Miliband’s tax policies divide advisers

AS WITH MOST PARTY CONFERENCES, Labour’s this week in Brighton has led to a heady mix of chatter, sniping, speculation and praise.

The big news for the profession is that leader Ed Miliband pledged to stop short of the Conservative’s headline corporation tax cut, instead keeping it at 21%.

Instead, he proposes a cut in business rates, claiming the country has “too long supported some businesses and not others”, in what could be interpreted as a thinly-veiled swipe at big businesses accused of tax avoidance.

SMEs are likely to be very pleased with the intention to cut business rates, which, according to EY, has risen to account for 4% of total taxes, coming close to meeting the declining revenues from corporation tax – due to be 5.75% of total taxes by 2017.

Of course, given that – unlike corporation tax – business rates don’t fluctuate, they’re generally disliked by companies, the cut is likely to be the more popular element of Miliband’s pledges.

Indeed, it is likely to sit well with Labour’s core voters, but convincing business it is not a set-back for the party’s pro-enterprise credentials is likely to prove far more challenging.

In fact, advisers are warning it is a divisive path to take, particularly given the current government’s drive to encourage commerce, which has seen large businesses such as advertising house WPP return to British shores.

The advertiser brought its HQ back to the UK after a four-year self-imposed exile in Ireland due to the British tax regime.

Despite attempts to curb tax avoidance activity from the coalition government, the core message has been one of a desire to encourage innovation and growth. Since this government came to power, the message has been one of increasing the country’s competitiveness, attracting overseas investment, and with it, jobs.

Miliband’s announcement has given rise to concerns from business leaders and tax practitioners that, should Labour take the next election, there could be a departure from that orthodoxy. So much so, in fact, that one adviser remarked that if that is the case “he should just come out and say so”.

For others, it shows a lack of ability to realise the bigger picture; that the success of a great many smaller businesses is dependent on the health of larger corporates, and a Labour government cannot, therefore, pick and choose which businesses it should encourage.

Keeping the headline corporate tax rate at 21% has a knock-on effect on investment, research, job creation across the business world. It also affects companies’ forecasts, which are based on the tax system as it currently is, factoring in the coalition’s promised cuts. Indeed, many have put in place measures for projects based on the current government’s model.

Another policy announced in Brighton was further pension tax restrictions for high earners, something purportedly targeted at a small group of people, but for many advisers, experience suggests that in practice the net will be drawn much wider, a possibility that could generate uncertainty for a significant number of people across the country.

HM Treasury figures confirm that the top 1% of earners pay 27% of UK personal taxes, with the top 10% of earners paying 57% of taxes. By contrast, the top 1.5% of earners are said to benefit from 15% of pension tax reliefs. On that basis, says Baker Tilly head of tax George Bull, high earners are already disproportionately deprived of tax relief on their pension contributions.

Miliband, then, has raised more questions among stakeholders than answers and even supporters are not unconditional in their approval of the policies. Indeed, many party faithful like the sentiment but query the methodology.

Indeed, some were heartened by the recognition of significant rising costs for small businesses, but funding it with a freeze in the corporate tax rate appears redundant to many.

There is also a significant group asking “why now?” at a moment when Britain’s economy appears to be finding its feet and is returning to levels comparable with the pre-financial crisis landscape.

Stability, above all else, is what the markets and individuals crave at this juncture, but amid the uncertainty created by Miliband’s hints is the question of why Labour did not address these perceived problems when they were in government.