David Gauke was elected to the House of Commons in 2005 and quickly found his way onto the Treasury Select Committee. After the Conservatives won last year’s election, Gauke was appointed Exchequer Secretary to the Treasury, working closely on the detail of tax policy to support the new government’s objectives of dealing with the UK’s debt and securing a private sector-led recovery. Gauke defends his record over the last year in pursuit of these goals, drawing on his background as he looks ahead to the government’s next tasks.
International Tax Review: How do you feel your background has prepared you for working on government tax policy?
David Gauke: I shadowed my current ministerial role for three years before we came to office last year. Of course, when you are in government, you have the civil service to call on for advice and information, but in opposition you don’t. When I was in opposition and shadowing this role, I greatly benefited from hearing industry views. This has informed my approach since coming to office and I meet regularly with tax professionals and representative bodies. My familiarity with industry issues and the concerns of tax professionals and business have helped shape the Government’s priorities as we work towards improving the tax system.
Before being appointed as a shadow Minister in 2007, I was a member of the Treasury Select Committee and had served as a backbencher on a Finance Bill committee.
I also think it helps having a legal background, though not one specialising in tax, in trying to grasp some of the more technical issues.
ITR: What have been the greatest tax challenges you’ve faced in the last year and how have you overcome them?
DG: When we came to office we were faced with the enormous challenge of restoring Britain's worst public finances in peacetime history and securing a private sector-led recovery. As part of that, we recognised feedback from business that over recent years the UK tax system had ceased to be the asset it once was. So the real challenge for me coming into this job was to show that Britain has an attractive tax system and is open for business.
In Britain, business has always been at its best as a global player, playing to our strengths and following our instincts as a free-trading, outward-looking economy. Given our history and culture, we should be well placed to benefit from globalisation. But to do so means attracting business from abroad and making Britain a place where people choose to do business and choose to locate. We need to demonstrate that business from all around the world is welcome in Britain.
It was clear to us coming into office that it is only by being competitive and attracting investment that we can secure economic growth, rises in living standards and the funding of public services for the long term. Making our tax system more competitive in a broader sense means also reducing the harmful effects that taxes can have. Where we can - where it is consistent with fairness and our other policy objectives - we must reduce the taxes that distort economic choices.
In response to the challenge of turning this situation round, we’ve embarked on a programme of corporate tax reform, the strategy for which we published last November. The UK used to be seen as very competitive in this area. In 1997 our corporation tax main rate was the tenth lowest among the current EU27 countries. Over time other countries have overtaken us and we now sit at twentieth. As part of this we have started to cut the main rate by 2% this year and by 1% per year after that so that it will reduce to 23% by 2014. This will give us the lowest rate of any major Western economy, one of the most competitive rates in the G20, and the lowest rate this country has ever known.
But lowering the main rate alone is not enough, we are supporting this with a raft of measures that will increase the UK’s attractiveness as a place to set up and grow a business: CFCs reform, the Patent Box and R&D tax credits.
ITR: With the public concerned about cuts to public services and rising VAT, is now really the time to cut taxes for companies?
DG: This is something that I am often asked and I am always happy to tackle the misconception.
We need our economy to grow through a private sector-led recovery and our tax policy must support this objective. I think the reason that people believe we can balance the books at the expense of British business is that often large companies are seen as being faceless and outside society. They’re not people, they don’t have families, and surely no-one will suffer if you tax them a little bit more. In fact, it is impossible to separate business from society.
Of course businesses aren’t people, but higher business taxes will ultimately be paid by people; a combination of employees, with lower wages and salaries; consumers, through higher prices; or shareholders, with lower dividends. And in an open economy, such as ours, it will probably be the employee who loses out.
So we don’t think that raising business taxes is in anyone’s interest. In reality, we need lower corporation tax so that we can make our tax system competitive again. It is by doing this that we will retain companies that are already here, encourage them to invest, and attract investment to Britain.
That’s why we cut corporation tax to 26% at this Budget and why we will continue to cut it by 1% every year for the next three until we reach 23%, one of the most competitive rates in the G20 and, as I mentioned earlier, the lowest rate this country has ever seen.
