Rebecca Cave outlines how the tax system could be used to heal the wounds laid bare by the EU referendum.
Who is in charge?
Our country currently has no effective government or opposition. We are in political limbo waiting for the Conservative Party to decide who will be our next Prime Minster, while the Labour Party commit collective hara-kiri. Long term government policies and projects, including making tax digital, are uncertain or have been put on hold, according to research by the Institute for Government.
Then this morning up pops George Osborne (still the Chancellor for now), saying that what the country needs is a reduction in corporation tax down to less than 15%! He argues that is this cut is needed to stimulate investment into the UK.
My view, and that of a number of other tax experts, is that a corporation tax cut the last thing the country needs right now. What we need is a stable tax system, not constant rate changes. In 2010 mainstream corporation tax was 28% and 21% for small companies. Now all companies pay CT at 20%, and that is due to drop to 19% on 1 April 2017 and to 17% on 1 April 2020. This is a crazy race to the bottom, only Ireland has a lower corporation tax rate at 12.5%, although some tax havens have zero rates.
Corporations did not vote in the EU referendum, if they had we probably wouldn’t be in the mess we are. People voted, and the Government should listen to what those people are asking for, such as:
- long term jobs
- decent housing
- inspiring education
- reliable transport systems
- fast broadband
- well-funded health service and social care
If the rate of corporation tax is reduced, the government funding required to satisfy the above needs must come from individuals either as tax rises or benefit cuts.
How to fund
I believe the money needed for investing in communities should come from corporation tax on large companies, taking the rate back up to a reasonable 25%. The lower rate of 20% could be maintained for small companies, but it should be linked to the number of employees on the payroll rather than to the level of the company’s profits.
All companies (or groups) with less than 50 employees would pay CT at the lower rate of 20%. HMRC can easily determine which companies have 50 or more employees as that information is instantly available through RTI reports. The cut-off point of 50 employees is also the boundary used for RTI penalties, and for tests to establish whether a business is a small company for R&D and other tax reliefs.
The results of the EU referendum shone a spotlight on the inequalities across the UK in terms of industry and opportunities for the local population. Investment by business and government needs to be targeted in areas where it is needed most, eg outside the greater London area.
Here are some ideas for stimulating investment:
- Business grants conditional on the creation of long-term jobs in a specific area.
- Scrap the apprenticeship levy (due to come into effect from 6 April 2017), which will only add to the burden of employing people and complicate the tax reporting for all employers.
- Allow employers to claim tax allowances on providing decent housing and schools for their workers, to emulate the Victorian industrialists such the Cadbury family who built Bourneville village near Birmingham and Sir Titus Salt who founded Saltaire Village near Bradford.
- Bring back capital allowances for investment in factories and warehouses.
- Fund improvements in transport systems between towns in the North of England.
- Scrap the HS2 rail project – it will only pull more people into over-heated London.
- Improve the ports in the north east and transport links to them.
- Build support areas for lorry drivers up and down the country – safe and secure overnight parking for drivers.
- Pay teachers premiums to teach in lower performing state schools, to inspire the young to create the educated workers the knowledge-based economy needs .
- Make sure every town, village and hamlet has high speed broadband.
This is a significant tax for many businesses, which has been devolved to the regions. So Scotland, Wales and Northern Ireland make their own decisions on the rates and reliefs.
In the March 2016 Budget the government proposed a major reform to English business rates to allow local authorities to retain 100% of the money raised. Those funds could be used to spend on urgent local needs such as social housing. Unfortunately, the reform of business rates in England has also been stalled due to political turmoil.
What do you think? Should modest tax rises be used to fund vital investment? Or do you agree with George Osborne that our top priority as a country should be to attract outside investors?
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.