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As part of its Budget submission, the Institute of Directors (IoD) has warned the UK government that economic policy now stands at a "fork in the road," and that the level of taxation now stands at a "tipping point" as international companies begin to seek out more tax competitive jurisdictions in increasing numbers.
The IoD argues that the UK government now faces a choice of continuing along its present path towards an economy that will mirror that of other EU economies with large governments, or of pursuing polices that aim to reduce the size of the state towards the levels seen in the US, Australia, Ireland and Switzerland, where public spending is between 34% and 37% of GDP.
The IoD also warned that the government's fiscal position is exposed in the event of a sharp economic slowdown the surplus on the current budget is a mere 0.1% of GDP and consequently there is no buffer in the public finances to absorb the impact of such an event.
Miles Templeman, Director General of the IoD commented:
“There is nothing inevitable about a rising burden of public spending and taxation. Other countries have achieved huge reductions in the spending to GDP ratio. The UK should take Spanish lessons. Since 1993 public spending in Spain has fallen by 10.8% of GDP – from 48.6% to 37.8% of GDP in 2007.
“The optimal size of Government in the UK is well below its current size. It will be a huge political and economic challenge to rein back the size of the state, but in the absence of effective action, UK competitiveness will be undermined. We hope the next Prime Minister will make the right choice. The Chancellor has stated that: ‘Globalisation was made for Britain and Britain was made for globalisation.’ Unfortunately, the current size of the state in the UK is not globally competitive.”
As part of its budget submission, the IoD is calling for: total public spending to be constrained to 1.5% per annum real growth over the period 2008-09 to 2010-11; the introduction of a 'Third Fiscal Rule,' namely a commitment, over the course of the economic cycle, to reduce net taxes and social security costs as a per cent of GDP; and the introduction of Regional Comprehensive Spending Reviews to help correct the regional imbalances in public spending.
The Institute said that the UK tax system has also "come to a fork in the road" with a succession of 400-page Finance Acts having added substantially to its complexity. The budget submission calls on the government "to resolve to pursue this path no longer" but to limit change to where it is necessary or is fully justified. It also cautions against continuing erosion in corporate tax competitiveness and is urging the government to cut the corporation tax rate by 2% to 28%.
In addition, the IoD says that the UK should respond to the pressures of European Court decisions by introducing an exemption for all corporate dividend income, and by reforming the controlled foreign companies regime to make it easier to work with. "This would be to choose the business-friendly route, rather than the route of defending every last penny of existing tax revenue," it argued.
The Institute also called on the government to consider its previously announced proposals to simplify the capital gains tax system and abolish inheritance tax, while calling for the proposed planning gain supplement to be abandoned.
“The government has rightly focused economic policy towards boosting the key productivity drivers – education & skills, innovation, investment, competition and enterprise. Unfortunately there is a rather large missing link, namely the impact of government. The Chancellor needs to add government to his list of productivity drivers – the missing 6th driver," Templeman added.
“Competitiveness is not a single issue, but when the UK is already less than world-class in other areas, such as transport and education, erosion of our previous relative advantage in the burden of taxation, could become hugely significant. In this way tax could become a ‘tipping-point’ issue for international companies," he concluded.A comprehensive report in our Intelligence Report series looking at Tax-Effective Global Manufacturing and Financing Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report8.asp
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