HAMISH MCRAE: Taxation urgently needs to be rethought
The cabinet wonders why the economy is growing so slowly. It should look in the mirror because it is curiously naive about the way its own actions have unintended consequences for growth.
Jeremy Hunt has been preoccupied with the de-banking scandal, an overreaction to his own money laundering legislation in 2017 that pressured banks to be much more careful about customers they took on. But given some leeway, the chancellor should rethink corporate taxation.
There is one acute issue that we have highlighted in this paper: the Treasury’s decision to end the VAT rebate for visitors who purchase items here.
There has been a huge wave of protest from businesses big and small about the impact on the economy, not only by discouraging visitors from buying goods in the UK, but also by deterring tourists from coming here.
Now the Center for Economics and Business Research has provided some figures on costs. It concludes that abolishing duty-free shopping has cut gross domestic product by £10.7bn and discouraged two million people from coming to the UK.
Shopping: Reintroducing tax-free shopping, rather than reducing revenue, would increase tax revenue
Reintroducing tax-free shopping, rather than reducing revenue, would increase tax revenue. The additional tax revenue would be greater than the VAT deduction. The CEBR calculates that the government would have gained £2bn in total taxes by 2022 and £2.3bn this year.
You can argue about the details of the numbers, but the assumptions seem pretty solid to me.
So it seems overwhelmingly likely that ending the rebates will have the exact opposite effect of the intended effect. I see the political appeal of ending a tax break for foreigners, but if they go elsewhere, it’s not very smart. In terms of public finances, the VAT rebate scheme is small stuff, but given the slow growth of the economy, an extra £10bn of GDP would be more than welcome.
A much bigger problem is corporate tax. It is the fourth largest tax and raised some £80 billion last year. Raising the rate from 19 percent to 25 percent seems a politically attractive way to generate revenue, were it not for the fact that businesses, like tourists, can go elsewhere.
As far as I can tell, there has only been one high-profile example to date of a company making a significant investment in a lower tax regime: AstraZeneca established a £280 million factory in Ireland, where the corporate tax rate is 12.5 per cent.
But AstraZeneca is the UK’s largest company by market capitalization and explicitly cited taxation as the reason for the decision. There will be many other companies that don’t want to make a fuss but quietly want to invest elsewhere.
Wisely, Ireland has kept its promise to keep corporate taxes low. It is under pressure to raise the rate to 15 percent, but it looks like it will do so as a 2.5 percent additional tax on large companies, allowing it to keep the headline figure at 12.5 percent – the rate it it has existed since 2003. With this we send a signal to the business community: we are committed to low corporate tax. Ireland understands how business people think.
The UK, on the other hand, has been everywhere. There was a push to cut corporate tax, with the chancellor gearing up for the lowest rate in the G7, to 19 percent. Then, scared, we were in a mess and increased it to 25 percent.
What does that do to the US executives who have persuaded their boards to invest in the UK on the grounds of low corporate taxation? It chops them off at the knees and they will do their very best not to trust a British government again.
I am afraid that Rishi Sunak, the chancellor at the time, was completely unaware of the damage he was doing.
Actually, there are many loopholes in our corporate tax system, especially the excessive one where foreign owners overload their UK operations with debt and take the money in interest payments.
That depresses profits and in the end they pay little or no corporation tax. If we need more corporate income, that’s a practice that needs to be fought, rather than hitting companies with conventional financial structures.
It’s hard to say whether the UK would gain higher overall tax revenue from lower overall corporate tax rates in the long run, but that’s the calculation for the Treasury to make.
If we had ministers and civil servants who knew better how the world works, we would make less harmful decisions – and fewer downright stupid decisions, such as ending the VAT credit for tourists.
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