CIOT/IFS debate: What should be in the business tax roadmap?

Watch a recording of the full debate.

With the new Labour government promising the roadmap will be published before the end of the year, the debate centred around what it should include and how to improve the landscape for businesses in the future.

The event on Wednesday 4 September was chaired by CIOT President Charlotte Barbour and featured speakers:

• Rt. Hon. David Gauke, Head of Public Policy at Macfarlanes LLP and Treasury minister 2010-17
• Dominic Mathon, Head of Tax and Treasury, RELX
• Helen Miller, Deputy Director, Institute for Fiscal Studies
• Ellen Milner, Director of Public Policy, Chartered Institute of Taxation

The background

Helen Miller opened the debate by providing an overview of the current corporation tax regime. She said there had been a trend of cutting the main rate of corporation tax “for decades” in the UK, with many other countries following the same path. “The motivation was to be competitive,” she said.

Helen added that our current rate of 25% is “middle of the pack”, saying: “A roadmap can bring a range of benefits including stability and help to build a consensus around what we are trying to achieve.”

Following Helen, former minister David Gauke, who helped introduce the first corporate taxes roadmap in 2010, said it gave the government the opportunity to “set out a pro-growth, pro-openness, pro-investment case in a time of austerity”. He said he felt the 2010 roadmap was a “good move”, and the Conservative government at the time “exceeded what we set out to” in terms of tax cuts. “We would return to this and do another penny… wherever there was room for it,” he said.

However, David acknowledged that over the 14 years it was in power, the former government could legitimately be accused of a lack of consistency on corporation tax. “2016 was where things started to go wrong,” he added. “George Osborne left office and business investment fell substantially due to the Brexit vote and the uncertainty that followed.”

Dominic Mathon said that “a few years ago” the UK was considered a “pretty competitive place” for businesses, due to the relatively low rate of corporation tax and some certainty and idea of the direction of travel.

However, he said: “That did all change with the six percentage point increase, which was dramatic in its impact.” He continued: “Our effective rate of tax is now lower in the US than in the UK. That’s something I never envisaged that I’d be able to say.”

The future

Helen said that the “priority” for the 2010 roadmap was cutting the rate of corporation tax, and it will be “interesting” to see how the next roadmap will address that. “Labour have said they don’t want to raise it any further, but should we now see 25% as a stable rate or is there any condition under which a rate cut would be seen?”

She added that “certainty matters” and a long-term commitment on corporation tax can offer predictability to businesses. “A roadmap could give us a clear vision for the type of business tax we’d like,” she said.

David was also positive about Labour’s plan for a roadmap but warned that both money and politics make significant cuts to corporation tax unlikely.

“They don’t have the money, and I think it would be very hard for Labour internally to maintain this policy,” he said.

Dominic said that while tax is not the biggest driver of economic activity, the UK is not doing well in other areas either. He added that the “purpose of a roadmap is to set out the direction of travel”. He said the future of the UK is not in being a low cost economy. “If the UK economy is going to succeed we need to be a high skilled, innovative economy,” he said, arguing that the current incentive regime has not kept up with technological developments.

Small businesses

The final speaker, Ellen Milner, emphasised the importance of small businesses and the need for them to be included in the roadmap. She said 60% of employees work for SMEs so any measures must be aimed at them too. She noted that small business are responsible for a majority of the tax gap, especially error and carelessness, with £24 billion, 60% of the tax gap, being lost to the Exchequer.

She said: “I think it’s a really good thing getting clarity on the direction of travel, but don’t forget about the little guy!”

Ellen laid out some of the problems very small businesses face with tax, providing the example of an electrician she called “Eli”, whose tax situation was made far more complicated when he became an incorporated business.

She added there must be ways for small and medium-sized enterprises (SMEs) to get extra support from HMRC when they need it, referencing the Low Incomes Tax Reform Group’s work around the gig economy.

Ellen concluded: “In making decisions for small businesses we need to listen to them.”

Simplification

The speakers agreed that simplification should be built in to future tax changes around corporation tax. Dominic said the increase in the size of the tax code we have had in recent decades has been “enormous” and suggested an ambition from government to reduce this.

David added that the abolition last year of the Office of Tax Simplification was a “great shame” and “simplification does matter”.

Other issues

Dominic said that the heads of tax at large businesses are “mystified” by the government’s focus on “full expensing”. “It’s of very little value to us,” he explained, and if there were a trade off they would rather scrap full expensing a have “a little bit of movement on the corporate tax rate” because that is something that drives earnings. He didn’t expect it to happen though. Helen was more concerned about consistency, saying: “If full expensing is good for machinery why isn’t it good for other assets too?”

David also stressed guidance around enforcement, adding: “I hope when they’re looking at this roadmap they will look at the enforcement side of things and offer some encouragement there will be certainty and stability in enforcement.”

Ellen said Making Tax Digital offers opportunities to increase support for business if done right, but “some certainty around what’s happening would be welcome”.

David said tax is “only one factor” when it comes to investment decisions, there are other factors likely to be more important. However, tax is something we can change more quickly, “for good or ill”. “The whole point of a roadmap is it constrains the flexibility of a government,” he added.

Dominic said that, in the US, it is “incredibly difficult” to make changes to the tax code, but warned that this is a “double-edged sword” – existing problems in the tax code are not addressed but it gives you a little bit more certainty.

Asked whether a reduction in the rate could result in a greater tax yield, Helen said: “The general rule is no, the evidence doesn’t back it up.”

Dominic disagreed, saying: “It’s really hard to tell when you look at all the different factors. So much depends on profits.” He said that when the 100 Group look at the impact of rate changes they do so company by company and there are instances where a lower rate has increased the take.

Helen said that there are “quite a few” corporation tax rates geared around different industries including banks and energy companies. She added that when considering a tax regime for North Sea energy companies, she would like to see something “quite boring”.

Asked to sum up the purpose of the roadmap in a single phrase, Dominic said: “It’s about creating an environment that encourages businesses to invest in the UK.” Helen added: “A roadmap should have a vision for what corporate tax should look like, what you are trying to get to ultimately.”