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Stephen Herring Institute of Directors
Stephen Herring is Head of Taxation at the Institute of Directors
The United Kingdom's General Election takes place on June 8, 2017. How will the tax proposals in the campaign measure up?
Let's face it; it is as unlikely that tax advisers and commentators will think that the tax proposals put forward by politicians in the campaign leading up to the U.K.’s General Election on June 8, 2017, have been properly thought through as it is that the politicians will consider that those tax advisers and commentators appreciate the pressures on politicians from the electorate. There is a long history of commitments during an election preventing much needed reforms after it for the fear of being shown to be political leaders who do not keep their promises. So is there any realistic prospect that this will not happen in the run up to this General Election and the aftermath of it and, assuming the answer is negative, how could the collateral damage be limited?
Looking firstly at business taxation, there are understandable concerns from business leaders and organizations that politicians make statements during the campaign which lead to tax measures being introduced which will damage the position of U.K. businesses in comparison to our European and global competitors. During the 2010 and 2015 General Election campaigns there was a significant focus upon actual—and perceived—tax avoidance by multinational companies which led to the U.K.’s sponsorship of the OECD's Base Erosion and Profit Shifting initiative (“BEPS”) which most tax commenters believed to be beneficial but it also led to the enactment of the ineffective—and unnecessary—Diverted Profits Tax without adequate debate.
It would be naïve to believe that during the General Election 2017 campaign, corporate tax avoidance will not be put on the agenda by one or more of the parties in an attempt to secure the electorate's belief that they are the party most committed to address the issue. In fact, the best outcome would be that tax avoidance is left to the next government to assess whether new legislation is needed or existing legislation could to be reformed or, indeed, repealed. Accordingly, the more vague commitments made on this topic in the campaign, the better the outcome. Hopefully, tax avoidance proposals are no longer “political news” following the plethora of anti-avoidance legislation over the last 10 years and little will be said during the campaign. It would be good to hear—but perhaps too much to expect—politicians making the case that authentic tax planning by business which does amount to tax abuse or aggressive avoidance should be welcomed but one assumes that such fiscal common sense would not survive the scrutiny of each party's spin doctors.
The agenda for business taxation reforms is not, of course, solely to do with tax avoidance. The U.K. needs to have an ever competitive tax system on the same basis that it needs to have competitive physical and digital infrastructure, skills, employment legislation and regulatory environment. A General Election campaign is not, of course, the time for a detailed and authentic debate about a proposed business tax incentive. However, it ought to be an opportunity for all the major parties to highlight areas where they consider that tax reform to enhance the U.K.’s competitive position—and, hopefully, simplify the legislation—is a priority. This is an area which we often discuss within the Institute of Director's Policy Unit and we consider that business rates, the tax relief for capital expenditure and reliefs for equity investment are all areas where reforms and enhanced reliefs are both imperative and overdue. Such reforms should be focussed upon small and medium-sized businesses which can fairly highlight that the reliefs introduced by the current Conservative Government and its Coalition and Labour predecessors have prioritized listed and multinational companies. Hopefully, the parties will include commitments in these areas to improve the existing reliefs but avoid an unnecessary focus on the detailed proposals where consultation is required to optimize their beneficial impact.
Sitting uncomfortably between business and personal taxation is, of course, the existing national insurance contributions system. It is to be hoped that the forthcoming report by the Taylor Review on modern employment practices (see https://www.gov.uk/government/news/taylor-review-on-modern-employment-practices-launches) shortly after the General Election provides an opportunity for politicians to avoid any promises or commitments they will regret before June 2017 ends. At the IoD, we favor a level playing field where the choice of business entity between a traditional limited company, a partnership, a limited liability partnership and a personal services company does not need to be driven by the impact of national insurance contributions upon the business and focuses upon the broader legal and commercial advantages of each alternative.
To be clear on this, we certainly do not consider that the substantial tax collected for the Exchequer from national insurance contributions should rise from its already stratospheric total of 130 billion pounds out of total national accounts taxes of 690 billion pounds (Source: HM Treasury 2017–18 forecasts in March 2017 Budget Red Book). Indeed, quite the opposite and we consider that the Employers' National Insurance Contribution should be renamed “Payroll Tax” as, like most payroll taxes, it depresses employment levels and thereby reduces economic growth. There are, however, effective lobbies, which, understandably, are seeking to pre-empt the findings of the Taylor Review both from the taxation and employment law perspectives. The politicians would be wise not to enter into a bidding war over the next four weeks to satisfy their conflicting demands.
Turning finally to personal taxation, it can be validly argued that this area is a more authentic area for political value judgments to be highlighted during a General Election campaign. The perspectives upon the right levels for personal tax rates, allowances and reliefs include (hopefully!) the effectiveness and efficiency of the tax system but they also include broader socio-economic value judgments about the incidence of taxation. If you were to ask tax advisers and commentators about the worst features of the income tax system, many would point to the spike in the tax rate to 60 percent at 50,000 pounds per annum (where the financial benefit of child benefit is progressively withdrawn) and again at 100,000 pounds (where the same occurs for the personal allowance); the married allowance (together with its restrictions and complexities); the complexity and limitations of the relief for pensions contributions and the effectiveness of the (45 percent) additional income tax rate in collecting tax for the Exchequer. It is to be hoped that ill-considered promises during the General Election campaign do not frustrate the ambition any government should have to simplify personal taxation.
In conclusion, it would be a win-win if the political parties found a way to keep sufficiently “wriggle-room” in their tax promises to protect their tax principles but not to create an obstacle to the necessary tax reforms which the U.K. economy requires and might even facilitate their re-election in GE2022.
Stephen Herring is Head of Taxation at the Institute of Directors
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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