Business tax battle lines beginning to be drawn

July 1, 2014

The election battleground of taxation policy grew in intensity today. Just as in 2010, when Labour’s planned hike in Employer National Insurance contributions was opposed by the Conservatives, business taxation policy will present a clear dividing line between the two major political parties in May 2015. Ed Balls has announced that instead of lowering Corporation Tax by a further percentage point next year, which would unify the rates paid by small and large companies, he would freeze and then cut Business Rates.

It is doubtful that anybody will find fault with the stated premise underpinning the Shadow Chancellor’s business taxation policy; that the system should be competitive, promote long-term investment, and be “simple, predictable and fair”. Indeed, there are even welcome nods in his speech to – although little concrete policy on – the differing taxation treatment of debt and equity financing, which experts have raised as an issue for decades. What is unclear, however, is how the policy related to Corporation Tax and Business Rates is consistent with another passage of the speech that argued the UK can only succeed economically by staying “…as an open and internationalist and outward-facing trading nation.”

A central tenet of the Coalition’s taxation policy has been that Corporation Tax reductions will show that Britain is “open for business”, and that the UK’s international competitiveness will be enhanced as a result. What is implicit in today’s announcement is that Labour believes that Business Rate reductions will make UK business, as a whole, more competitive than a Corporation Tax reduction. It is difficult to see how this is the case, and the risk is that the policy creates as many winners as it does losers. Those businesses with commercial property intensive operations would win, and those businesses that are not property intensive and pay the main rate of Corporation Tax would lose. The policy also fails to address the widespread recognition that the Business Rates system is in need of “fundamental reforms”, rather than just a lowering of its burden.

To allay fears that the UK’s competitiveness would be harmed, Ed Balls committed to maintain the UK’s position as having the lowest rate of Corporation Tax within the G7, which compares to George Osborne’s commitment to have the joint lowest rate in the G20. Yet it is not clear why either of these groupings should be the basis of comparison. Within a globalised world there are numerous factors dictating the location of footloose multinationals, and when policy changes to reduce one tax burden at the expense of another the mobility of the tax base has to be a consideration.

Perhaps the final word on this should go to the Office for Budget Responsibility, which concluded in its 2012 Fiscal Sustainability Reportthat:

“global corporation tax rates have been on a declining trend as governments around the world compete to attract mobile profits and capital. If a similar pattern were to persist whilst the UK headline rate remained unchanged, the incentive to draw profits away from the UK would reduce corporation tax receipts over time. If UK rates were to move in line with a declining global average there would be a direct fall in UK corporation tax receipts. But lower corporation tax rates could increase the level of GDP by reducing the cost of capital.”     

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