TaxAdministrationGetting the tax system you need

Getting the tax system you need

Both business and the government believe that we should have a competitive tax system. This means a system which is business-friendly, and which makes the UK the first choice for businesses deciding on a location.

But will we actually get the tax system that we need?

We can certainly expect some progress in the Budget. The most important proposal is the new exemption for trading companies selling substantial shareholdings in other trading companies. Gains will no longer be taxable, and losses will not be allowable. If a group builds up a trade and then decides to spin it off, perhaps so as to re-focus on core activities, the tax system will not cause trouble.

This change is vital for two reasons. First, recent changes to double taxation relief made it tricky to maintain tax-efficient group structures based in the UK: the exemption will go some way towards redressing the balance. Second, other countries have similar exemptions, and the UK needs to keep up with the game. But the minimum shareholding to qualify is 5% in the Netherlands, and as small as you like in Germany. The chancellor should look again at whether the UK minimum should be as high as the proposed 20%.

Other aspects of the corporation tax system can also make it unattractive.

For example, when a company acquires an asset from another group company and then leaves the group within the following six years, there can be an immediate tax charge. This rule was introduced to prevent tax avoidance, but it is also a major hassle for groups wanting to undertake ordinary commercial transactions. And the rules which tax profits made in low-tax overseas subsidiaries, again aimed at tax avoiders, can be just as unfriendly to legitimate commercial groups.

Finally, it should be a lot simpler to employ people. There are some good ideas in the Carter review of payroll services, but they concentrate on administrative changes. It is time for the government to make policy changes as well. Nothing is as anti-competitive as a mountain of red tape.

The government may not give us everything that business wants: it has to consider its other policy objectives. But it should not forget that if business is not encouraged, none of those other objectives will be achieved. It is the private sector that generates wealth, allowing taxes to be levied and public services to be provided.

  • Richard Baron is deputy head of the policy unit at the Institute of Directors

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