UK’s Competitiveness Under Threat

by Robert Lee, Tax-News.com, London

18 March 2010

With the UK budget announcement now less than a week away, a major City of London law firm has warned the government that tax should neither hinder commercial decision-making, nor be used "as a political football".

"The UK has become a less attractive and competitive place to invest or do business because of the tax regime’s uncertainty and complexity compared to its rivals, let alone the high rates," says Michael Wistow, head of tax at international law firm Berwin Leighton Paisner. “The 50% income tax rate for individuals and the persistent lack of clarity over taxing companies’ foreign profits are two examples of a tax system which is more deterrent than enticement."

Wistow suggests that the UK will lose its entrepreneurial edge unless the government delivers a tax regime "which supports and rewards those who generate wealth and employment, not penalizes them.”

One indicator of the UK's deteriorating competitiveness was seen last week when London lost its rating as the number one financial centre in the world in the Global Financial Centres Index, with New York rated as equally good and Asian centres like Hong Kong and Singapore rising rapidly into third and fourth place.

While the government is still in desperate need of new revenues, Wistow warns the government to resist the temptation to increase capital gains tax (CGT), currently set at 18%, because "it would not raise much revenue and would damage venture capital and entrepreneurial behaviour, which drives so much innovation and wealth creation in the UK."

“The current rate of CGT is an international competitive advantage for the UK so if there is desire to align it more closely to income tax the smart move would be to lower the latter, not push up CGT and as the Institute for Fiscal Studies says, lowering high income tax rates usually increases the overall tax take,” he observes.

While not a "vote winner", Wistow also urges the government to tackle problems with foreign profits legislation.

“The current lack of clarity is a deterrent to planning long term investments in the UK and is making many companies re-think the logic of headquartering here too," he concludes.

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