Call for clarity

Head of taxation, Institute of Directors

3 Jan 2012

Reducing corporation tax rates instead of tinkering with reliefs is the answer to the complex tax regime, says Stephen Herring
All tax practitioners advising multinational companies, listed companies, entrepreneurial businesses, trusts and individuals have their own list of anomalies in the UK’s tax legislation which should be rectified without further delay. Almost invariably, those solutions involve significant costs to the Exchequer which Treasury ministers are unwilling to accept, especially in the context of a substantial fiscal deficit.

Reducing corporation tax rates instead of tinkering with reliefs is the answer to the complex tax regime, says Stephen Herring

All tax practitioners advising multinational companies, listed companies, entrepreneurial businesses, trusts and individuals have their own list of anomalies in the UK’s tax legislation which should be rectified without further delay. Almost invariably, those solutions involve significant costs to the Exchequer which Treasury ministers are unwilling to accept, especially in the context of a substantial fiscal deficit.

The government has stated that it favours simplification of the tax code but is equally and understandably determined to combat artificial tax schemes. By way of example, the measures enacted in the Finance Act 2011 to attack disguised remuneration consist of over 60 pages of legislation and even more explanatory notes and statements. Whatever the merits and results of this legislation are, it does not amount to tax simplification.

Business taxation

Other government tax priorities include providing the UK with the most business-friendly system for both entrepreneurs and foreign direct investment by global companies. Both the controlled foreign company reforms and the proposals for patent box companies come to mind as examples of this.

It must not be forgotten that the overarching policy is to reduce the size of the UK’s structural fiscal deficit and I have assumed that any reforms to simplify taxation must be achieved upon a broadly tax neutral basis.

Similarly, I have avoided reliance upon untested assertions, such as hoped-for reductions of tax avoidance or tax revenues from business being boosted by lower tax rates or focused tax incentives. The question is: how much do targeted tax reliefs incentivise business investment in the UK (or elsewhere) as opposed to lower corporate tax rates? In my opinion, most tax reliefs, incentives and exemptions are not worth the price paid in the form of a higher corporation tax rate than would be the case if the aggregate tax saved from their repeal, were to be channelled fully towards lowering the rate itself.

The UK should be targeting a corporation tax rate of around 18%, which would be very competitive internationally and would enable multinational, listed and closely held companies to focus on increasing profits rather than needing to take undue account of the incidence of corporation tax upon their cash flows and earnings per share.

The small profits rate of corporation tax has been frozen at a fixed limit of £300,000 for over a decade and the reductions in the main rate of corporation tax have resulted in the relief becoming increasingly less valuable. Surely it would be better to repeal it and have a single rate of corporation tax but use the tax raised to fund a reduction in employers’ national insurance, say, for the first 20 employees?

The draft Finance Bill 2012 published on 6 December 2011 included the repeal of the targeted tax relief for the conversion of retail and commercial property into rented flats and the targeted stamp duty land tax relief for residential properties in disadvantaged areas, neither of which are now considered to have achieved their stated goals. Although the failure to promote the intended investment might be obvious for these two reliefs, I consider that the proposed introduction of the seed enterprise investment scheme may not be seen as a success in three or four years time.

It is more likely that the fixed investment limit for each company will be seen as having been set too low (at £150,000) to allow promotion of investment with the necessary safeguards or the Treasury and HMRC will conclude that the relief is too generous and/or is abused and must be repealed.

More radically, the Treasury should ask the Office of Tax Simplification to re-examine the case for both the enterprise investment scheme and venture capital trusts from the perspectives of investment choice, investor protection, provision of finance in targeted areas and management costs. The outcome may be that both reliefs should be retained but confirmation is overdue.

Personal taxation

Inevitably, tax reliefs benefiting individual taxpayers are even more difficult to repeal than business tax reliefs as the political fallout is likely to be more immediate. Nevertheless, the personal tax system contains some fundamental flaws that need to be addressed, including:

an income tax higher rate of 40% that applies to taxpayers earning less than twice the median earnings;
the kinks in the tax system as an individual’s taxable income exceeds the basic rate tax thresholds (when child tax credit will be withdrawn from 6 April 2013), and £100,000 (when the personal allowance is already progressively withdrawn); and
and the differing values of personal tax reliefs for 20%, 40% and 50% taxpayers which are, at the very least, counterintuitive.

An alternative might be a personal tax system where all reliefs are treated as a tax credit at the basic rate of tax alongside a £10,000 personal allowance, a £50,000 basic rate band taxed at 20%, a £100,000 higher rate band taxed at 40% and, whilst unavoidable (and, of course, subject to the chancellor’s review early next year of the tax collected by this rate), a top tax rate of 50% for taxable income above £150,000.

To further simplify personal taxation, the first £1,000 of the total of interest income and dividend income could be exempted from tax, thereby removing the need for reporting this income for the great majority of savers and investors.

Individuals are also, of course, liable to capital taxation in the form of capital gains tax and inheritance tax. These together are forecast to collect in the region of £6bn in 2011/12 and a similar sum in 2012/13. In comparison to the tax collections for income tax of £158bn, NICs of £10bn and VAT of £100bn, these are very small sums indeed and significant reforms are therefore easier to contemplate. By way of example, an individual’s death could be regarded as an occasion of charge for CGT (with the necessary reliefs for owner-managed businesses) as the ‘price’ of repealing IHT.

We have a government which is, in my view, rightly prioritising the reduction of the fiscal deficit, but there also needs to be a determination to simplify the UK’s tax system, including the removal of reliefs and exemptions which do not earn their keep and the reduction of the UK’s excessively high tax rates.

From a taxation perspective, one way to judge the government should be its progress in achieving tax simplification on a bold and authentic basis.