A radical overhaul of the UK's corporate tax system is needed urgently if the country is to regain its status as an internationally competitive location, a new report argues today (Monday).
Under the chairmanship of GE Capital Europe's President, Charles Alexander, the CBI's independent Tax Task Force - consisting of 12 leading tax experts from some of the UK's largest international companies as well as smaller businesses, spanning every sector of the economy - has spent nine months collating intelligence and conducting detailed international research to produce a long-term vision for the UK tax system.
Its report, 'UK business tax: a compelling case for change', reveals that the UK has now reached a tipping point. The ever rising business tax burden and the failure of the tax system to respond to increasingly global business activity is creating a corporate tax system which is unsustainable in the long-term.
To tackle this, the report proposes a root and branch overhaul of the UK corporate tax system, with a wide-ranging programme of reform to include:
- A headline corporation tax rate of 18 per cent within eight years, with the cut more than paying for itself over time through increased economic activity1.
- Tax calculated on the basis of existing company accounts, scrapping the current system where firms have to maintain two sets of books. Allow all genuine business expenses to be properly recognised and replace complicated capital allowances with accounts-based depreciation.
- A 'no surprises' legislative and administrative process, with more time allowed for proper consultation on tax proposals, better resourced and effective parliamentary scrutiny, and limited budget secrecy.
- A non-political, independent tax law commission, established to monitor and review existing tax law and suggest improvements.
- Proactive UK government action on all cross border tax issues, co-ordinating with other governments, including on treaties to assign primary taxing rights.
- A simplified and improved tax system to stimulate the growth of small and medium-sized enterprises (SMEs), with an exemption from rules intended for multinationals, a small firms corporation tax rate brought back rapidly to 18% within three years and the SME investment allowance doubled to £100,000.
Richard Lambert, the CBI's Director-General, said:
"Our traditional tax system is no longer fit for purpose and is making the UK look increasingly uncompetitive. We need bold action to restore a competitive headline rate of corporate tax.
"An 18% business rate within eight years would help restore the UK's low tax credentials. But a radical shake-up is also vital if clarity, certainty and simplicity are to be reintroduced to the system so firms can plan with confidence and make Britain their long-term home.
"We have all seen the to-ing and fro-ing over CGT and non-doms in recent months. Knee-jerk, retrospective change is no way to manage a tax system.
"The case for change presented by the CBI Tax Task Force really is compelling. The UK government should clear away the thick layer of silt that has built up over time in our tax system.
"It needs to have the confidence to permit a serious, non-political, dialogue about where the business tax regime should be heading, what it needs to achieve, and what we want it to look like in ten years time. A clear government road map should follow, setting out the route to reform so business can plan with certainty."
The report makes clear that the advantages the UK gained from cuts to corporation tax during the 1980s and late 1990s have been lost. Other countries have taken bold steps to cut their rate: the Netherlands and Portugal to 25% and Ireland is famously at 12.5%. The UK's rate meanwhile has lagged and is now higher than the OECD average of 26.8%, even after this April's cut from 30% to 28%.
In terms of the burden of corporate tax, the UK's effective average tax rate is now the eighth highest in the OECD. Nor is corporation tax the only burden; companies pay £1 in other taxes for every £1 of corporation tax. According to the World Economic Forum, the UK has slipped from 4th place in 1998 to 15th in 2003 on the Global Competitiveness Index.
In a KPMG survey last year, only 2% of business thought the UK could claim to have the most competitive tax system in the world. While the UK's corporation tax rate was third lowest among the EU15 in 1997, it is now the sixth highest.
New analysis conducted for the report supports the argument that cutting corporation tax can actually boost rather than reduce tax receipts over the long term, as has been the experience in Ireland. Using US-style 'dynamic analysis', the figures show a net cost to the Exchequer, varying from £0.3bn to £4.2bn, in each of the first seven years of the CBI's proposed reform. But from then on, government revenues would be boosted by an average of £15.6bn each year, over years 8 to 12, rising to £26bn in year 12.
The way business works has changed dramatically, says the task force. Twice the number of multinationals operate in the world today as did in 1990 - an estimated 77,000 with a network of around 866,000 subsidiaries. Small firms are now just as likely to be global, with new technology making it ever easier for them.
Richard Lambert continued:
"Globalisation is a serious challenge to the tax system - as companies become more mobile, differences in tax regimes across the world are starting to matter more than ever before. Threats firms make to move their headquarters away from the UK are in no way empty - the government ignores them at its peril.
"Britain has historically adapted well to globalisation. But just as new technology, rapidly expanding cross border trade and the influence of emerging markets have radically altered how business operates, the way we tax firms must move with the times.
"The UK tax system cannot continue as a ball and chain round the ankle of British business, when it should be a springboard for encouraging growth and attracting investment."
Complexity in the tax system makes it harder for business to plan ahead and pay its taxes. The average number of pages contained in the Finance Bill rose from 153 pages during 1980-4 to 312 pages from 1995-9 and 463 pages between 2000-7. In 2007, Tolley's Yellow Tax book totalled 9,866 pages, 4000 more than in 2001. So it is no surprise that the UK now has the longest tax code in the world.
A more complex tax system creates uncertainty, and this has led to charges of unfair tax 'avoidance' made against firms even when planning arrangements are legitimate and purely commercial. Smaller firms suffer disproportionately from increased complexity because they cannot afford the same level of in-house resource or external advice as many larger firms.
Charles Alexander, Chairman of the CBI Tax Task Force and President of GE Capital Europe said:
"Key business decisions, such as where to locate a corporate HQ or invest, are now strongly influenced by the competitiveness of the tax system.
"You don't have to be a tax expert to work out that every penny spent on tax leaves less available for investment in jobs, research and development. So an uncompetitive tax system affects everyone.
"No-one wants to see the UK lose its edge and it would be tragic if an uncompetitive tax regime was allowed to undermine the other attractive features that make Britain a good place to live, work and do business. The CBI's Tax Task Force has shown that maintaining the status quo is no longer an option."