I was very pleased to be invited to speak at this event, which I know forms part of Politeia’s Recovery and Growth economic series.
‘Recovery and growth’ are, of course, two of the biggest challenges facing the UK. And as a Government, as a country, we cannot afford to be complacent about our economic position in the world.
We are in a global race. This race pits us against a number of existing and new competitors and, like any competition, there will be winners and there will be losers. There will be countries that continue to move towards ever greater prosperity, and there will be countries that see their economic outlook, and in turn their standard of living, decline.
As Government, it’s our role to do what we can to ensure that the UK falls into the former category. That our economy is stable once again, and that our businesses have the right environment to compete in the 21st century. Some factors in achieving this are beyond our control. The economic circumstances we inherited. Commodity prices. The Eurozone crisis.
But other factors are within our control and, within the strict fiscal constraints in which we have to operate, we have to make sure that we pull all the levers available to us to achieve growth. This is why we are reducing burdensome regulation - reforming planning and employment law, modernising our infrastructure, improving our education system, increasing apprenticeships and reforming welfare.
But one of the biggest levers we have access to, and the lever that I would like to talk about today, is tax.
I know that this Government’s tax policy has been at the centre of some very lively debate, and this is a debate that we welcome. Allister has played a very large role in this debate, and it is absolutely right that organisations like Politeia and the Taxpayers Alliance have joined the discussion too, and made calls for radical reforms. I welcome a debate not only on how much we tax but what we tax.
But what I want to do this evening is take head-on the critique that this Government has failed to make significant supply-side reforms to our tax system and, in particular, our corporation tax system. I will make the case that this Government, when compared to both its international competitors, and its historic predecessors, has embarked on some radical tax reform in challenging circumstances.
We inherited the largest deficit since the Second World War, but the Government is taking decisive action to return the public finances to a sustainable path. Spending cuts will constitute 79 per cent of the total fiscal consolidation by 2015/16. Total spending, as a proportion of GDP, is forecast to fall from 47.4 per cent in 2009-10 to 40.9 per cent in 2016-17. Nonetheless, we operate in an environment where a competitive and efficient tax system is essential, but with limited flexibility in the public finances.
So how have we responded? Put simply, this Government wants to establish the most competitive tax system in the G20. Not only to attract businesses here, but also to help the enterprise that already exists on these shores.
We set out our plans in the Corporate Tax Roadmap, and have worked hard, together with business, to introduce a substantial package of corporate tax reforms to make the UK more attractive as a place to invest.
We have cut corporation tax from an inherited rate of 28%, to 23% from this April, and then 21% from April 2014. We have reformed the Controlled Foreign Companies tax regime, which is seeing organisations move their head offices to, rather than away from, the UK. We are introducing the patent box and making our R&D tax credit regime more generous; ensuring that the UK is an attractive place to invest for innovation. And we have increased the rate of VAT, as taxing consumption is much less damaging to businesses than taxing employment or profit.
We’ve managed to deliver all these changes in a time of austerity, and I know that other countries have been envious of what we’ve managed to achieve.
My focus this evening is on business tax, but we cannot ignore personal tax. The top rate of 50 per cent, as inherited from Labour, was one of the highest in the developed world. It was supposedly implemented to raise greater revenue and address the country’s deficit, but ended up having the opposite effect.
It only served to discourage talented individuals from working in the UK, it raised little (if anything) in revenue and - most worryingly - it sent a signal to businesses and entrepreneurs (the exact people that could bring jobs and growth and revenue to our country) that Britain was not open for business. And that is why this April we will be reducing that rate to 45p - a level which is lower than Japan, Germany, Canada and Australia.
This was a politically brave move, it isn’t one that will make us popular with some people, but I am certain it sends the right message to high earning individuals and strengthens our prospects for growth.
A better tax environment for business leaders and for businesses though, isn’t just about the policies we introduce. It’s about making sure that we engage with the sector when making these policies, and that we give them advanced warning of any major changes.
This is why, for example, we published the majority of Finance Bill clauses in draft, for greater scrutiny, at least 3 months before introduction of the Bill. Businesses welcomed this opportunity to engage as early as possible, and this has resulted in better quality tax law. We will continue that engagement. In fact, this greater level of engagement has proven beneficial with regards to collecting taxes too.
The complexity of many large companies’ tax cases, and the large amounts involved, make engagement the most cost-effective way to improve tax compliance and support businesses at the same time. So for the largest two thousand corporations in the UK, we now have dedicated HMRC customer relationship managers.
This strategy has been very successful. By supporting the organisations and ensuring rigorous compliance they garnered positive feedback from business, while also helping HMRC to maximise revenues by recovering the right amount of tax.
But HMRC can only collect the tax that is due under the law. And the law in this area is not simply a domestic matter. As with most major economies, the tax system in the UK is consistent with internationally agreed OECD guidelines.
There are international concerns over whether the current corporate tax rules manage to properly capture the profits generated by multinational companies in the jurisdictions where their economic activity is located. And it’s understandable that not only citizens, but the vast majority of businesses will feel aggrieved if some companies aren’t seen to be paying their fair share of tax.
This is a complex area, but any reform will require concerted international action. It is an issue that all countries are facing, and politicians will continue to work with each other to develop the appropriate international solutions.
