Capital allowances blotting govt attempts to make tax system competitive

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There's an article in the FT today 'Corporate tax regime taken to task' that supports many of EEF's previous assertions that the UK's current tax system of recognising the depreciation of plant and machinery investments does not match the demands of rebalancing the economy.

Perhaps more telling for the government, the article, which is quoting research from the Oxford University Centre for Business Taxation, suggests it is failing on its own stated ambition of making the UK the most competitive tax system in the G20.

'Britain ha[s] the highest effective marginal tax rate of all but two countries in the OECD group of many of the world's most advanced nations.'

This means that:

'Even after the implementation of the planned cuts to corporation tax, the UK will not be particularly competitive relative to other countreis in the G20 and OECD'

The driver for this is cited as the capital allowances regime in the UK - recently made even less supportive by the government:

'...allowances for capital spending in Britain...are lower than any OECD country except Chile.'

It's worth remembering that perhaps 50,000 businesses might benefit from the government's cuts to the headline rate of corporation tax but 900,000 are made worse off by less supportive capital allowances.

The Treasury in its response notes that the Chancellor recognises tax competitiveness is about more than corporation tax and points out reforms to the CFC regime, R&D tax credits, and the incoming Patent Box. It is encouraging that the Treasury has this wider view and indeed there has been good progress in the areas mentioned.

But I don't think the Treasury can afford to keep rowing in the wrong direction on capital allowances for too much longer. It is a bit rich to claim the Centre for Business Taxation is looking at an 'incomplete picture' when the effective rate is surely more inclusive than the Treasury's focus on the headline rate of corporation tax - important though the cuts to the headline rate are.

What we need now is a fundamental reevaluation of the UK's uncompetitive system of capital allowances.

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