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.