Philip Gent is a Chartered Accountant and Chartered Tax Adviser. He Chairs the CPF of Woking Conservative Association.
Capital investment, human talent, and innovation activity are extremely mobile and impact positively on productivity, economic growth and public finances. A Conservative government should seek to ensure that tax strategy and policy is consistently developed to contribute to ensuring that the UK is seen internationally as an attractive place to invest, innovate, work, and live.
It is widely recognised that tax structures with greater dependence on corporate and personal taxation can discourage economic growth, and countries which rely more on consumption and property taxes have greater GDP per capita ratios. This is because the distortive impact of taxation on production is reduced. Efficient tax structures are conducive to economic growth and strategically should be given a similar degree of prominence by government as reducing non-productive government spending and balanced budgets.
Our corporation tax system is currently not the most competitive amongst OECD countries as UK companies are generally taxed on a broader tax base and recoup the cost of capital investment over a longer period. As a result, despite the headline corporation tax rate being comparatively low, the effective corporation tax rate is actually in the median range.
The policy over many years of trading a reduced corporation tax rate for a larger tax base has led to a reduction in capital intensive industries and contributed to the worsening of regional economic performance. The planned corporation tax rate rise to 25 percent and withdrawal of the super deduction from April 2023 will see the UK fall into the lower quartile of corporation tax competitiveness amongst OECD countries as well as in relation to the recovery of capital investment.
The 6 percent corporation tax rate rise, which will apply to businesses with profits of at least £50,000, is now against a backdrop of UK business investment being 9.1 percent below pre-pandemic levels. UK foreign direct investment, already amongst the lowest in the OECD, is estimated to fall by a further 5 percent as a result.
Studies show that a 10 percent increase in the effective corporation tax rate is associated with a reduction in the ratio of investment to GDP of up to 2 percentage points. Meanwhile, a tax increase equivalent to 1 percent of GDP reduces output over the next three years by nearly 3 percent. Research looking at multinational firms’ decisions on where to invest suggests that a 1 percent increase in the effective corporation tax rate reduces the likelihood of establishing a subsidiary in an economy by 2.9 percent.
In relation to the impact on tax incentives for innovation the post-tax cash benefit will decline as a result of the corporation tax rate rise and reduce research and development funding. Additionally, as a consequence of the tax reforms to be introduced in 2023, large UK businesses will lose their competitive advantage of low cost research and development offshoring and as a result may well consider downsizing their equivalent UK operations.
Businesses fund £21 billion of the £39 billion research and development spend in the UK, performing £26 billion of the work, and support nearly 500,000 FTE roles of which 56 percent are in UK companies. There is a clear need for government to create a more competitive tax environment for our businesses to invest and perform research and development activity in the UK
That is especially as UK research and development spend, at 1.7 percent of GDP, is already well below the OECD average of 2.5 percent. The research and development spend of Germany, Japan and the US is at or above 3 percent of GDP and that of South Korea and Israel well above 4 percent and 5 percent of GDP respectively.
The current centrally dominant tax system has contributed to the deterioration of economic performance in some regions and inherently works against local place-based thinking and local policy actions. Ambitions for further devolution set out in the 2021 Levelling Up White Paper should provide an opportunity for greater devolution of tax powers rather than settling for a long-term funding plan from central government which will not help to level up productivity. Instead local government with significant devolved tax powers will help to level up productivity when incentivised to pursue growth oriented fiscal policies.
With talk of an imminent recession, the Government should reconsider its plan to increase taxation on business profits and provide additional tax incentives to overcome the cautious mindset for business investment through increased and accelerated recovery of capital investment and further encourage research and development and its commercialization in the UK for productivity gains and export led growth.