The last time anyone really reformed the UK business tax system was when Tory chancellor Nigel Lawson scrapped generous capital allowances in return for moving the rate of corporation tax down from 45% to 40% to 35%. Since then, business taxes have been subject to endless tinkering by chancellors from both parties.

The result is a mess, which, according to the CBI, is no longer fit for purpose and is in danger of harming Britain’s global competitiveness. The CBI is calling for a root and branch reform of the system, including sweeping away elements of the system that have been in place for centuries.

In a report, UK business tax: a compelling case for change, the CBI argues that the UK has reached a tipping point. The ever rising tax burden and the failure of the tax system to respond to increasingly global business activity is creating a corporate tax system which is unsustainable in the long term.

The CBI is proposing a wide-ranging programme of reforms, which it says should
be adopted wholesale rather than cherry picked.

Richard Lambert, the CBI’s director-general, called for the government to clear away the ‘thick layer of silt’ that has built up over time in the tax system.

‘The government needs to have the confidence to permit a serious, non-political dialogue about where the business tax regime should be heading, what it needs to achieve, and what we want it to look like in 10 years’ time. A clear government road map should follow,’ he said.

Lambert stressed that, in the end, it is individuals, not business, who shoulder the tax burden whether employees or investors.

His hopes of a non-political debate did not get very far, however. The TUC slammed the report with general secretary Brendan Barber saying: ‘The CBI might as well hang a giant “Tax is for the little people” banner from its office windows.’

Less intemperately, Barber added: ‘The CBI is either astonishingly naive or extremely disingenuous if it believes there could be such a thing as a non-political tax commission. I can’t see ordinary tax payers having a say in such a commission. It would be like asking Britain’s poachers to regulate game-keeping.’

So is there a case for reform? The CBI says that in 2000, the UK’s main rate of corporation tax was the fourth-lowest among the EU-15 countries. It is now sixth-highest and the seventh-highest among the EU-27.

The absolute tax burden - the proportion of profits paid in corporation tax - has also risen. Over the past two economic cycles, corporate tax revenues, as a proportion of GDP, have risen from 4.74% to 5.30%.

The OECD is on the side of the CBI. In its economic survey of the UK in 2007 it identified lower corporate tax rates and tax simplification as much needed reforms.
Many FDs and their tax advisers would recognise the CBI’s argument that ‘the annual finance bill process is responsible for much of the complexity and deficient legislation in the UK corporate tax system’.

The UK can now boast the longest tax code in the world. Tolley’s Yellow Tax book totalled 9,866 pages in 2007, 4,000 pages more than in 2001.

When asked whether his members might have provoked the present complexity by its apparent willingness to embrace aggressive tax planning techniques, Lambert replied that the current situation was chicken and egg.

The report says that the reforms would address concerns about tax avoidance. It argues a more competitive tax system with a lower rate will discourage offshoring of tax liabilities, and giving relief for all business expenses will remove the need for complex structuring to avoid tax distortions and double taxation. It adds: ‘More fundamentally, a system that is simple and certain is almost more transparent and less open to abuse.’

Underlying this report is the threat that multinationals will relocate if Britain’s tax system remains uncompetitive. Charles Alexander, chairman of the CBI Tax Taskforce that produced the report and president of GE Capital Europe says: ‘Key business decisions, such as where to locate a corporate HQ or invest, are now influenced by the competitiveness of the tax system.’

The CBI concludes that for the sake of the country’s economy the status quo for the UK tax regime is not an option.

The CBI's ideas

● A headline corporation tax rate of 18% within eight years. The CBI says the cut will pay for itself over time through increased economic activity.

● Tax calculated on the basis of existing company accounts, scrapping the need for companies to maintain, in essence, two sets of books. The proposals include allowing all genuine business expense to be properly recognised and replace capital allowances with accounts-based depreciation.

● A no-surprise legislative and administrative process with more time for consultation on tax proposals, better resources and effective parliamentary scrutiny and limited budget secrecy.

● A non-political, independent tax law commission to monitor and review existing tax law and suggest improvements.

● Proactive government action on cross-border tax issues, co-ordinating with other governments. Including treaties to assign primary taxing rights.

● A simplified and improved tax system to stimulate the growth of small and medium-sized enterprises with an exemption from rules intended for multinationals and SME investment allowance doubled to £100,000.

This article originally appeared in the April edition of Financial Director (fiancialdirector.co.uk)