By Janet Kerr from PwC’s Tax Transparency & Total Tax Contribution team
Many people may assume that corporation tax is the largest tax paid by UK financial services companies. After all, the scrutiny over taxes paid by large companies has focused on corporation tax and yet this is only part of the picture. It’s crucial to raise awareness and provide more visibility over the total contribution made by financial services companies from all taxes - the recent Total Tax Contribution study carried out by PwC for the City of London helps to provide that clarity.
Based on a sample of 48 financial services firms, the latest report is the eighth study carried out by PwC. In this year’s report, it is possible to see how the policy of successive governments, together with the economic crisis, has moved the burden of tax from profit based taxes to other business taxes. Over the period from 2007 to 2015, the taxes borne by the sector have become less dependent on corporation tax and more dependent on other business taxes such as irrecoverable VAT, bank levy and employers NIC as shown by the graphic below.
So what is the total contribution from the sector in taxes?
The recent report estimates that the financial services industry paid £66.5bn in taxes during the 2015 tax year, a 1.4% increase on the previous year. The rise is driven by increases in corporation taxes and bank levy. But while the amounts of these two taxes increased, they still represent a small component of the overall tax contribution.
Employment taxes borne by these companies make up a third of total taxes borne, which is a reflection of well paid jobs in the sector. However, it’s often a surprise that irrecoverable VAT (arising when VAT on purchases cannot be recovered in an exempt business) is the second largest tax borne, making up a quarter of the total. This tax often attracts little attention, but is a larger burden for this group of companies in 2015 than corporation tax.
The study provides robust data to answer the question ‘which are the largest taxes paid by the UK financial services sector?’ The focus of the wider discussion on corporation tax paid by large companies can be misleading. To fully understand the contribution made by the financial services sector, it is important to look at the Total Tax Contribution, particularly at employment taxes and irrecoverable VAT. It’s important to note too that these taxes provide a more stable source of revenue for the government than corporation tax receipts which are more volatile and depend on profitability and the economic cycle.
The scrutiny over taxes paid by financial services companies is not likely to go away any time soon; therefore the data provided by this study is helpful in providing a greater understanding of the largest taxes paid by the sector.