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It’s a pleasure to be back here, to speak to the Centre for Business Taxation just over a year since we came to Government, and almost exactly a year since I spoke to this same gathering.
Last July I set out the thinking behind our emergency Budget. Our case for dealing with the country’s largest ever peacetime fiscal deficit. A path that has been endorsed by the IMF, the OECD, and the credit agencies, and one that provides the best conditions for a private sector led recovery.
Although I could not predict what the economy would look like in one or five year’s time, what mattered was to provide an environment for business to grow with confidence.
And grow on the back of investment and export, not unbalanced debt-fuelled consumption.
And the last year has given us cause for cautious optimism.
The UK has stayed out of the fiscal danger zone. Yields on our bonds have remained close to Germany over the past year despite us inheriting a deficit larger than that of Portugal.
UK manufacturing output has risen by over 4%.
Exports to the rest of the world have been nearly 13% higher than the previous year.
And most importantly, the private sector has created net over half a million jobs.
Of course we always said that the recovery would be choppy. And no one can be comfortable or complacent, particularly given risks stemming from the Eurozone as highlighted recently by the OBR and the Bank of England amongst others.
But this Coalition is committed to creating the environment for growth now and for the medium and long term - to position the UK to meet the challenges of today’s global economy.
In March this year we launched the Plan for Growth which included:
Steps to reform the way the planning system works.
Measures to lift the burden of regulation on businesses.
Investments in key transport infrastructure.
Much-needed reforms to our country’s education and welfare systems that will leave a lasting legacy on the UK’s labour market.
And of course plans to create the most competitive tax system in the G20.
Now for many people - many in this room in fact - tax is always the most important thing.
As the Minister responsible for tax, I can certainly see this point of view. After all, tax policy is intertwined with the nation’s economic and political history.
The Civil War over 400 years ago….
The Boston Tea Party nearly 250 years ago…
The Corn Laws 170 years ago…
I am just the latest in an unbroken line of Exchequer Secretaries that go back to…4 years ago.
Last year, so soon after a change of Government, there was a lot of uncertainty as to how tax policy would change over the coming years and what role it would play in this government’s plans.
Over the last year we have fleshed out our approach, and demonstrated real commitment to tax reform.
Tax and globalisation
The approach is rooted in the belief that in today’s economic climate, tax is more important than ever.
After years of tariff reform, technological advance, and information revolution, we are operating in a much more fluid world economy.
Globalisation and the free movement of capital and labour can create vast new opportunities, and indeed the UK has capitalised on these.
But of course, globalisation also brings with it challenges. Where our competitiveness slips, we can very quickly be left behind.
In fact, according to the World Economic Forum, UK competitiveness has dropped from 4th to 12th in the last decade. And many businesses, including those of you here today, have raised concerns about lost tax competitiveness. There’s a risk that tax is holding the UK back.
Our tax system was once viewed as an asset, and we need to make it that asset again.
Our ambition is no less than to create the most competitive tax system in the G20.
A year in I can say what we have done.
The Chancellor outlined the four key principles for tax reform that have been guiding us and I’ll use these principles to frame my remarks:
- Be efficient and support growth - we need a tax system that supports innovation and enterprise
- Be certain and predictable - because businesses need more certainty on tax
- Be simple to understand and easy to comply with - untangling the web of reliefs and exemptions in the British tax code
- And finally, be fair, reward work and support aspiration
Firstly, what are we doing through the tax system to boost competitiveness and support growth?
We have made cutting Corporation Tax one of our key priorities for tax competitiveness
Far too often the political debate focuses on what the general tax burden should be, influenced by differing views about the appropriate size of the State. Far too little emphasis is placed on the question of which taxes to levy. That is, which taxes are the most efficient and least growth inhibiting.
We are prioritising reform of Corporation Tax because it is the most growth impeding tax there is.
In contrast there are those who insist we increase Corporation tax and reduce the deficit on the backs of business.
As if “business” was an entity separate from society, distinct from employees, and irrelevant to growth.
