One small step for the taxman

In a report entitled ‘Helping Britain Thrive’, Ernst & Young examined
different indicators around the competitiveness of the UK tax regime and
compared them to a similar exercise carried out in 2001.

The report found that the UK had lost ground on the tax base, the rate of tax
and the administration of tax collection. Five years ago the corporation tax
rate was competitive and we were in a strong position in relation to other OECD
countries. However, the UK’s ranking has now slipped significantly.

Although tax is not the only reason for investing in a country, it has become
more important as the other advantages of the UK, in terms of skills and
infrastructure, are now being matched by our competitors.

The UK’s tax system compares unfavourably, being costly, unnecessarily
complex and unpredictable. Each year it suffers further from poorly drafted
legislation that often fails to achieve the objective for which it was intended.

Alongside this complexity, the introduction of corporation tax self
assessment has switched the onus of ensuring the corporation tax return is
correct from HM Revenue & Customs to the taxpayer. Businesses are struggling
to comply with a tax system that they do not always understand and which they
know may be changed retrospectively.

There is an increasing sense among businesses that the government gives too
little consideration to economic impact when introducing tax measures,
international tax competitiveness or the tax compliance burden. The primary
motivation appears to be an increase in tax revenues. This issue, coupled with a
sense that HMRC does not understand the way that businesses operate in the 21st
century, means that many of the positive steps that the government is taking
(such as enhancing the approach to tax administration, as set out in the Varney
Review) are overshadowed by the day-to-day concerns of those organisations
trying to do business here.

But the gravest implication of the current tax system is that the UK’s
competitiveness as an investment location is being compromised. Ultimately, we
will hear more stories of major corporates threatening to move their
headquarters out of the UK.

Not all of the issues that might deter investment in the UK can be remedied
overnight. But real clarity, simplicity and predictability around our tax system
will reinforce the UK’s economic strengths. The Chancellor needs to design
policy with the UK’s competitiveness as an investment location at its core, not
as an afterthought. Although the Varney review is a step forward, in reality
much more has to be done.

Paul Davies is head of tax at E&Y