Britain’s manufacturers have warned the government that the increasing level of tax and the complexity of the taxation system is now damaging the UK as a competitive location for manufacturing.
The warning comes with publication of a new report today by EEF, the manufacturers’ organisation, ‘Our Tax Challenge – How to address the tax burden on UK manufacturing’ which suggests alternative approaches to those aspects of the current tax system most damaging to manufacturing competitiveness. It also follows the recent announcements of a new Business Research Tax Centre at Oxford University's Said Business School and a Conservative Party Commission to look into simpler, fairer and flatter taxes.
Commenting on the report, EEF Director General, Martin Temple, said:
"Whilst government is actively promoting innovation and improved skill levels, the rising cost and complexity of business tax is preventing companies from taking full advantage of this to improve their performance.
“Our long-held competitive advantage on tax is starting to erode. The UK's tax burden has been rising while falling in many other countries, who are actively designing their tax systems to attract high value manufacturing."
According to the report:
- In 2005/6 business will pay an additional £2.2billion annually in corporation tax and an additional £5.5billion in other business related taxes following tax changes since 1997 – some of this increase has come from introducing new ‘input’ taxes on business, for example the Climate Change Levy
- Between 1997 and 2006, only a small handful of OECD countries will have seen a greater increase than the UK in their tax burden
- During the same period, the US, most large EU countries and the newly acceded members of the EU have seen their tax burdens fall
- Tax is second only to regulation as a negative influence in assessing the competitiveness of the UK as a business location
With UK manufacturing profitability falling in six of the last seven years manufacturers are hit disproportionately by increases in 'input' taxation and find it difficult to pass on increased costs to their customers. Any further increase in taxation will make it ever harder to break out of the cycle of weak profitability and low investment.
EEF argues that whilst manufacturers understand the need to invest in the UK’s infrastructure and improved public services, they also believe that in instances where tax revenues are spent inefficiently this will limit the UK’s long run growth potential and add further to the business tax bill. This highlights the importance of government delivering on promised annual efficiency gains in public spending.
Whilst some headline rates of business tax have been lowered and, welcome measures such as the R&D tax credit introduced, the overall burden has risen. While the government has acknowledged the need to cut red tape for business, the sheer magnitude and complexity of the current UK tax system remains difficult and costly to navigate.
To address these concerns, EEF believes government must:
- Avoid any further increases in the tax burden on business, particularly further rises in input taxes, such as National Insurance Contributions (NICs) and environmental taxes
- Pursue substantial simplification of the complex UK tax system and take concrete and measurable steps to reduce the complexity and administrative costs of tax compliance in accordance with its agenda on better regulation
- Step up efforts to achieve its 2.5% annual efficiency savings in public spending
- Re-direct its current policy on environmental taxes away from the ‘stick’ and towards the ‘carrot’ approach. This would support environmental goals whilst minimising negative effects on competitiveness, for example by encouraging the development of environmentally friendly technology