By Tim Sarson
Every now and then the normally dry subject of taxation makes it onto the front pages. It’s a short-lived chance for professionals like me to air our long-held views on the oddities, distortions and iniquities of the system: its head-scratching complexity and the patches of unfairness – between social classes, regions and age groups – mean we often end up taxing the wrong people the wrong amounts for reasons nobody can remember.
We have seen more than the usual amount of debate in the last two weeks, in the papers and on social media. There is certainly much to go after: from unexpectedly high effective tax rates at certain income bands to the wide range of thresholds in the system that discourage businesses of a certain size from getting bigger. Many distortions in a system which is badly overdue reform.
So as a tax policy commentator I should be delighted this is all getting an airing, right? Well, I’m not sure I would have chosen the precise circumstances of this particular debate. One of the roles of an adviser like me is to explain the UK tax system to multinationals and investors based in other countries, especially the USA. The importance of such investment can be seen, according to government data, by the fact that in 2019 US-owned businesses supported 1.48 million jobs across the UK, around 60 per cent of which were outside London and the South East.
Questions I am often posed include how does it work, what are the guiding principles, what considerations should be made when deciding if and where to make new investments? That job has gone from straightforward to increasingly tricky in the last few years.
For a long time we had a tax system for corporates that was fairly easy to explain, and generally stable. It might not have achieved everything it should have in driving the right kind of investment but at least you could articulate what made it tick.
Since 2016 it has become harder. It’s well known that business investment stagnated after the referendum, but that trend started well before any actual changes in our regulatory relationship. What it did was up the uncertainty. I remember this well – companies pausing for breath until the fog dispersed. Now Brexit is a reality, the trade frictions remain but the uncertainty has fortunately started to dissipate. Only for it to bubble up again in fiscal policy following the announcement and subsequent reversal of major changes under both the previous and current Treasury regimes.
Uncertainty is its own tax. As British politics makes headlines globally, this uncertainty prevails and makes businesses waiver. Government policy should be flexible to changes in circumstances, but that is different from being unable to announce a policy and see it through.
The reach of our politics on the international stage is a downside of our residual soft power. And nuance and perspective can get lost in those headlines. This filters into business decision making and has muddied the waters when trying to explain what the country stands for as an investment destination.
But we can’t and shouldn’t freeze tax policy as it is: there will be more change. It’s almost certain that if a new Labour government gets into power in 2024 things will shift again, including the likely reintroduction of a higher headline corporation tax rate accompanied by more targeted incentives for investment, including the transition to net zero. Perhaps that long-overdue business rates reform may even happen. The challenge for Labour will be to make sure these policies are articulated in a straightforward way. Resist the temptation to surprise with rabbits out of hats
It’s a truism to say that inward investors value stability and predictability, but it bears repeating at this moment. Whatever happens politically in the following months we could do with a period of calm. This does not mean stasis. There is still plenty of scope for reform but reform done calmly and in the place that corporate tax policy truly belongs: in the business section, not the front pages.
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