The argument is made - I heard it last week from the trade unions in Northern Ireland - that cutting corporation tax favours the wealthy over the rest of society.
But of course the economics doesn’t stack up.
We all know that higher business taxes feed through to a combination of prices, dividends, pensions, profits…and for an open economy like the UK, wages in particular.
Higher taxes on profits reduce the return to investment, leading to lower levels of investment. And a lower level of investment undermines productivity which ultimately feeds through to lower wages.
Ever increasing tax rates would simply serve to make the UK’s business environment internationally uncompetitive….to the detriment of our private sector, and to the detriment of our wider society, rich and poor alike.
Cutting Corporation Tax encourages investment. As the Chancellor said last year, reducing the headline rate signals that we are committed to creating a competitive environment for business.
Last year’s Budget announced that the Government will reduce the main rate of corporation tax to 24%. This year’s Budget announced a further 1% cut on top of that. Reducing Corporation Tax to 23% by 2014. The lowest rate in the G7 and the 5th lowest in the G20.
We are also making changes to reflect the realities faced by multinational companies.
The ownership of UK businesses has become more internationally diverse and a competitive tax system should recognise this.
And central to doing so is a move towards a more territorial system of taxation.
That is why we have taken steps to reform the taxation of foreign branches, introducing an opt-in exemption from corporate tax for the profits of foreign branches of UK companies.
And why, we are also taking action to improve the Controlled Foreign Company (CFC) anti-avoidance rules. These rules are important to protect against the artificial diversion of profits to low tax jurisdictions. But many of you have been loud and clear that the UK’s current rules, having been in place since 1984, have become outdated. Many businesses have told us that the rules are a direct reason why they have chosen to leave the UK.
Two weeks ago we published a consultation document on CFC reform, which outlines detailed proposals for new CFC rules to be introduced in 2012.
I also said in my speech last year that we would be looking at ways in which the tax system could better support R&D and Innovation.
As such, we have announced that from April 2013 we are introducing a Patent Box which will allow companies to apply a 10% rate of corporation tax on profits attributed to patents.
In similar spirit, we are committed to simplifying and increasing the support to business through the R&D tax credits. From our own evaluation we know that tax relief for R&D expenditure results in as much as £3 in extra expenditure for every £1 of tax foregone.
These are direct changes that we have made to date to boost our tax competitiveness. They are significant and targeted changes to ensure that we not only have a low headline rate but also a low effective rate especially for the most geographically mobile businesses.
Of course, today this centre released its paper assessing UK competitiveness. And as ever, it provides a further helpful contribution to the policy debate.
It’s encouraging to see that the report’s bold attempt at international benchmarking supports our argument that over the last decade UK competitiveness has indeed slipped. And the report also agrees that this Government’s programme of reforms will enhance the UK’s competitiveness ranking…
However, I believe that the report’s consequential focus on capital allowances is misleading. Even if the analysis could have taken into account the short-life assets measure announced in this year’s Budget, such a focus would be far too narrow. Our corporate tax reforms in the round will result in unambiguous reductions in marginal rates.
And, as the report acknowledges, it does not take into account a significant range of other tax factors that I have mentioned today…CFC reform, R&D tax credits, or indeed the reduction in the small profits rate.
Certainty and predictability
In fact competitiveness is also about much more than even this.
It is also about how businesses experience tax in the UK - including how businesses experience the tax policy making process.
And that’s why our second principle of tax reform is that tax policy should be certain and predictable.
Because businesses tell us they need certainty almost above all else. The winds of media opinion.
We take this concern absolutely seriously, and we set out our approach in our discussion document Tax Making: A New Approach, published alongside last year’s Budget. We want to build a framework for making law that is:
- Predictable not haphazard
- Stable not disorderly
- Transparent not opaque
Building this will take time, but we have already made substantial progress rooted in extensive engagement with outside parties on how to do so. I am grateful for the contribution that many of you here today have made.
