Tax factor to support investment

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If it wasn't obvious before then surely it is now - we need more business investment to help support the recovery in the UK.

We expect that the Chancellor's Autumn Statement will again make difficult reading in terms of the OBR's updated forecasts for business investment. For 2012 and 2013, successive forecasts have been repeatedly downgraded since the OBR's first effort in June 2010.

So anticipating that this will still be a challenge, we think that the government has to use the Autumn Statement to send out a clear signal on how its supporting investment in the UK.

There's been a lot swirling in the media about business investment. One strand in particular are the supposed £750 billion of cash that companies are 'sitting on'.

Starting with the cash point (and setting aside the issue of whether £750 billion is the right number) why might firms be sitting back on piles of cash?

Well the most glaringly obvious factor is the demand environment that we find ourselves in which can be summed up in one word: weak. The domestic consumer is recovering from a sustained crunch on real incomes. This loosk set to continue a little while longer with the CPI ticking up again in October to 2.7%.

Our export markets are a divergent story. Europe bad. Others good. Indeed non-EU exports are on the cusp of streaking into the lead in terms of share of our overall exports. But the problem is that at around 50% and in recent times falling, EU export markets are a drag.

So yes, a weak demand environment would be a reason to pause before outlaying a major investment. Unfortunately the government can't do much to change this situation.

But even so, there are factors that could help encourage investment to go forward that the government can influence. One of these is the tax environment.

There's been a lot of action on corporate tax from the government with the headline rate currently sitting at 24%, on course to reach 22% within two years, and the not-so-subtle hint that the government would like it to be 20% in the not-too-distant future.

It sounds good - indeed it is - to a certain extent. This headline rate is the lowest in the G7 and is on course to be the fourth lowest in the G20. Large companies that I've spoken to in recent months suggest that this has high 'symbolic' value about the direction the UK is heading to.

Good news. Except it's not quite the complete picture.

An Oxford University Centre for Business Taxation study released in June showed that as of 2012 the Effective Average Tax Rate (EATR) that companies in the UK face and which has an empirical link to where mobile international investments go ahead ranked 22nd out of 33 OECD countries.

Worse than that, the Effective Marginal Tax Rate (EMTR) faced by companies in the UK, which is empirically linked to the level of investment given location, ranked 32nd out of 33.

Why? Because although the headline rate of corporation tax rates has been cut - and cut quite aggressively - the capital allowances system in the UK (the way the tax system treats the non-cash expense of depreciation) - has actually been made less generous. It is now the second least supportive system in the OECD (ahead only of Chile).

This is a factor the government could address. And especially for SMEs, where capital allowances make a big difference to cashflows, this would make a difference.

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