We are also working hard to simplify the tax system on our shores. We established the Office of Tax Simplification - or OTS - in 2010 to provide independent advice on simplifying the UK tax system, and we have implemented a number of their recommendations.
But let me address one argument that is sometimes made - that ‘if only we simplified the tax system, we wouldn’t see the avoidance that has featured so prominently in recent months’. There is an element of truth in this. Complexity can provide the opportunity for avoidance.
But it is also the case that complex behaviour can take advantage of simplicity in the tax system. Many of the high profile cases that have attracted media attention have had little to do with complexity within our tax system.
I believe we have to look at the complex interaction between the tax systems of different countries and an international tax architecture that has not kept pace with the complex modern global business environment. In other cases, relatively simple tax rules have been exploited by complex and contrived behaviour. To paraphrase Einstein, a tax system has to be as simple as possible. But no simpler.
This has been something of a whistle stop tour through this Government’s actions on tax, but hopefully it provides some kind of overview of the large number of actions we’ve taken, and changes we’ve implemented, to reduce the tax burden on businesses. I believe that these have been radical reforms. And I’d like to spend the last few moments explaining why, by comparing the actions that this Government has taken against those of both our international competitors, and our political predecessors.
With regards to international comparisons, I believe that our approach has been vindicated, and that the UK is increasingly becoming known as a competitive nation for investment. We have a considerably more competitive CT rate than the US at 40%, France at 33.33% and Germany at 29%.
But perhaps most striking was the recent survey by KPMG, asking tax professionals to rate the three countries they rated as most attractive from a tax perspective. In 2009, the UK featured in only 16% of responses. By 2012, this number had increased to 72%. In three years, we had moved from being an also-ran to the number 1 spot as the most competitive tax regime in the world, ahead of the Netherlands in second and Ireland in third.
The report stated that a low effective tax rate remains the number one tax factor when assessing the competitiveness of a country’s tax system, but that stability, simplicity and advanced warning of major changes are also of high importance. These are all factors this Government has worked hard to enhance, and the report is a reflection of the way this Government has rebalanced our tax regime from being a business hindrance to a business facilitator.
So when some complain that we have not taken the radical steps necessary to make our tax system competitive, I would say - ask the people who deal with the tax system for a living, who deal with different tax jurisdictions on a day to day basis. KPMG did just that. And the answer is clear - and positive.
Closer to home though, let us compare the radicalism of the current Government, in terms of cutting business taxes, with the Governments of Mrs Thatcher. Like many in this room, I look back with admiration to a Government that came to power at a time when the country faced severe economic difficulties. Our borrowing high, our competitiveness in decline, the Thatcher Government pursued a number of radical reforms which transformed our country for the better.
But in terms of tax reform, how do we compare?
A comparison with the first Thatcher Government - with Sir Geoffrey Howe as Chancellor - draws up some interesting parallels. Both Governments have to be described as tax reformers, as opposed to tax cutters. The deficit in 1979 was 4.1% of GDP, lower than the 11.2% we inherited but, like the current Government, Sir Geoffrey’s focus was on reducing borrowing. For example, the overall tax burden was sharply increased in the 1981 Budget, in the teeth of a recession. However, within the constraints in place, both Governments have engaged in tax reform. Both Governments increased VAT and cut income tax, predominantly by raising the personal allowance.
Turning to business tax, in the early ’80s, further revenue was found from the Petroleum Revenue Tax and a windfall tax on bank deposits. A comparison can be made with higher taxes on North Sea Oil and the Bank Levy. But if we ignore all those taxes, we see that only minor changes were made in business taxes. In current prices, the value of the net change in the corporation tax burden was less than £1bn per year.
In contrast, the total fiscal impact of changes to the corporation tax regime introduced by George Osborne, excluding the North Sea, amount to a reduction of around £7 billion per year by 2015/16.
The current Government’s record also stands comparison to the second Thatcher Government from 1983 to 1987. With the advantages of benign economic conditions (a just reward for the courage shown in the first term), a huge Parliamentary majority and a Chancellor - Nigel Lawson - with a close interest in tax reform, this Government has a deserved reputation for radicalism in this area.
The 1984 Budget saw the announcement of substantial reductions in the corporation tax rate, from 52% to 35%. However, it should be remembered that this was funded by making capital allowances and other reliefs less generous. That is not to say that the reforms were wrong - they were not, they have stood the test of time and future Governments followed in this direction. But this meant that the net corporation tax burden was reduced by less than £1bn per year in today’s prices for the 1983 to 1987 Parliament, as with the preceding Parliament.
This once again shows the radicalism of this Government’s equivalent reduction by £7billion a year by the end of this Parliament.
It is true, of course, that different times require different responses. Capital is more mobile now than it was in the 1980s. Consequently, competition is greater and Governments have to work harder to attract investment than was once the case. Nonetheless, it is clear that not just in international terms but also in historical terms, this Government has delivered substantial tax reforms, making our tax system much more competitive.
But this is not to suggest that we will become complacent, nor that we think our work is done. The nature of a global race is that one cannot be static. But with regards to tax reform, I believe that we have made strong progress towards our goal of the most competitive tax system in the G20.
That we are creating a simpler, competitive, well-enforced tax structure, which will help businesses to help the country back into economic prosperity. That we are putting in place the conditions for recovery and growth.