Top UK Firms Paying Less Tax Despite Higher Profits

The effective tax rate paid by FTSE-100 companies has dropped to 26% compared to 35.8% just two years ago, while firms have seen profits increase.

According to research conducted by accountancy firm UHY Hacker Young, Britain’s FTSE-100 companies have reduced their tax rates by almost a third in the last two years, a consequence partly due to the reduction in headline corporate tax rates in the UK.

The effective tax rate paid by FTSE-100 companies has dropped to 26% compared to 35.8% just two years ago, while firms have seen profits increase.

According to research conducted by accountancy firm UHY Hacker Young, Britain’s FTSE-100 companies have reduced their tax rates by almost a third in the last two years, a consequence partly due to the reduction in headline corporate tax rates in the UK.

UHY also noted that companies in the FTSE-100, which is increasingly dominated by foreign mining firms, were generating a higher percentage of their revenues overseas where tax systems are often more favorable.

Some top companies also carried forward losses made during the recession to gain tax relief in later years. More than a third of FTSE-100 companies paid no corporation tax at all last year.

“With more of companies’ operations now based overseas it is only sensible for them to ensure that their business is structured properly so that they are paying tax at the best rate,” said Roy Maugham, tax partner at UHY Hacker Young.

The figure for the current year is based on annual reports published up to 31 August. The effective tax rate in 2010 was 30.1 per cent, according to the study, published today.

Maugham, however, said the firms were not doing anything wrong.

“Companies have a duty to their shareholders to keep the tax they pay under control,” he said. “With more of their operations now based overseas it is only sensible for them to ensure that their business is structured properly so that they are paying tax at the best rate.”

[quote]That doesn’t mean they are doing anything that is illegal or pushing the boundaries of acceptable tax planning. They may simply be reducing their activities in high tax overseas jurisdictions or controlling their non-allowable expenditure more effectively.[/quote]

Concerns over the possibility of more companies moving offshore have led to the government looking at making the UK more attractive tax-wise says UHY.

As Maugham explained, “The tax burden is a vital consideration for highly mobile multinational companies when deciding where to be based. Whilst the Government has made efforts to make the UK tax regime more attractive, will it be enough to stymie the tide of British companies still thinking about the exit?”

Earlier this month, UHY also released a study that showed the UK has one of the lowest corporate tax burdens among G8 countries.