Call for taxman to drop revenue neutral 'straitjacket'

A leading tax adviser has urged UK tax authorities to drop their revenue neutral ‘straitjacket’ and accept that reform may cost the exchequer money in the short-term.

In the wake of the proposed controversial changes to taxing foreign profits, Chartered Institute of Taxation spokesman John Whiting pushed for rulemakers to take the same line as big business and think about the long-term benefits.

‘The tax authorities have got to get rid of this “revenue neutral” straitjacket,’ he said. ‘The starting point seems to be that reforms have to be revenue neutral. Businesses understand that you have to invest to make money and perhaps the government should take the same view. You can’t have a tax system where you’re handing out cash willy-nilly, but you must also spend a pound to raise a pound sometimes.’

His comments came in the wake of United Business Media and Shire dropping the UK as a tax base. The departures led to Alistair Darling scrambling to keep plcs from following suit by setting up a business-government tax forum last month.

The latest CFC changes, to clamp down on companies keeping assets such as intellectual property in low tax regions and setting up offshore treasury functions, were made to try to smooth out the loss to the exchequer from the dividend exemp- tion. Under the exemption, corporate gains made in low tax regions will not be hit by UK taxation.

Chris Sanger, head of tax policy at Ernst & Young, said that while being revenue neutral was prudent, the taxman was taking too cautious an approach in some cases.

‘There’s a real question as to whether [the tax authorities] concerns with issuing the dividend exemption will actually come to pass.’ In terms of repatriation of funds onshore, the foreign profits exemption would actually benefit the UK, Sanger said. ‘I think it’s important that the upsides are looked at as well as the downside.’

Whiting added that it would be a major boost if the authorities eased the compliance burden. ‘If I spend a pound to raise 90p and also cut 10p in admin costs then I would also see that as revenue neutral. More attention needs to be given to the admin costs of taxpayers.’