A good example of this in action was the consultation on the draft Finance Bill clauses published in December last year. HMRC received over 250 substantive comments on the draft clauses, and a number of these were revised before Finance Bill 2011 was introduced.
This approach is unprecedented. We also currently have over 30 consultations planned or in motion and as the Chartered Institute of Taxation has said, this is ‘a big step towards improving the way UK tax law is made.’
I recognise that the Government’s changes to the oil tax charge or the changes to the bank levy are believed by some to undermine the drive to greater certainty. However, as I sought to make clear last year the Government will always need to retain some flexibility on tax policy. We have sought to be clear that generally the Government can’t and won’t consult on rate changes or where consultation would otherwise present a risk to the Exchequer.
Now, for many businesses, stability and simplicity go hand in hand.
And that leads me to our progress against the third principle - making taxes simpler and easy to comply with.
When we came to office we inherited the longest tax code in the world. Businesses - particularly smaller businesses complained of being tangled in, and confused by, a web of reliefs and exemptions.
We have got the Office of Tax Simplification up and running to lead a determined effort to simplify the tax system. This March it produced its review of tax reliefs…having found over a 1000 in total.
And following this first report we announced the abolition of 43 tax reliefs.
The OTS initial phase of work also raised the profile of complexities associated with income tax and National Insurance - and in particular that administering these taxes can impose considerable cost and complexity on employers. Greater integration of the operation of the two systems has the potential to reduce burdens, remove distortions and improve fairness. Following announcements at the Budget, today we are issuing our Call for Evidence on the issue. I encourage you all to engage and contribute your thoughts in that process.
We have also asked the OTS to turn their attention to other aspects of how small businesses experiences of tax administration. Today we are confirming the scope of that work, which will include a look at the potential for a flat rate tax scheme for the smallest unincorporated businesses.
And we are announcing the other reviews that will make up the OTS’s second phase of work: on pensioner tax, and on employee share schemes. These reviews will report back to the Government ahead of Budget 2012 and help us continue the work of making life easier for taxpayers who just want to comply with their obligations and pay their taxes.
As part of that same effort we want to make the tax system more accessible and transparent.
The Government has taken huge strides on improving transparency on the spending side. We have published more data on spending than any previous Government, and we are leading the way internationally to open up the Government’s books and public services online for the public.
But, over time, we need to do the same on the revenue collection side.
HMRC are already capitalising on digital technology to deliver simpler services to business. HMRC already has over 250 services live online, receives more than 70 million returns online, but we need to go further. From next Spring we will make registering for business tax a single online process with a new Registration Wizard, a new Tax Dashboard enabling businesses to see simply and clearly their tax position with HMRC.
In my view, it would be great to get to a similar position for personal taxes. We will say more later this year about how we want to make it easier for taxpayers to see exactly how much tax they pay.
This year, we have also taken difficult decisions to ensure we embed a fair tax system - and the system as a whole retains public support and legitimacy.
Decisions that at times necessarily involve a trade off with competitiveness.
Firstly, the bank levy.
We believe it’s right that during difficult times, steps are taken to ensure that banks make a full and fair contribution. Equally, the Government remains committed to maintaining the UK’s presence as a leading, global centre for financial services
The Bank levy gets this balance right - reflecting the risks the sector as a whole poses to the wider economy.
Similarly, the 50p rate of tax demonstrates the same commitment to sharing the burden for reducing the deficit. But we also understand that high marginal tax rates are not good for the UK. We believe that making this permanent would do lasting damage to the UK’s economy and the Chancellor has already made it clear that this is a temporary measure.
A fair tax system also ensures that businesses and people pay what they owe. The Government is committed to strengthening our defences against tax avoidance, and where we see avoidance we will crack down on it.
This goes hand in glove with the work HMRC are undertaking with business to resolve complex disputes and uncertainty on tax liabilities.
