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KEY POINTS
- Constant legislative change damages our economy.
- The need for an holistic approach to tax law.
- Do anti-avoidance measures now cost too much?
- Consultation should precede change.
- Government and private sector must work together.
The constant fiddling with tax laws is creating massive damage to our economy and its effects could be long lasting. It destroys an incredibly important aspect of the tax system, which is certainty. 
Tax policy must encourage long-term enterprise investment, be consistent, and discourage short-term speculative behaviour.
However, it is currently failing badly in this regard. Both tax policy and the approach to making new tax laws must change in the UK.
The current approach is unsettling investors and entrepreneurs; it is making it very difficult for people and companies to make long-term capital commitments in the UK, and it is driving wealth creators to other, more stable, jurisdictions.
Our tax laws are so complex that commercial transactions require the employment of numerous professional advisers and the incurring of disproportionate costs.
These burdens and uncertainties make planning difficult and costly and probably do not increase the tax take overall, because a greater proportion of individuals and businesses take advice on how to structure their affairs so as to reduce their impact – or exit the UK totally.
The new government has an opportunity to look holistically at tax and its relationship with growth, rather than viewing the tax take as just a by-product of growth.
The right tax policy can increase the overall tax take by encouraging entrepreneurship and attracting private sector funding for the development of key national assets, infrastructure and regeneration projects, with the creation of many jobs along the way.
In the wake of the recession, funding for such projects is thin on the ground and the right incentives will smoke out willing investors ready to help Britain.
But these projects are five to ten-year investments, and investors need to be certain that what they signed on for will be what they get mid-term and at the end of their investment term.
The constant threat of reviewing tax obligations sends a message that the UK is for short-term investment only. In this case, only speculators will win.
Legislation and loopholes
Recent years have seen massive growth in tax legislation, with HMRC policy units and draughtsmen busily at work to plug loopholes, real or perceived, to increase the tax take by finding more ways to tax the rich – or profitable companies – and dealing with other failings of existing legislation.
Furthermore, HMRC have, with the influence and culture of Customs to the fore, become far more adversarial in their relations with taxpayers. As an example, approximately £1 billion of HMRC’s £4 billion annual budget is now earmarked to counter tax evasion and tax avoidance.
This is patently ridiculous and a reflection of the fact that the taxation system is not perceived as fair and transparent by those taxpayers who bear the greatest burden of tax contributions.
Sure, some people cheat on their taxes and should be pursued and prosecuted, but the majority of taxpayers, even rich ones, are fundamentally honest.
It is also clear that this vast amount of money is being spent to pursue a revisionist approach to former legislation, such as film tax reliefs, which have cost the Government far more than it ever understood or budgeted for.
Pursuing the country’s wealth creators in this manner will only disenfranchise them and is likely to lead to an ever greater exodus of talent: precisely the people who make the most significant contribution to government coffers, directly and indirectly.
Recent messes
Some other, well-known examples of ill-thought-through recent tax policies include the following.
First, the mess over the taxation of non-domiciles. Government rushed out ill-conceived legislation, mostly driven by aggressive newspaper campaigns and perceived public pressures about fairness in the taxation system, only to partly back track when it was clear that it risked an exodus of wealthy non-doms with no particular need to be in the UK.
Non-doms contribute massively to the wealth of the UK though indirect taxation, such as VAT and tax on salaries of people they employ or companies they own – as well as attracting substantial amounts of inwards investment.
I am convinced they represent a large part of the potential for any future growth in our economy – and yet we can’t even spend time thinking properly about appropriately structured, long-term, taxation plans for this critically important group of contributors to UK PLC.
This is inexcusable – and has been and continues to be damaging to our economy.
Second, pension contribution restrictions. These are now forcing people to use ever more convoluted and risky ways to save for their futures and likely deferring tax costs today for greater costs and burdens on the public purse in the future (when the number of pensioners as a percentage of the total population will almost certainly be far higher).
The bank payroll tax also represented policy on the hoof, rather than long-term thinking to deal with the root causes of excessive remuneration in the banking sector.
Another example was HMRC’s announcement that the avoidance of tax by legitimate means (i.e. organising one’s affairs to pay the least amount of tax in accordance with legislation in force) is no longer acceptable if HMRC consider that such arrangements are unacceptable or not intended ‘if Parliament had turned its mind to the specific issue in question’!
My final example is the increasing use of retrospective legislation to counter arrangements or practices HMRC consider unacceptable – often without understanding all of the issues adequately – or the consequences.
Fundamentally, this destroys an incredibly important aspect of the tax system, which is certainty.
Change and consultation
More recently the spotlight has fallen on the Conservative party’s announced plans to reduce corporation tax and to fund this by simplifying and reducing certain tax allowances – including capital allowances for expenditure on business assets.
Reducing or replacing capital allowances may make sense, but it should have nothing to do with corporation tax rates.
Sure, some companies that make a lot of profits invest substantial amounts in such assets – but a lot of this investment also comes from entrepreneurs and/or new businesses that cannot benefit from lower corporation tax rates.
For example, much capital investment in green energy projects is coming from new companies or groups of individuals.
In our case, we raise approximately £100 million of equity a year for such projects, driving total capital investment in the sector of approaching £1 billion per year.
This creates thousands of construction jobs and hundreds of long-term employment opportunities, together with associated vertical and horizontal industry opportunities in businesses which are set to grow substantially.
If tax legislation, such as these allowances, is to be changed then it needs to be done properly. This should first involve industry consultation – and not just with big, profitable, companies (as these are often the slowest to innovate or to quickly adapt to new industries and opportunities) – but also with entrepreneurs at the forefront of cutting-edge investment.
Second, changes need to be managed with signposts, transitional programmes and respecting long-term investment decisions already made.
Third, changes should typically simplify legislation. For example, the USA has both state and federal tax credits (payments made on direct expenditure on certain qualifying assets or businesses) to encourage investment in areas such as green energy, low income housing, historical building renovation and film and TV production.
Such systems enable isolation of key areas requiring investment without an undue reduction in overall tax take, are transparent, and deliver the benefits in a very targeted manner (and are difficult to abuse).
Conclusion
Tax policy and the approach to making new tax laws must change in the UK. We should have a general anti-avoidance provision in legislation if the consensus view is that tax avoidance is unacceptable.
Rulings should be available in an acceptable time frame from HMRC and operational mechanics put in place to support such a system. If necessary, taxpayers may have to contribute to the cost of obtaining such rulings.
This will save massive amounts of time and cost, as well as reducing litigation and lessening the adversarial relationship between HMRC and taxpayers.
Tax laws need simplifying and the volume of legislation needs to be tremendously reduced. Ways to do this would include some ideas adopted in other countries such as flat tax rates, minimum tax bills, including the impact of indirect taxes – such as stamp duty and VAT – to assess overall true economic contribution.
Government should work with the private sector, in particular with groups of wealth creators and entrepreneurs, to refine and simplify the system.
In my experience, while no one likes to pay tax, most of us understand that we need to make a contribution to help create opportunities for all and to deliver basic services in an acceptable manner.
Finally, as mentioned, tax policy must encourage long-term enterprise investment, be consistent, and discourage short-term speculative behaviour. It is currently failing badly in this regard.
Tim Levy is the chief executive of Future Capital Partners
