As more businesses take steps to move their tax residence from the UK and as many workers in the financial sector leave these shores because of high levels of personal tax, the UK Chancellor must urgently review the competitiveness of the UK tax system or risk prolonging the recession.

Almost all commentators, economists and tax experts agree that raising tax rates usually results in a reduction in the amount of money that flows into government. Whilst the UK coalition government is generally heading in the right direction on tax policy, it does have to bear this in mind if it wants to stem the exodus of business and attract new investment to the UK.

I am sure George Osborne knows this too but he is somewhat hamstrung by political concerns. The LibDems are a high tax party and the Conservatives are keenly aware that if they reduce taxes they will be accused of favouring the rich at the expense of the poor particularly in the present economic crisis.

However unless the Conservatives can deal with this issue there is a real danger that the UK economy will dip back into recession and even harsher cuts may be on the cards.

The facts he has to consider are:

  1. The UK’s corporation tax rate of 28 per cent means that 18 out of 31 OECD countries have lower rates. Even the Government’s planned rate of 24 per cent will not raise the UK up the list very much.
  2. Highly skilled and highly mobile workers (and these are not found just in the financial sector) look for low marginal tax rates. The 40 per cent rate is tolerable, although it does apply at a relatively low income level. The 50 per cent rate is not.
  3. Employers’ National Insurance Contributions are a massive burden on businesses, far higher than corporation tax.
  4. The consultation on reforms to international taxation, including the controlled foreign companies (CFCs) regime and the taxation of branches, seems to be going well but there is a danger that savings here will be outweighed by other changes such as new restrictions on the deductibility of interest.

Recent company departures and planned departures from the UK are an urgent wake-up call for the coalition government. The UK must raise its game on tax competitiveness, or lose investment, jobs and tax revenue. Countries are just like supermarkets in this respect: the competitive ones win, the others lose out.

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Category: Taxation


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