Of course I’m well aware that working with the tax authorities can sometimes be a tortuous affair. We know that people inevitably feel HMRC’s deep commitment to getting in the revenue can sometimes go a bit far…There was the case last month where a local farmer in North Devon had been using his tractor to do a good turn and mow the local football pitch …using though his red-diesel tractor. Strictly speaking that can only be used for agricultural purposes and so this proved too much for one HMRC official who issued an on the spot fine for £250!
But HMRC does a good job in a difficult task of great importance for the country. And credit where credit’s due, HMRC have made huge efforts to change the culture of its working relationships.
Only last week the National Audit Office produced its report into HMRC’s High Risk Corporates Programme. And they commended the programme’s success in reducing the backlog of outstanding tax issues and its contribution to reducing avoidance activities by major companies. The NAO estimated that the programme had brought in a yield of over £9bn to March 2011.
For the Government’s part we believe that while regulation and policing will always be important in tackling tax avoidance, it must be right that ultimately the most effective system is one that is based on trust and responsibility.
That is important not only on grounds of fairness but as the OECD has pointed out this approach to tax administration is increasingly important in terms of tax competitiveness.
The emphasis on trust and responsibility is why I am a strong supporter to the Code of Practice on Taxation for banks. When we came to Government only 2 of the top 15 banks were signed up to this, but by November last year, all the major banks had signed up.
By adopting the code, banks commit themselves not to use artificial schemes to avoid tax. The Code is a commitment to respect the spirit, not just the letter of the law.
And this leads me to observe a tension at the heart of my experiences over the last year.
On the one hand the economic case for reducing burdens on business is very strong. On the other the public’s tolerance for what they perceive as abusive behaviour has - understandably - never been lower
It falls to all of us to try to resolve this tension.
And business’ role is in being more upfront and transparent in setting out the tax it pays and in engaging in the debate about why we need a more competitive tax system.
Just as transparency can lead to greater tax certainty, and an earlier resolution of tax issues, in time I believe it can lead to a more informed public debate on tax.
It’s impossible to miss the intense scrutiny that tax affairs have come under in recent years by pressure groups and newspapers. Across the board, the public expect greater openness.
That’s not going to go away, And given that I believe it is in your long term interests to engage with this discussion. To set out and explain your position. To open yourselves to greater scrutiny and to more robustly defend the essential contribution that you make to this country, both in terms of your contributions to the economy and overall tax revenues.
Yes this may be an uncomfortable experience for some. But it is an opportunity for most…an opportunity to address the myths and confusion on the tax debate, and put yourselves on the front foot.
In the long run positive engagement and transparency will result in a simpler, more efficient, and less costly tax system to the benefit of everyone.
Of course, as a Government Minister, it is a key part of my job to explain why we are prioritising cuts in the corporation tax rate.
But it will be easier to win this debate if we have the vocal support of our nation’s wealth creators. Acknowledging the difficult balance we have to strike but recognising the bold decisions we have taken and publicly giving us credit for it.
Over the past year I have sometimes felt that business can be hesitant to engage in these debates and detected a lack of confidence in the persuasiveness to the public of the arguments used by business in this area.
But I am also reminded of comments made about the 2010 General Election campaign by Tony Blair in his memoirs. From the perspective of the Labour Party, he wrote about how the loss of support from business leaders by 2010 meant a loss of economic credibility. And he made the striking observation: ‘When the Tories brought out 30 or so chief executives who were against the National Insurance rise, I knew the game was up’.
I stress that I am not calling for businesses to engage in a party political debate. Indeed, I am keen to build a cross-party consensus on the need for a competitive tax system. But I do think that business can do more to make it easier for us to pursue pro-growth tax policies.
We have achieved much to date. And we have achieved this through our engagement with businesses and tax experts like yourselves.
Of course, we have much further to go to realise our ambition to create the most competitive tax system in the G20. We will continue to drive this ambition and see through the changes I have discussed today.
But we can’t reach this goal on our own. Achieving this ambition will require the work, ideas and co-operation of all of you here today. And I challenge you and the wider business community to play your own part in driving towards a more transparent, simpler, fairer and competitive system.
And I very much look forward to working with you in this task.