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- Tax reliefs: If done right an important tool for delivering the UK's economic ambitions
Tax reliefs
An important tool for delivering the UK's economic ambitions.
It is often assumed that ‘tax relief’ relates to giveaways for big business. But, let’s be clear about the facts.
According to HMRC’s own statistics only 3% of tax expenditures (reliefs designed to promote particular activities rather than structural elements of the tax system) result from reliefs from corporation tax. The remaining 97% are mainly made up of reliefs from personal taxes (e.g. income tax relief for pension contributions, 0% VAT on things like food and children’s clothing).
If designed effectively reliefs can be an important lever for governments to deliver national economic policies. The UK’s R&D tax expenditure credit is an example of this. Providing relief to profitable as well as loss-making businesses, it can help to encourage investment activity that may not have otherwise taken place. Again, data from HMRC shows that in 2015-16 £22.9bn of R&D expenditure in the UK was used to claim R&D tax credits, of which 20% was by SMEs and 40% was claimed by businesses under 10 years old.
Like with all elements of the UK’s business tax system, international competitiveness is crucial. Policies like the UK’s Patent Box encourage greater foreign direct investment, supporting domestic businesses and job creation. And this isn’t an either/or choice, inward investment has been shown to have knock-on effects, creating clustering of domestic and foreign-owned businesses.
But the UK’s capital allowances regime is one area that may be worth another look. With one of the lowest present values of capital allowances in the G20 and productivity growth relatively stagnant since the financial crisis, the UK could benefit from measures that boost long-term private sector investment.
Whilst much attention is often paid to the rates of tax, of equal importance to business is the stability and predictability of the tax regime. Two levers government has to deliver this are: firstly, the clarity of guidance from HMRC once legislation has been introduced and secondly, the transparency of the tax policymaking process.
So, when considering options to introduce or amend tax reliefs the government needs to follow a clear, evidence based approach that considers the economic, social and environmental impacts.