billions in tax that won’t actually hurt anyone because hey its only companies, not people.

    Personally I would eliminate corporation tax altogether. Not only would a large chunk of the “loss” (loss to the treasury that is, not the economy) be mitigated by the increase in either CGT or payroll taxes, but the UK would become the best place to HQ a business attracting more and more business.

    • Misanthrope Girl says:

      Likewise Chris but I remember trying to convince my Dad – no idiot – that employers NI is borne by the employee in the form of lower wages and he wouldn’t have it.

      As for lower Corporation Tax, I wrote about cutting it last month in response to the days of drip fed stories about how those ‘nasty’ multi-nationals were avoiding it.

      • ChrisM says:

        Yep, my dad too, who used to be a barrister, my brother who is a biologist (but not interestingly my other brother who read economics), and various well educated friends. They really do really do argue that “the company” pays the tax, and no person feels the pain. Indeed I was arguing with someone recently who was annoyed at the fact that many companies are reducing pension contributions because they wanted to put profits before people. The fact that pensions are paid by companies profits seemed lost on him.

        Even if your Dad was correct, and it came out of the shareholders’ loot, rather than the employee wages, that just means that pensioners received a lower pension.

        I can accept that it isn’t always possible to accurately work our who precisely pays the tax, shareholder, customer or employee. What however is not open to debate is it is some combination of the 3.

  3. David says:

    Thank you so very, very much. I have been trying to convince friends for years that only people pay tax. And what’s more that only private sector workers pay tax. Public sector workers are just paid less than they think they earn.
    Hope you don’t mind if I post this elsewhere

    • Misanthrope Girl says:

      Happy to have been of help. I’m not describing anything radical here, just trying to summarise the basic understanding that I have of the matter. If you believe it can be of assistance to others then by all means share away (with a suitable attribution of course).

      As for public sector workers not paying tax – payroll and consumption taxes anyway – you won’t get any disagreement here. The problem is that, at least in my experience, they won’t accept the point when you make it to them.

  4. sadbutmadlad says:

    I like the other examples of non-taxpaying entities. Useful to remember when arguing with a thicko. As to why many think that companies pay tax, maybe it’s because brand names and actions carried that seemingly make a company look like its alive (like publicity that makes out that a company is carrying, looks after its customers, etc) create an idea that a company is an entity. The thought that a company is nothing more than pieces of paper is just too much of an abstract concept for the human brain. Too much even for politicians who brought in corporate manslaughter which is only an easy way out because of the difficulty in pinning down blame on individuals within the corporation.

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