Budget – No More Own Goals But No New Scoring Opportunities

Everyone will understand Alastair Darling’s focus on avoiding new initiatives
which inevitably carry with them the risk of backfiring such as his attempts in
the PBR to simplify capital gains tax and increase the UK tax take from

The aggregate effect of the policy decisions in the Budget 2008 is less than
£150 million in 2008/09, less than £800 million in 2009/10 and £1,900 million in
2010/11. These are microscopic changes in the context of total tax receipts in
2007/08 in excess of £500 billion. Both the Government and the Opposition appear
to agree that there is no scope for tax cuts in the short to medium term.
Accordingly, perhaps all we can look forward to (or fear!) are adjustments both
within and between existing taxes which have no net effect on the total tax

Set against these parameters, what could the Chancellor have done?

Firstly, we should hope that the Chancellor has not abandoned his inclination
for tax simplification following the very mixed response to his CGT reforms.
There were losers from these measures and, not surprisingly, lobbyists for these
groups made much more noise than other taxpayers who gained from this
simplification. I am convinced the UK tax system for both businesses and
individuals is excessively complex and must be simplified.

Secondly, governments must accept that it is inevitable (and, indeed,
mandatory from the fiduciary perspective of directors to their shareholders)
that business taxation levels will be compared between jurisdictions. The
clearest manifestation of this comparison is the headline rate of corporation
tax. The UK used to have one of the lowest rates in the OECD and now is merely
in the middle of the pack and its position is steadily eroding following recent
corporation tax cuts in, for example, Germany, the Netherlands and across
Central Europe.

This is not a party political matter. Gordon Brown recognised the need for a
competitive corporation tax rate when, in the early years of his Chancellorship,
he cut the corporation tax rate from 33 per cent to 30 per cent. It was 30 per
cent in 1999/2000 and is to be 28 per cent in 2008/09. This 2 per cent reduction
in nine years is simply not enough to maintain the UK’s competitive tax position
and Corporation Tax now collects £50 billion per annum in comparison with £30
billion in 2001/02.

How can the Chancellor both simplify individual and business taxation and cut
the increasingly less competitive corporation tax rate whilst he is not able to
cut tax revenues in aggregate? I believe that he should avoid taxes which
increase businesses’ fixed costs, which operate as a disincentive for
individuals and which discourage entrepreneurs.

Fortunately, however, this still leaves the Chancellor with some options
available. For example, relatively small increases in VAT and Customs Duties
could have financed both tax simplification and a measured cut in the
Corporation Tax rate to, say, 24 per cent over a four year period.

Any increase in indirect taxation would not of course be popular in the
tabloid press but surely this is a price worth paying in the short term for a
simpler and more competitive business taxation system?

Stephen Herring is a tax partner at BDO Stoy Hayward

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