Bright Blue, the independent think tank for liberal conservatism, has today published a new report commissioned by its high-profile cross-party, cross-sector Tax Commission, entitled Energising enterprise: reforming business taxes. As the Chancellor prepares to deliver the 2022 Spring Statement this week, the report sets out how to reform the structure of business taxation to increase productivity, incentivise investment, and repair the public finances after Covid-19.
The report is guided by four principles for reforming business taxation:
- Neutrality. The tax system should preserve a level playing field between businesses of different sizes, different sectors, and different investment strategies.
- Simplicity. Excess complexity makes the tax system more difficult to administer, opens up more opportunities for tax avoidance, and disproportionately burdens smaller firms.
- Equity. All things being equal, a shift in the tax system towards economic rent will be progressive as workers and consumers would benefit relative to shareholders.
- Revenue. Any package of reforms should not worsen the UK’s long-run fiscal position, particularly as the public finances are repaired after the pandemic.
At this critical moment for the economy, the report proposes 14 new policies to improve business taxation across three areas: reforming Corporation Tax, reforming Business Rates, and reforming business tax reliefs, with the overall progressive objective of shifting the tax burden away from the normal return on investment and risk-taking and towards economic rent.
Reforming Corporation Tax
- Recommendation one: Move to the full immediate expensing of capital investment in new plants, machinery, and industrial buildings when the investment super-deduction expires in 2023. We estimate that this reform will increase investment by 10.85%, GDP by 4.5%, and wages by £3,200. This would be a significant tax reduction on investment, reducing long-run corporate tax revenues by 0.61% of GDP (or £13.5 billion) on a static basis. However, on a dynamic analysis this fiscal cost would be partially offset by higher tax revenues elsewhere resulting from higher output.
- Recommendation two: Eliminate the bias in favour of debt-financed investment by excluding interest from the corporate tax system. Instead, debt interest payments should no longer be deductible expenses, but interest payments received would not be taxed either. This would increase revenues significantly, offsetting as much as a third (£4.5 billion) of the static cost of moving to a system of full expensing.
- Recommendation three: Allow corporate losses to be carried forward with a factor that adjusts for inflation and a safe rate of return on capital. The 50% annual cap of loss carryforwards should also be eliminated. The impact and cost of this policy is likely to be small in the short-term as interest rates are low, however if interest rates rise in the future a lack of interest factor for losses could have a significant deterrent effect on risk-taking.
- Recommendation four: The UK should lobby internationally for the OECD’s proposed agreement on a 15% global minimum corporate tax to use a cashflow base. This would ensure tax competition would focus on pro-investment and positive-sum reforms to the tax base, as opposed to zero-sum competition on headline rates. It would also dramatically simplify the taxation of cross-border investments.
Reforming Business Rates
- Recommendation five: Business Rates should be replaced with a Business Land Tax levied on commercial landowners, based on unimproved land values. Investments in commercial property improvements would no longer lead to increased tax burdens.
- Recommendation six: To discourage tax motivated shifts from commercial to residential property, a new levy on commercial-to-residential transfers should be introduced. Commercial landlords converting their property would be forced to make up the difference between Business Rates (or Commercial Land Levy) and Council Tax. Payment would be flexible, allowing landlords to pay the discounted value of the tax advantage upfront, or alternatively to pay it annually.
- Recommendation seven: Responsibility over Business Rates reliefs and exemptions for Small Businesses, Charities and Agriculture should be devolved to local authorities. This would mirror local authorities’ existing discretionary powers to top-up Charitable Rate Relief from 80% to 100%. Councils may choose to limit the rate of relief available and retain revenues to spend on local priorities, such as funding business incubators or providing assistance to SMEs operating in co-working spaces.
Reforming business tax reliefs
- Recommendation eight: The Patent Box should be abolished. This would raise at least an estimated £1.8 billion per year from 2023 onwards.
- Recommendation nine: The Film Tax Relief and High End TV Tax Relief should be abolished. This would increase tax revenue by an estimated £0.8 billion.
- Recommendation ten: The Employment Allowance should be phased out over the next five years. This would raise an estimated £2.6 billion. In future, employment support schemes should be targeted more directly at groups with high risk of unemployment, as is the case with the Kickstart scheme.
- Recommendation eleven: Venture capital reliefs such as Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) should be maintained at current levels and the process for qualifying and accessing these reliefs should be streamlined in line with the Office for Tax Simplification’s proposals. These include administrative changes such as allowing applicants to save partially completed forms online, alongside allowing investors to benefit from the capital gains tax relief in years where they make an income tax loss.
- Recommendation twelve: Social Investment Tax Relief should be preserved, but more resources should be invested in promoting the relief. There is a sound economic rationale to allow investors in social enterprises to benefit from reliefs similar to the venture capital reliefs. However, to ensure the relief’s long-term viability more needs to be done to combat low levels of awareness among accountants and social enterprises, such as targeted information campaigns.
- Recommendation thirteen: The scope of qualifying expenditures for R&D Tax Credit should be expanded to include cloud, data, and User Interface (UI)/User Experience (UX) costs as announced at the 2021 Autumn Budget. This would correct a major bias against the types of research and development used by digital startups.
- Recommendation fourteen: In order to ensure value for public money, HM Treasury should adopt the German model for scrutinising tax reliefs. This would legally mandate biannual reviews of corporate tax reliefs based on a standard evaluative framework including: target accuracy; cost-effectiveness; necessity; and sustainability.
Ryan Shorthouse, Chief Executive of Bright Blue, commented:
“There is a Byzantine system of business tax and reliefs in Britain. We need to properly and repeatedly evaluate them to ensure they are increasing both the equity and efficiency of our changing economy. In particular, we need to ensure our tax system encourages risk-taking and investment, and properly taxes income derived from luck and rent-seeking.”
Sam Dumitriu, Research Director for The Entrepreneurs Network and report author, commented:
“The Chancellor has rightly made the link between the tax system and our consistently low levels of business investment. It’s vital then he puts his money where his mouth is by radically reforming the way we tax businesses.
“Moving to a system where businesses are able to deduct in full the costs of new investments from their corporate tax when the super-deduction expires, and fixing business rates so they no longer punish investment in commercial property, would be a powerful signal that the UK is open for investment.”
The Rt Hon Sir Vince Cable, former Secretary of State for Business, Innovation and Skills, commented:
“This paper has recommendations for business reform which are eminently sensible and practical but would go a long way to provide consistent incentives for investment, modernise the discredited commercial rate system and sort out the mess of an overcomplicated, inefficient system.”
ENDS
- This report is part of Bright Blue’s project on tax reform, which is kindly supported by the Joffe Trust and Social Enterprise UK. However, Bright Blue retains complete editorial control over the report. The views in the report will not necessarily reflect the views of the sponsor.
- This report has been commissioned by a high-profile cross-party, cross-sector commission established by Bright Blue to advise on reforms to the tax system in the years ahead to support the post-pandemic economic recovery, the restoration of the public finances, and the achievement of better economic, social, and environmental outcomes. Bright Blue has commissioned independent experts to provide original analysis and policy recommendations in four areas of tax policy: carbon taxation, property taxation, business taxation, and work and wealth taxation. The commissioners do not necessarily endorse the findings of this particular report.