ITR: How would you respond to critics of this policy who might say it is ideological, rather than about encouraging growth?
DG: This is about creating the right conditions for business investment and growth. The strength of the private sector is critical to the economic recovery and improving the competitiveness of the UK tax system will benefit both large and small businesses across the economy. Furthermore, in a world of increasingly mobile capital, business taxes are an important determinant of the attractiveness of a country to foreign investment.
There is a high degree of consensus that corporate tax has a strong negative impact on GDP relative to yield and compares unfavourably against other taxes. For instance, the OECD's analysis shows that it has a worse impact on growth per pound raised than other taxes.
ITR: What are your priorities in tax for the next year?
DG: At Budget this year, the Chancellor set out the Government’s principles for the tax system. These are that:
taxes should be efficient and support growth;
taxes should be certain and predictable;
taxes should be simple to understand and easy to comply with; and
the tax system should be fair, reward work, support aspiration and ask the most from those who can most afford it.
I am focused on advancing reform in line with these principles.
This includes continuing the valuable work that has already begun on simplifying the tax system. The OTS has made a good start and has raised some interesting and sometimes challenging issues for our consideration. However, there is some way to go before we untangle the mess that was the system we inherited. But this is not just about reforming existing tax law; these principles also apply to how we make new ones. I am committed to ensuring that in future we have a more stable and certain approach to making tax policy.
Finally, my main priority has to be to continue to drive forward the Government’s work on corporate tax reforms – reduction of the main rate of corporation tax, improvements to the Patent Box and R&D tax credits and reforms to CFCs and foreign branch taxation. It is through this work that we will move towards a world where the UK’s tax system creates one of the best places in the world for business. This is how we will drive the private sector recovery.
ITR: The European Commission has released its proposals for a Common Consolidated Corporate Tax Base. Is Britain likely to join?
DG: The UK will not agree to any proposal that would jeopardise our ability to shape our own tax policy and stop us from achieving our objective of creating the most competitive corporate tax regime in the G20. We believe it remains important that member states retain the flexibility to shape their tax policy to suit their own economic circumstances and compete in a global environment.
We have concerns about the increased costs to tax administrations associated with running two separate tax systems. We also think that the CCCTB could result in an increase in complexity and compliance costs, placing burdens on businesses. One obvious concern is that the Commission’s impact assessment shows that the proposal would have a largely negative short-term impact. It has been clear from the discussions that there are many questions that need to be addressed concerning the substance of the proposal and its overall effects.
ITR: What progress is being made on the General Anti-Avoidance Rule?
DG: We were clear when we came into government that tax avoidance is an issue and one that we needed to tackle in a strategic way. The work on the General Anti-Avoidance Rule (GAAR) is part of our strategy on this.
In December last year I asked Graham Aaronson QC to lead a study into a GAAR and he put a committee of tax experts together. Their role is to look at whether the introduction of a GAAR could deter and counter tax avoidance in a fair way, while providing certainty for business. However, this would need to be balanced with ensuring that such a rule wouldn’t adversely affect the attractiveness of our tax regime to business. I also asked the study to take into account how much a GAAR would be likely to cost businesses and HMRC.
The committee is due to report back to me at the end of October with its conclusions, which I will then consider carefully. We wouldn’t bring in a GAAR without a full public consultation process, but this will depend on the study’s findings.
ITR: Is tax simplification about cutting the number of pages in the tax code, or making it simpler to understand?
DG: It’s a bit of both. I’m pleased that the abolition of 43 tax reliefs will lead to a reduction of the tax code by 100 pages, but of course there is more to the issue of simplification than that. We think it’s really important that people and businesses understand the tax they pay.
As well as taking steps to simplify the system, we are committed to improving the way we make tax policy. As the Chancellor outlined in his Budget speech – the tax system should be certain and predictable as well as simple to understand and easy to comply with. We will be a Government of fewer, better thought out reforms; one that engages business throughout policy development; and one that places a greater emphasis on simplification.
