Business will be looking at where taxes are going, not just where they are
Tomorrow’s Budget announcements will capture immediate attention, but it’s the tax roadmap that could have the most enduring impact, says Chris Sanger
The government’s decision to publish a corporate tax roadmap in this week’s Budget is intended to strengthen the UK’s economic foundations and attractiveness as a destination for capital. This move comes at a critical time and, if properly executed, could signify a pivotal shift for the UK’s economic future.
While many Budget announcements may capture immediate attention, it is the roadmap that perhaps holds the potential to create the most enduring impact. Its primary purpose will be to lay a solid platform for future investment and foster confidence in the UK economy.
The policy proposals outlined in Labour’s manifesto were reliant on the UK achieving the economic growth that would reduce the need for further tax rises beyond this upcoming Budget. A workable, understandable and interpretable roadmap has a critical role to play in delivering that environment. However, in order to be effective, it also needs to be adaptable and applicable to future developments.
The UK’s history of similar tax roadmaps is somewhat mixed. The corporation tax roadmap of 2010 provided the impetus for further investment, following a period of successive reductions in the tax rate and exempting profits generated abroad. Although it was funded at least in part by delaying when tax relief was given for acquisition of capital assets, this did not detract from its attractiveness, as businesses were willing to trade the deferral of tax relief for an overall reduction.
In contrast, the business tax roadmap of 2016 was arguably less effective. It was more akin to a travel journal, looking back over past successes, rather than setting out a map of what was to come. To succeed, the new roadmap must provide predictability for investors and offer businesses a degree of certainty around how the Government would respond to future situations, such as further geopolitical turbulence or another pandemic.
In some ways, this roadmap will be delivered in a similar environment to that of 2010. The corporation tax rate has climbed back to 25 per cent and, with full expensing, relief is again being given (and more generously so) for capital investment. However, in 2010 there was a clear plan for tax cuts and reform. This time, there is far less clarity as to the future direction of policy – making this document even more important and valuable.
The new roadmap should set out a clear underlying approach to business taxation, with principles that can be applied to future tax changes. For example, is the government committed to taxing profit, through taxing all income but also offsetting against that income all genuine business expenses unless there is an overriding policy reason not to? It may sound obvious but, with today’s complex tax system, there are many situations where this is not the case.
Is the government committed to taxing profit, through taxing all income but also offsetting against that income all genuine business expenses unless there is an overriding policy reason not to? It may sound obvious but, with today’s complex tax system, there are many situations where this is not the case
Whilst the exchequer is protected by a general anti-abuse rule, could the taxpayer be given an equivalent: a genuine tax deduction rule. Initiatives like this could also help foster an environment where businesses can thrive and contribute to the overall economic growth of the country.
Whilst the new roadmap is likely to cover only corporation tax, the government has an opportunity to provide greater certainty by including the broader range of taxes that many businesses also pay or collect, such as value added tax and business rates. This comprehensive approach, whilst challenging, would help to create a cohesive and effective tax system fit for the future.
Chris Sanger is UK tax policy leader at EY