UK Tory Tax Plans Under Scrutiny

by Robert Lee, Tax-News.com, London

18 January 2010

With a general election approaching in the spring of 2010, the UK opposition Conservative Party has been forced onto the back foot over aspects of its tax proposals, with political opponents and business leaders warning that they could be costly and ineffective.

Shadow Chancellor George Osborne has said that the party is sticking with its plan to lower the headline rate of UK corporate tax, currently 28%, by using revenue freed up from the elimination of certain capital allowances and other business tax breaks. However, business has warned that while cutting the corporate tax rate would be a welcome move, many manufacturing and investment-intensive industries depend on capital allowances.

Osborne told the Financial Times that if victorious at the forthcoming election, which must be held no later than June, the Tories would ensure that the UK has "the most competitive corporate tax system of any major economy” within five years.

Osborne wants to achieve this goal by reducing the main corporate tax rate to 25% and the small business rate to 20% (currently 21%). In addition, the Tories have proposed that incentives in the tax system that encourage excessive corporate borrowing would be replaced with new tax breaks that would reward equity financing. Furthermore, complex tax relief schemes would be pared back to reduce tax system complexity and to allow revenue lost as a result of the corporate tax cut to be replaced.

The plans have come under attack, however, from various business and industry groups. “Debt is not an economic four-letter word,” Simon Walker, Chief Executive of the British Venture Capital Association, said when the Tories unveiled their proposals last year. “At the personal level, Britain would not have the Tory ideal of a property-owning democracy without a large mortgage market. In the corporate sector, debt is often the only device for securing the investment essential for companies to expand and prosper.”

John Moulton, founder and managing partner of Alchemy Partners, one of the UK’s largest private equity houses, has also warned that banks, property companies and leasing businesses "would all sink like stones if this were introduced over-night.”

Others believe that the Tory plans are not nearly radical enough, and that much more needs to be done to restore UK tax competitiveness in the light of several high profile corporate defections by major companies seeking more friendly tax regimes in the likes of Ireland, Luxembourg and Switzerland over the past 18 months.

“We marginally support these proposals, as better than doing nothing, but we’d much prefer them to be bold and not fiscally neutral,” Miles Templeman, director general of the Institute of Directors (IoD) said, according to the FT.

Last month, the IoD published a major report on the long-term reform of the UK tax system, which called for a much deeper cut in the corporation tax rate than Osborne is proposing, to 15% over 10 years.

"Reducing the corporation tax rate will also address a number of structural concerns in a straightforward way," the IoD said. "It will take the pressure off the transfer pricing and controlled foreign companies regimes, allowing those regimes to be less forbidding to multinational groups. Complications and distortions in the tax system could also be cleared out in a painless way if the corporation tax rate were falling."

In an attempt to discredit the Tory's plans for business taxation, the governing Labour Party has claimed that the tax burden on business would actually increase by GBP1.3bn should they be put into effect, although economists have pointed out that the government has got its sums wrong by failing to take into account the impact of the recession when calculating the revenue effect of cutting back tax reliefs.

The government and opposition Liberal Democrats have also been sticking the boot into the Tory's aspirations to recognize marriage in the tax system with the proposed introduction of a transferable tax relief for married couples.

Nick Clegg, the Lib Dems's leader, dismissed the proposal as a "bribe" to sweeten taxpayers in the run up to the election, while Schools Secretary Ed Balls told the Sunday Telegraph that they would be "hugely expensive and unfair."

The Conservatives argue, however, that the present tax system penalizes married couples when it should be rewarding them as part of efforts to support the institution of the family.

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