Partner Article

Sudden halt in long term decline in the tax rate of FTSE 100 companies

The long term decline in the tax rate of FTSE 100 companies has come to a sudden halt, according to research by UHY Hacker Young, the national accountancy group.

The average effective tax rate of FTSE 100 companies has increased by more than a tenth over the last year, rising to 27.6%* of profits, up from 24.5% and reversing a steady downward trend in the previous four years (see graph below). A company’s ‘effective tax rate’ is the amount of tax charged against profits by a company globally, as a percentage of its overall profits.

In the last year FTSE 100 companies paid, in total, £51bn in tax on profits of £143bn, a fall from the £58bn paid on profits of nearly £188bn in the previous year.

Although the overall amount of tax paid by FTSE 100 companies has fallen, UHY Hacker Young points out that profits for the FTSE 100 fell even faster.

UHY Hacker Young says that the higher tax rate is partly due to large fines and compensation payments that several FTSE 100 companies have had to pay which are not tax deductible. For example, the $4.5 billion settlement reached by BP with the US government over the Deepwater Horizon accident is not tax deductible, nor will be any future fines that BP might face under the Clean Water Act.

Lloyds and Barclays were also hit by huge fines over the manipulation of LIBOR, Standard Chartered for the breach of sanctions relating to Iran and HSBC picked up a $1.6billion fine for alleged money laundering – pushing down these companies’ profits without reducing their tax bill.

Less aggressive tax planning also pushing up bills of FTSE 100- but for how long? UHY Hacker Young says that the increase in tax payments as a percentage of profits is also been driven by the less aggressive approach that big corporates are taking to tax planning

Clive Gawthorpe, Tax Partner in the Manchester office for UHY Hacker Young, says: “FTSE 100 companies are definitely taking a more risk adverse approach to tax avoidance. The political furore over Starbucks and Google has led to non-executives on boards asking more questions over the tax policy followed by corporates.”

“Heads of Tax are being asked to explain what they are doing and some tax planning opportunities are not being pursued as they seem too hard to justify to a sceptical public – clearly that is going to feed into bigger tax bills.” “The debate over corporate tax had got so inflamed that businesses were being castigated for following standard policy such as claiming capital allowances after investing in infrastructure. However, as memories of televised grillings in front of the Public Accounts Committee fade, then we may see more businesses returning to viewing a low tax bill as an important competitive advantage.”

Clive Gawthorpe, says that a number of resource companies have also taken big restructuring charges this year that have had the effect of reducing this year’s profits without reducing their tax bills in proportion. This is because businesses normally book the costs of a major restructuring programme against profits in advance of actually making the payments needed to undertake the restructuring. However, they will only be allowed to reduce their taxes as they actually incur the costs of the restructuring.

Resource companies have also seen an increase in taxes over the last few years aimed specifically at the sector. UHY Hacker Young says that many governments around the world decided to take advantage of the profits being thrown off by these companies at what was the peak of the commodities cycle. However, if commodity prices continue to stagnate these resource companies might be left facing higher tax rates even if their profits fall.

This was posted in Bdaily's Members' News section by Ian Hunter .