Tories Outline UK Business Tax Reforms

by Jason Gorringe, Tax-News.com, London

10 March 2009

George Osborne, the Conservative Party's finance spokesman, has told an audience in Birmingham that reducing the deductibility of interest on debt for tax purposes could fund a cut in corporation tax, and described other tax reforms that could make the UK much more tax competitive.

In a speech on March 6, Osborne said that the Conservatives have already given a commitment to cut the rate of corporation tax to 25% from its current rate of 28%. But he claimed that a future Tory government would have the ability to cut the rate even lower by eliminating incentives in the tax system for companies to fund investments through debt and excessive leverage.

"Our corporate sector's excessive dependence on debt is deep rooted in the structure of our economy. In particular, economists have long pointed out that our corporate tax system favours debt financing over equity," he said.

"Interest costs are fully deductible with very limited restrictions, while the returns on equity receive little or no tax relief," Osborne observed.

The Shadow Chancellor went on to point out that Prime Minister Gordon Brown's decision when he was head of the Treasury in 1997 to abolish the dividend tax credit for pension funds "made an existing imbalance worse."

"The result is that the UK is widely regarded as having the most generous tax treatment of debt interest of any major economy. That's economically inefficient at the best of times, but it makes even less sense now that we understand more about the dangers of excessive leverage" Osborne argued.

Eliminating stamp duty on shares - the UK remains the only major economy to impose such a tax on share dealing - would help to address this imbalance by reducing the cost of equity finance relative to debt, Osborne said. However, he suggested that there is a more pressing need to examine the generosity of interest deductibility in the UK corporate tax system.

"By reducing the tax breaks for debt we could potentially fund a significant reduction in the headline rate of corporation tax - a key determinant of our international competitiveness," he posited.

"I have already committed to reduce the headline rate from 28p to 25p by reducing complex reliefs and allowances, but we will need to go further if we are to keep pace with an increasingly competitive global economy. The prize could be considerable - a simpler and more competitive tax system, more jobs and investment, and British business that are less dependent on debt," he argued.

Osborne's speech, coupled with the decision by the somewhat inappropriately named Brit Insurance to re-domicile the group's holding company to the Netherlands, partly for tax reasons, has re-ignited the debate about the attractiveness (or lack of it) of the UK's corporate tax system for multinationals, following a flurry of corporate defections to Ireland, Luxembourg and other jurisdictions last year.

"We have identified the Netherlands as the preferred location for the domicile of the Group’s holding company in order to enhance prospects for shareholder value," Dane Douetil, Brit Insurance's Chief Executive confirmed in the company's preliminary results for the year ended December 31, 2008.

"With its many positive attributes including membership of the EU, strong financial services sector, stable fiscal strategy and excellent communications we anticipate the Netherlands will provide a good springboard for future growth. Subject to receipt of requisite clearances and approvals we anticipate being able to put detailed proposals to shareholders in the coming months," Douetil added.

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