RSS feedsAgainst a backdrop of greater international competitiveness in business taxation and the short-term need to balance the UK’s books, the government needs to engage business to produce a more competitive tax regime to deliver greater prosperity for all.
More recently, the government’s strategic policy for corporation tax has stalled and fragmented into a number of diverse and uncoordinated tactical measures designed to close what the government likes to refer to, but not necessarily define, as the “tax gap”.
Strategic consideration of competitiveness, the benefit to the UK’s long-term economy, the EU dimension and the increasing administrative burden placed on UK taxpayers have all been parked, at least for now, in order to deliver higher tax revenues to meet the Chancellor’s short-term spending plans. To redress the balance from tactics to strategy and from short to long term, the government needs to re-engage with business on the development of tax initiatives that increase UK investment, broaden the tax-paying population and lower the tax and compliance burdens for all – in short make the UK tax regime more competitive.
Looking back over the last 18 months, the government’s opening tactic in the Finance Act 2004 was to address unintended consequences of existing law with a specific focus on artificial, promoted remuneration schemes and financial products. The disclosure regulations provide an early warning system for marketed schemes and most, including the Hundred Group of Finance Directors, accepted these measures as reasonable and justified.
However, the following two 2005 Finance Acts introduced a number of additional measures to cancel UK tax advantages in relation to financing and taxation of foreign profits. Such measures close out certain longestablished UK reliefs and therefore go much further in shaping the competitive standing of the UK tax landscape. The government has been at pains to frame these 2005 measures as an extension of its policy to counter what it perceives as unacceptable avoidance. The characterisation of such measures as anti-avoidance is at best disingenuous given past decades of acceptance as part of the UK corporate tax package. The new laws are seen by many as a further tactic to deal with short-term cash requirements at the expense of putting a dent in the UK’s competitive position.
Finance directors will also recognise that attempts to sever the supply of tax planning opportunities have been matched with attempts by HM Revenue & Customs to raise the level of reputational risk to UK corporates and senior management. Through initiating a debate regarding the morality of taxpaying, the government not only hopes to restrict the take-up of tax planning, but also to muddy the waters regarding certainty of tax treatment. Combined with the current focus on governance, disclosure, and for US registrants, the exacting requirements of Sarbanes-Oxley, the effect has been to heighten the need for a more carefully considered tax strategy and possibly more prudent attitude to tax planning sanctioned at the chief executive and board level.
While the government’s domestic agenda has increased the level of uncertainty in tax treatment, the external influence of the European Court of Justice continues to destabilise the UK tax regime through its drive to eliminate the discrimination of national tax laws against EU members. So far the UK government’s reaction has been to shore up its defences by removing UK tax reliefs and denying taxpayers access to restitution and damages wherever possible through legal manoeuvring.
In so doing the fundamental questions of what changes could be made to the UK’s tax regime in order to make it competitive have been avoided. Other EU members, and not just those who have recently joined following accession, have made or have proposed substantive changes to their tax systems to address discrimination and are seeking to steal a march on the competition to capture a greater share of investment.
The recent tactics employed by the UK government in the face of increased spending requirements and ECJ intervention may prove successful in the short term. However, the real question is at what point such measures become self-defeating as existing and new investment seeks alternative locations to the UK. If the collective corporate reaction is to invest elsewhere for greater certainty and incentives, will the tax gap continue to widen, particularly as pension deficits are corrected with tax-deductible payments?
So what should finance directors be concerned with as a result of current developments? In response to a distinct shift in perceptions of tax risk as far as the fiscal and other regulatory authorities are concerned, for individual corporates it will be vital to revise past tax risk assessments and generate a clear strategy to manage risk in accordance with an agreed level of tolerance. Delivery of a tax strategy, in common with all other aspects of the business, must be governed by appropriate controls across planning, compliance, document management and reporting requirements. These may be new considerations in the context of tax management but are necessary for successful delivery of desired outcomes for the tax charge and tax cash outflows in the current environment.
Beyond the individual corporate level many finance directors, including those represented by the Hundred Group, are more than willing to engage in a dialogue necessary to strengthen the understanding of business by government for the formulation of a long-term strategy for tax policy. The absence so far in 2005 of any concrete developments in this area needs urgent correction as the challenges from competitive regimes and the ECJ decisions continue to grow.
The key to determining the actions necessary to deliver long-term goals must include a clear understanding of the existing environment and potential outcomes of policy change. The Hundred Group has long perceived a gap in the market for clear analysis of the relationships between elements of the tax regime and sustainable domestic and inward investment.
Armed with a greater appreciation of the role of the tax regime in driving economic flows and the dynamics of global tax competition, government should be able to direct policy towards its strategic goals of sustainable economic growth while balancing the needs of the short term.
Confidence in its understanding of corporate behaviour in the face of tax competition should pave the way to a more positive agenda and greater prosperity. This would involve a shift away from the elimination of UK advantages to cost effective, fiscal measures that attract a greater share of investment.
Ian Brimicombe is the director of group tax at AstraZeneca and a member of the Fiscal Committee of the Hundred Group of Finance Directors.
