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UPDATE: UK’s main opposition party outlines tax plans

Labour, the opposition political party in the UK, will raise corporation tax if it comes to power after the next election. And Shabana Mahmood, shadow exchequer secretary to the Treasury says her party would also focus on improving tax transparency.

Ed Balls, shadow chancellor of the exchequer, laid out his proposed principles for the tax system in a speech to the London Business School this week, committing to “maintaining the most competitive corporation tax rate in the G7 while making reforms to support long-term investment and tackle tax avoidance”.

“The last Labour government left Britain with the most competitive rate of corporation tax in the G7 and we are committed to maintaining that position,” said Balls. “But unlike George Osborne [chancellor of the exchequer] we also recognise that companies are just as concerned about other elements of the business tax regime, such as capital allowances and business rates.”

Michael Devereux, director at the Oxford University Centre for Business Taxation, commented on this oddity at his organisation’s summer conference 2014 on tax competition and BEPS.

“The UK is engaging in aggressive competition,” said Devereux. “It is competing over patent income through the introduction of the Patent Box but it is not competing over capital allowances, which are less generous in the UK than in Chile.”

Balls said he would oversee a “business-friendly, but not business-as-usual”, approach to corporate taxation.

“That is why, having started and supported successive cuts in corporation tax over the past 15 years, we do not think the right priority is a further cut next year,” said Balls, adding that, instead, he would cut and then freeze business rate for more than 1.5 million business properties.

David Gauke, exchequer secretary to the Treasury – the title given to the UK’s tax minister, points out that Labour could achieve the aim of “maintaining the most competitive regime in the G20” and sill raise corporation tax to 26%, because the next lowest rate is Canada at 26.5%.

“Rarely agree with Richard Murphy [tax justice campaigner and director of Tax Research UK] but agree ‘this commitment means that Labour has got plenty of scope to increase corporation tax rates,” tweeted Gauke.

The Confederation of British Industry (CBI) is concerned about the Labour proposals.

“A competitive business tax system is crucial for future growth – and that includes an attractive headline rate of corporation tax,” said Katja Hall, CBI deputy director-general. “The best way of ensuring the recovery benefits all is through a thriving private sector and businesses of all sized will deliver this growth.”

Allowance for corporate equity

Balls also said the tax system must tackle short-termism, which he described as “an entrenched feature of the UK business environment”. To do this, and specifically to counter the “systemic bias in favour of debt finance”, he proposes examining the case for introducing an allowance for corporate equity (ACE) along similar lines to those suggested in the Mirrlees Review.

Hall reacted positively to these particular proposals.

“Tax and other measures to boost business investment, including capital allowances and equity finance will help firms of all sizes harness their potential, particularly medium-sized companies and those in the manufacturing sector,” she said. “It is also important that the tax system encourage and rewards a long-term investment focus.”

Structural changes to the tax system will also be considered as a way of incentivising long-term investment. A report on short-termism in British business, conducted by Sir George Cox, recommended a number of reforms including a lower rate of capital gains tax for long-term investors.

“This could complement an allowance for corporate equity, by making long-term investment attractive to the investor as well as to the recipient of funding,” said Balls.

Transparency

Gauke’s opposite number, Mahmood, is also keen to stress the emphasis a Labour government would place on corporate tax transparency.

“If a consensus on transparency is not possible in the BEPS project, Labour is committed to discussing with business about what the UK should do,” said Mahmood at a Mazars-organised debate at the UK House of Commons this week which was attended by International Tax Review.

Mahmood also outlined that her party wants to see increased levels of independent scrutiny of the tax system and envisages a bigger role for the National Audit Office.

“The HMRC CEO and chancellor of the exchequer should have to explain every year what they are doing to combat tax avoidance,” she added.

Mahmood dismissed the argument that public disclosure of tax information is not worthwhile because the subject matter is too complex to be understood.

“Just because we may not be able to explain to the public about the complexities of the system, doesn’t mean the tax system shouldn’t be more transparent,” said Mahmood. “The Labour Party is grappling with what figures or data could be put down on paper to explain to the public, with enough context, about what government policy is and what companies are doing.”

“Do we want to attract MNCs to the UK? How much will that cost? What benefits are there? That’s the debate we should have in the run-up to the election,” added Mahmood.


Further reading:

Catherine McKinnell plans new direction for global tax policy

Ed Miliband: UK Labour Party would raise corporation tax

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