Manufacturers publish tax manifesto to drive rebalanced economy

The UK’s tax system is tilted against manufacturing, stands in the way of growing a more balanced economy and needs major reform, according to a major report published today by EEF, the manufacturers’ organisation.

The report ‘Tax reform for a balanced economy’ lays down the gauntlet to the Chancellor and his Shadow counterparts ahead of this evening’s debate. It sets out reforms which would provide an immediate boost to high-tech investment and innovation and create an internationally competitive tax system that helps to repair the public finances in the medium term.

EEF warned that a failure to tackle a tax system that not only makes the UK uncompetitive but doesn’t support manufacturing, will fail to help re-balance the economy and will lead to some companies moving their headquarters out of the UK.

Commenting, EEF Director of Policy, Steve Radley, said:

“While there have been some helpful changes to the tax regime in recent years, we still lack a coherent tax system that encourages manufacturers to invest and sends the signal that they should be doing it here. The next government must think and act differently about how the tax system supports manufacturing and a balanced economy. In particular, it can achieve much larger benefits from any new measures if its approach is more predictable and transparent.

“In the short term it means developing a modern, efficient tax system that helps to grow a diverse and dynamic manufacturing base. In the medium term, it means creating a more competitive tax environment to help reduce the number of hard choices we have to make when repairing the public finances.

“A modern, competitive tax system would not only re-balance our economy but attract mobile multinational investment to the UK and send the right signal to would-be investors. The next government of whatever colour must make this a priority.”

EEF’s proposals focus on twin priorities: immediate reforms to boost high-tech investment and innovation; and medium-term reforms to create a competitive tax system.

Immediate reforms to encourage manufacturing investment, innovation and entrepreneurship

EEF’s proposals for immediate reform would encourage investment in modern machinery, innovation and growing businesses by making the tax regime more efficient. And given the pressures on the public finances, EEF has designed a package that has minimal cost over the next five years.

A simple and practical proposal to recognise the true cost of modern machines with shorter lives would be to extend the time restriction on short-life asset election from four to eight years. This would allow a wider range of assets to be written off at the end of their useful economic lives.

The next government should make the R&D tax credit less costly to claim and reflect a wider range of costs. This could be done through a revenue-neutral package which focuses the credit on high-tech research and development.

Compared with a 50p top rate of income tax, the current 18% capital gains tax rate is an unsustainable ‘welcome’ sign for tax evasion. Consequently, the regime should be reformed so that current incentive to avoid paying tax is replaced by incentives to make long-term investments in business.

An indicative cost of £400 - £500m is based on returning the business asset taper relief regime.

Medium-term reforms to create a competitive tax regime

The UK needs a modern, simpler, more efficient tax system that encourages investment in modern machines and in global markets.

A lower headline tax rate is welcome but not if it can only be achieved through a reduction in allowances for legitimate business costs which disproportionately hits manufacturing.

Raising the VAT rate would accelerate the rebalancing process by encouraging further savings, while weaning the economy off debt-fuelled consumption. This additional tax revenue should then be used to mitigate the potentially savage cuts to government capital spending and mitigate the tax burden on productive sectors of the economy.

Multinationals are thinking twice about investing here and serial entrepreneurs are being pushed abroad. Returning the top rate to 40p would send a signal that the UK was serious about attracting investment and encouraging innovation.