Falling Taxes for the FTSE 50

The declared tax rate among the U.K.'s largest companies has fallen steadily, from 44.7 percent in 2001 to 26 percent in 2004, according to a new r...
Stephen TaubJanuary 16, 2006

From 2000 to 2004, the 50 largest companies in the United Kingdom paid £20 billion ($36 billion) less than their expected rates would suggest from 2000 to 2004, according to a study primarily researched by Richard Murphy of Tax Research LLP on behalf of The Tax Gap Ltd.

Extrapolate this shortfall to all U.K. companies, suggested the report, and the likely total “expectation gap” may be as much as £9.2 billion a year, or about 28 percent of total corporate tax receipts in 2004-05.

The report also found that the declared tax rate among the FTSE 50 has fallen steadily, from 44.7 percent in 2001 to 26 percent in 2004.

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The report suggested several reasons for the gap between expected and declared taxes. For example, it found that many companies declared tax liabilities on their income statements that suggest they are paying tax at higher rates than required by U.K. law. “This is misleading because those provisions include significant charges for deferred tax, much of which is not paid, and because pre-tax profits declared on profit and loss accounts are not the basis used for calculating a company’s taxation liabilities,” the report noted.

The deferred tax provisions of the FTSE 50 have increased by £3 billion a year since 2002, added the report, and these companies owe a total of £36 billion of deferred tax. The report asserted that these benefits are akin to “an interest-free loan from governments with no set date for repayment.”

According to the report, the vast majority of deferred taxes relate to “excessive corporate tax allowances” given to encourage investment in plant and machinery. “These tax breaks are wholly unrelated to the underlying economic substance of the transactions taking place,” it added.