Tax Task Force delivers findings

Radical overhaul of the UK's corporate tax system is needed

A radical overhaul of the UK's corporate tax system is needed urgently if the country is to regain its status as an internationally competitive location, a new report argues from the CBI, the UK's leading business organisation that speaks for some 240,000 businesses employing around a third of the private sector workforce.

The CBI's independent Tax Task Force has spent nine months collating intelligence and conducting detailed international research to produce a long-term vision for the UK tax system.

Its report, 'UK business tax: a compelling case for change', reveals that the UK has now reached a tipping point. The ever rising business tax burden and the failure of the tax system to respond to increasingly global business activity is creating a corporate tax system which is unsustainable in the long-term.

To tackle this, the report proposes a root and branch overhaul of the UK corporate tax system, with a wide-ranging programme of reform to include:

A headline corporation tax rate of 18 per cent within eight years, with the cut more than paying for itself over time through increased economic activity.

Tax calculated on the basis of existing company accounts, scrapping the current system where firms have to maintain two sets of books. Allow all genuine business expenses to be properly recognised and replace complicated capital allowances with accounts-based depreciation.

A 'no surprises' legislative and administrative process, with more time allowed for proper consultation on tax proposals, better resourced and effective parliamentary scrutiny, and limited budget secrecy.

A non-political, independent tax law commission, established to monitor and review existing tax law and suggest improvements.

Proactive UK government action on all cross border tax issues, co-ordinating with other governments, including on treaties to assign primary taxing rights.

A simplified and improved tax system to stimulate the growth of small and medium-sized enterprises (SMEs), with an exemption from rules intended for multinationals, a small firms corporation tax rate brought back rapidly to 18 per cent within three years and the SME investment allowance doubled to £100,000.

The report makes clear that the advantages the UK gained from cuts to corporation tax during the 1980s and late 1990s have been lost. Other countries have taken bold steps to cut their rate: the Netherlands and Portugal to 25 per cent and Ireland is famously at 12.5 per cent. The UK's rate meanwhile has lagged and is now higher than the OECD average of 26.8 per cent, even after this April's cut from 30 per cent to 28 per cent.

In terms of the burden of corporate tax, the UK's effective average tax rate is now the eighth highest in the OECD. Nor is corporation tax the only burden; companies pay £1 in other taxes for every £1 of corporation tax. According to the World Economic Forum, the UK has slipped from 4th place in 1998 to 15th in 2003 on the Global Competitiveness Index.

New analysis conducted for the report supports the argument that cutting corporation tax can actually boost rather than reduce tax receipts over the long term, as has been the experience in Ireland. Using US-style 'dynamic analysis', the figures show a net cost to the Exchequer, varying from £0.3bn to £4.2bn, in each of the first seven years of the CBI's proposed reform. But from then on, government revenues would be boosted by an average of £15.6bn each year, over years 8 to 12, rising to £26bn in year 12.

The way business works has changed dramatically, says the task force. Twice the number of multinationals operate in the world today as did in 1990, an estimated 77,000 with a network of around 866,000 subsidiaries. Small firms are now just as likely to be global, with new technology making it ever easier for them.

Complexity in the tax system makes it harder for business to plan ahead and pay its taxes. The average number of pages contained in the Finance Bill rose from 153 pages during 1980-4 to 312 pages from 1995-9 and 463 pages between 2000-7. In 2007, Tolley's Yellow Tax book totalled 9,866 pages, 4000 more than in 2001. So it is no surprise that the UK now has the longest tax code in the world.

A more complex tax system creates uncertainty, and this has led to charges of unfair tax 'avoidance' made against firms even when planning arrangements are legitimate and purely commercial. Smaller firms suffer disproportionately from increased complexity because they cannot afford the same level of in-house resource or external advice as many larger firms.

Levels and bases of, and reliefs from, taxation are subject to change.