Putting the UK Back In Business
A new Civitas report, Corporation tax: Beating the Competition, argues that the UK’s current tax burden is jeopardising business and undermining our ability to escape from recession.
UNLIKE THE REST OF THE WORLD, THE UK HAS RAISED, RATHER THAN REDUCED ITS BURDEN ON BUSINESS.
Supporting business is crucial to the UK’s recovery from the current recession. Only businesses can provide the jobs, incomes and profits that allow taxes to be collected to pay for public services, so the UK must ensure that tax levels are conducive to companies’ survival.
After all, if businesses fail, there will be no tax revenue.
The authors, Richard Baron and Corin Taylor, present a ‘recession-proof’ solution to get Britain back on track: reduce the corporation tax rate to 15% over a ten-year period:.
‘A low rate would enhance competitiveness, reducing the proportion of profits taken in tax and the proportion of total tax revenue which came from business profits.’ (p14)
Business fleeing the UK
By contrast, current levels of corporation tax in the UK are pushing business away. The growing trend of companies relocating outside the UK is a serious threat to the UK’s economic health:
‘KPMG’s most recent annual survey on the UK’s tax competitiveness found the proportion of groups surveyed that were actively considering leaving the UK had more than doubled, from 6% the previous year to 14%. Of the 20 FTSE 100 companies surveyed in November 2009, four were actively considering moving.’ (p8)
In short, taxation levels on their profits make a critical difference to businesses choosing which countries to reside in.
Whilst UK rates are at an all time high, corporation tax rates around the world have been falling rapidly:
‘A 2000 survey of corporation tax rates across 86 countries worldwide found that the average corporation tax rate was 31.1%, above the UK’s rate of 30% in that year. In 2009, the average rate across the 116 countries surveyed was just 24.2%.’ (p6)
The UK headline rate is 28%.
Declining rates of corporation tax have enhanced the competitiveness of regions such as Asia-Pacific.
‘In 2000, the average corporation tax rate across the 19 Asia-Pacific countries surveyed was 31.4%. In 2009, the average rate across the 20 Asia-Pacific countries surveyed had fallen to 27.5%.’ (p7)
Particularly as the UK will never match the Asia-Pacific region for low-cost labour, so it needs to be ahead in other ways – the rate of corporation tax should be, and indeed used to be, one of the factors where the UK led the world:
‘Out of the 86 countries surveyed worldwide, the UK had the joint 29th lowest corporation tax rate in 2000. In 2009, the UK’s rate was the 68th lowest out of the 116 countries surveyed.’ (p7)
THE GOVERNMENT HAS ADDED TO THE UK’S DISADVANTAGES AT EXACTLY THE WRONG MOMENT.
The burden of UK taxation
Over the past decade the UK has lost much of the competitiveness that its tax system once enjoyed. The World Bank’s estimate of the total tax rate for 183 countries around the world ranked the UK 67th, and a 2008 survey of FTSE 100 companies found that total taxes borne were 45% of pre-tax profits:
‘Out of the other countries on which data were collected using the same “total tax contribution” methodology, the UK FTSE 100 companies faced the third highest average total tax rate, behind Belgium and the US; the third highest average total tax rate as a percentage of turnover, behind Canada and the Netherlands; and the second highest average figure for employment taxes per employee, behind Belgium.’ (p7)
The volume of UK taxation
This plummeting in the international rankings is no surprise considering the growing bulk of UK tax legislation:
’25 years ago, the annual CCH collection of UK tax legislation comprised two volumes, together occupying five inches of shelf space. Today, there are seven volumes and they take up more than a foot of shelf space.’
Today, the UK’s overall tax burden is well above the OECD average:
‘The UK is now ranked 84th out of 133 countries on the “extent and effect of taxation” as measured by the World Economic Forum. In other words, 83 countries around the world have tax systems that suffer from fewer disincentives than the UK’s. In 2004-05, by contrast, the UK ranked 18th out of 104 countries.’ (p8)
The overall cost
As reduced tax rates are good for economic growth, some effect on revenue from corporation tax can be recouped in tax revenue increases.
Baron and Taylor estimate that reducing the corporation tax rate would at most cost Â£22.4bn (only 3% of total government spending), and the cost could be as low as Â£12.4bn. They conclude:
‘Either figure would be a very small price to pay for restoring the UK’s tax competitiveness, a move that would bring jobs and capital to the country. Ultimately the public finances would benefit, as well as the private sector.’ (p27)
For more information contact:
Richard Baron on 020 7451 3212 and Corin Taylor on 020 7451 3263
Notes for Editors
i. ‘Corporation tax: Beating the Competition’ by Richard Baron and Corin Taylor can be downloaded here.
ii. Richard Baron is Head of Taxation at the Institute of Directors (IoD). Corin Taylor is a Senior Policy Advisor at the IoD.
iii. Civitas is an independent social policy think-tank. It receives no state funding either directly or indirectly and has no links to any political party.