Tax loss policy hits long-term investment

Is the UK tax system discouraging companies from making long-term investment? That’s what a growing number of tax experts claim.

Limits on the amount of tax relief companies can claim on losses makes long-term investment, which may not produce a quick payback, less attractive for business.

The taxman’s restrictions on ‘loss carry-back’ relief make less sense in a recession when the taxman should be doing everything possible to encourage companies to invest and create growth, thereby boosting tax receipts.

Changes to the loss carry-back scheme announced in last month’s Budget will go some way to help companies limit tax losses. For the next two years UK companies are able to carry back tax losses, to set against profits, as far back as three years. But for any one year, the loss that can be carried back is capped at £50,000.

This is good news for smaller companies, but most tax advisers say the measures don’t go far enough. There was talk before the Budget of introducing measures that would make loss carry-back more favourable, but the government did not act.

Professor Michael Devereux, of the Oxford University Centre for Business Taxation, says the UK tax system is littered with pockets of uncertainty, but believes much of this can be cleared up if the government allowed more generous treatment of tax losses.

His sentiment will have resonance in the current climate. After all, in a recession, the percentage of businesses with total tax losses increases significantly, while the sums of money invested in corporate growth can slump dramatically.

And the investment problem is exacerbated by a slow down in inbound investment, probably brought on by the decline in the pound since last year.

The principle of targeting tax cuts toward more profitable firms is refuted by the likes of Devereux, who says it’s these companies that are less likely to be credit constrained and where additional funds would have a minimal affect on investment decisions.

Speaking at a Budget briefing last week he said: ‘A stable tax system has no place for short-term measures. I’m advocating a system that’s far more generous in its treatment of tax losses.’

According to Chris Sanger, head of tax policy at Ernst & Young, making decisions on the treatment of tax losses will play a key role in determining future corporate investment in the UK.

It will also play a key part in the long running debate over a worldwide debt cap ­ limiting the amount of tax relief that can be claimed on debt held by multinationals around the world.

The government has received much criticism for the way it has managed the tax competitiveness of the UK. It looks as if the critics won’t be going quiet any time soon.