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UK tax overhaul essential for attracting investment

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3rd Jun 2010
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Potential investors are being put off bringing much needed capital into the UK by increased instability in the tax system, argues Baker Tilly’s George Bull.

A ‘serious debate’ on business tax is required ahead of the latest Budget if the economy is to be stabilised, argues George Bull, tax partner at Baker Tilly.

Client surveys conducted by the firm reveal that it’s not the level of tax that’s keeping international investors away, but a perceived uncertainty in the system. “The feedback we’ve received is that the way the system keeps changing is worse than the absolute level of tax.

“Politicians from all parties need to understand that the way they act, even down to the things they say affect the decisions of potential overseas investors,” he says.

The prime minister’s recent public assertion that ‘Britain is broken’ is a prime example of political posturing having a direct impact on investment. “That’s the last thing overseas clients want to hear if they’re considering investing in the UK. Most clients now make decisions on a longer timescale than the average UK parliament, so the government should put themselves in the shoes of the people they think they’re governing by recognising that people plan on a far longer timescale and want certainties,” argues Bull.

Political upheaval

The coalition government has the potential to impact tax policy in one of two ways, according to Bull: “It will either have a moderating effect because the parties will be forced to reconcile their different approaches to specific issues and agree a harmonious policy; or the coalition will simply end up agreeing which parties policies prevail in certain areas, so far from dampening out the fluctuations, it could actually accentuate them”.

Business taxation in general requires a significant overhaul if the UK is going to boost its international competitiveness. “Labour started what they said was a process which was to make the UK more competitive for big business by reducing the mainstream rate of corporation tax and paying for that by increasing the rate on small companies. They carried out the first year of that and then everything ground to a horrible halt because they realised that wasn’t actually a vote winner. It’s now time for a serious and sensible debate about the way small businesses are going to be taxed, because they are the backbone of the British economy”.

Domicile and residence
Another area that requires significant attention in order to boost investment is residency and domicile. “There’s been complete uncertainty over the issue of residence. It’s become such a subjective matter, left to court interpretation with no statutory rule”.

The recent case of Robert Gaines-Cooper, a UK born entrepreneur who has been disputing his residency status since 1996, highlighted the confusion surrounding the issue in UK law.

“There are no signs of any immediate changes here but that doesn’t mean there won’t be later. Indeed HMRC and the Treasury are believed to be working on a statutory residence test. The Lib-Dems wanted to scrap the remittance basis of tax for non-doms but that is not acceptable to the Conservatives. However, the Conservatives are not averse to the idea of increasing the amount of the remittance basis charge which Labour set at £30,000. Don’t expect an announcement on this in the first Budget but be prepared for further developments in the autumn 2010 pre-Budget Report,” suggested Bull.

Large scale review

The specifics are important to clients, but more than anything else what’s required from this Budget in terms of tax policy, is clarity. “To quote an American academic, what we need is to produce a system that looks as though it was designed to be that way”, says Bull.

Over the years the government has come out well several well intentioned plans that haven’t quite worked. “For example, the tax law rewrite project has produced some superb redrafting of legislation, however in some of the share option areas the first set of new changes have had to revert to the old, lengthy cumbersome drafting because the draftsman’s been working under pressure and hasn’t had time to write a short new provision. (Brevity always takes times and so something long has had to be written due to this time pressure)”.

What’s needed now is some clear thinking about where the tax system is going. “I wouldn’t want to see a quick review; it requires careful thought, consideration and consultation,” argues Bull.

 

Replies (9)

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By User deleted
07th Jun 2010 11:22

UK Tax Overhaul

A good place to start an overhaul would be to ban restrospective changes to tax law, starting with repealing S. 58 of the Finance Act.

It's not just overseas investors we have to attract - its UK investors moving their money offshore to more certain climes!

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By wood and co
07th Jun 2010 11:27

TAXATION overhaul

I agree that something has got to be done to make the system both fairer and more understandable, as well as simpler, not just with Business Tax but all taxes.

For years now every time someone finds a gap in the legislation it is quickly blocked by reams of print in the next Act. The modern Finance Acts are all so large that it is impossible, I would suggest, for any one person to any longer be able to absorb it all, and be able to answer a question on any point of tax. We may have moaned 20 years ago about the amount of legislation but it was a small fraction of what we now have. The complexity is such that is it any wonder you make the comments you do.

It could be argued we should start again. There are tax experts in the big firms who I am sure between them, if there salaries were covered, would work out, given the parameters necessary to meet Government requirements,  a new and simpler tax regime.

 

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By NeilW
07th Jun 2010 12:09

Big is beautiful - according to lobbyists

Perhaps what we really need to do is stop pandering to large foreign 'investors' and construct the tax system so that it allows small acorns to grow into great oaks organically.

And to do that we need to get away from the 'bungs' approach inherent in the current system - with less fixation on the percentage value of corporation tax.

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By sue scherzo
07th Jun 2010 12:38

tax review changes needed

the civil servants need to provide for much better training for HMRC higher staff, including those engaged in investigations on 'small-fry'. This will no doubt be commented on following the Cumbria tragedy.

If the Inspector handling the investigation did not take account of the feedback and 'signals' in interviews  he or she is now going to feel deeply concerned if there is anything in the procedure which they should have spotted , or could have spotted if given some awareness training on the psychology of the investigation process and the alarming effects it can sometimes have on taxpayers.

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By johnjenkins
07th Jun 2010 15:07

change to the tax system

GB had a fantastic opportunity to completly change our tax system, even the way we look at taxes. We are left with chaos.

CG and IT are both wrong in principal because tax has already been paid on the money that has gone into the Asset.

I do not believe that direct taxation is the way forward. Indirect taxation is the only method that will work. That way people can decide what to spend their money on.

This will generate more growth and more income for the government. What's more important, people will be happier and will work harder, producing more growth etc. insted of the stagnation we have at the moment.

I agree that DC was right to say "Britain is broken". It's about time politicians came clean. Antway a wise investor will always invest when the chips are down knowing full well they will make a tidy profit.

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By User deleted
07th Jun 2010 15:14

Uncertainty is the killer

hmmm... when they are risk of the government making retrospective changes to the tax law? I think not...

The only way to clear up that particular confusion is to repeal S.58 !!

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By [email protected]
07th Jun 2010 21:01

tax review changes needed

Well said Sue Szerco. I have had my fair share of clients and their wife's hovering on the edge of a nervous breakdown. Thus making these taxpayers incapable of working properly throughout the investigation and thus leaving the Treasury with less funds coming in.

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By tomsims101
16th Jun 2010 14:04

Freelancers would benefit from tax overhaul
In order to secure the UK’s future, the tax law process that affects freelancers needs to be drastically overhauled. That’s the message that Vincent Oratore, the president of the CIoT is sending to the coalition.
He pointed out that the way we make the tax laws in this country is deeply flawed. They are not scrutinised properly by experts and there is never enough parliamentary time to properly consider the effects of any changes. Read more here : http://www.freelancesupermarket.com/news/2010/6/14/freelancers-would-ben...

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By quadra
17th Jun 2010 10:45

Who should approve tax law?

I agree - additionally there are so few MP's that have any clue about taxation that I question whether Parliament is the right body to pass tax law?

In my experience most are not very interested in this "boring" subject anyway, and I have even spoken to one who had no clue how PAYE worked!!!

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