Against 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
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
Ian Brimicombe is the director of group tax at AstraZeneca and a member
of the Fiscal Committee of the Hundred Group of Finance Directors.