Tax chat - Labour's reform agenda

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There are a few sure signs we're in the midst of a general election campaign – babies don't want to leave their buggies for fear of featuring in an MPs selfie, canapé production ramps up and politicians starting talking about serious issues – such as business tax.

Last week, we learnt a bit more about the business tax plans of a future Labour government (see Delivering Long term prosperity – reform of business taxation). We're spared the bells and whistles of official tax condocs in a report that neatly sets out what would be some of the early priorities of a Labour administration and the driving factors behind their choices.

Just like five-a-day, predictability makes good sense

First up, businesses would be hard pushed to take issue with many of the principles outlined.

Labour says: Business tax reform should support long-term investment and encourage innovation. The tax system should be simple and predictable and a future Labour government is committed to fairness in the tax system, ensuring revenues are raised to invest in skills and infrastructure.

We say: A stable and predictable tax system is important for businesses that have plans to invest spanning many years. Setting out clear objectives for reforms can help with the process, as can good consultation with business on the technical detail of reform. It will be good to hear more about how Labour would ensure that the improvements to consultation with business we've seen in recent years would be sustained. One principle that does feel missing is one covering international competitiveness – not just on the narrow corporate tax rate, but across the system as a whole.

Digging into the detail

There are a couple of tax issues we've raised (sometimes at length) that are particularly relevant for manufacturers and indeed for the Labour ambition of supporting long-term investment and innovation – capital allowances and the R&D tax credit.

On the R&D tax credit Labour says: They will improve the targeting of the R&D tax credit to ensure it has the highest impact possible.

We say: We'll assume that this means it stays, which is really important. The R&D tax credit has been amongst the most stable component of the UK's tax system over the past decade and the majority of EEF members are aware of it and have experience of using it. Over half of the total value of the credit is claimed by manufacturers, which carry out the bulk of UK business expenditure on R&D. Ideally we'd see the definition of allowable expenditure remain broad and stable and the rate for both large and small claimants should be internationally competitive.

On capital allowances Labour says: There should be a road map for Capital Allowances, factoring in the allowances available in competitor countries and creating a system that will endure over the next parliament.

We say: On the one hand - Amen to that. On the other the proposals are relatively light on the detail of what is wrong with the current system. There are some common misconceptions around the capital allowances regime – it is not a tax credit or incentive, it exists to allow firms to deduct the cost of depreciation from taxable income. There is a balance between ensuring that the pace of technological change and therefore higher depreciation rates are reflected in the tax system and building in stability and predictability. There is a fair bit more work needed to progress towards such as system.

A roadmap of sorts

While a roadmap for capital allowances reform would be good, a road map for all business tax reforms over the next parliament would be better. Labour's report has some components of such a map including, for example, a commitment to work through the OECD BEPS process to tackle avoidance. However, the plan to keep the headline rate of corporation tax rate the lowest in the G7 still leaves quite a bit of scope for interpretation. In addition, taxes such as National Insurance Contributions should also be within the scope of such as roadmap.

As far as initial thinking goes this is a good step in giving business a view on likely tax priorities of a future Labour administration. This matters in the context of providing a competitive and predictable cost base for manufacturers.


Chief Economist

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