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.