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Red tape
Research undertaken by KPMG for HMRC shows that the burden of tax administration in the UK, at around 0.41% gross domestic product or 1.1%, compares favourably with the only other two countries, i.e. the Netherlands (0.82% of GDP or 2.1% of tax take) and Denmark (0.57% or 1.2% of tax take), that have used the same methodology. Other countries are undertaking a similar exercise.
KPMG says that the relatively low UK figures reflect well on the historic approach taken in the UK tax system, and demonstrate the benefit of the steps already taken to reduce the burden on business. The relatively higher figures in Denmark and the Netherlands are accounted for by various requirements which either have never been imposed on business in the UK, or have already been removed. These include the separation of responsibility for tax and social security payments, audit and VAT thresholds much lower than those of the UK, and requirements to make VAT returns more frequently. In contrast, the UK already has one of the highest thresholds in the EU for VAT registration, exempting more than two million businesses from dealing with VAT, and a high audit requirement threshold. Small businesses can file VAT returns quarterly rather than monthly, and HMRC has introduced shortened tax returns for smaller businesses and made many business services available online.
Although the UK has already benefited from a number of deregulatory reforms, the creation of HMRC offers significant opportunities to deliver further reductions in administrative burdens. No tax system will ever be free from some administrative burdens, and it is clear from the data that there is a complex picture that underpins the headline results. For example, the research indicates that 85 of the 2,692 obligations impose 85% of the total administrative burden. Those 85 include dealing with the main tax returns and forms. HMRC will therefore target a reduction in the burden of dealing with forms and returns, starting with the self-assessment return completed by three million businesses, and with the partnership return, filled in by 600,000 others.
The research also indicates that there is a long list of obligations which, while adding little to the overall administrative cost (because they apply to relatively few businesses, or are triggered only by specific events) contribute to a picture of complexity and include a high irritation factor. They can also be costly to deal with for individual businesses, e.g. HMRC's inspection and audit regimes. Responding to previous business feedback, HMRC announced changes to those regimes at Pre-Budget Report, including a redesign of its inspection and audit processes to reflect the needs and practice of modern business.
As announced in the Budget, HMRC will tackle both aspects of the burden on business, by:
- reducing the burden on businesses of dealing with HMRC's forms and returns by at least 10% over five years;
- reducing the burden of dealing with HMRC's audits and inspections by 10% over three years and at least 15% over five years; and
- establishing a new administrative burden advisory board, chaired by Teresa Graham, non-executive director of four businesses and deputy chair of the Better Regulation Commission, to work with HMRC on dealing with the complexity of the tax system.
KMPG report: Progress towards a new relationship: How HMRC is working to make life easier for business
Competitive rates
Average corporate tax rates in the EU fell by 0.28% to 25.04% in 2005, thanks to rate cuts in six EU Member States including France, Greece and the Netherlands. This compared with average rates of 28.31% for the Organisation for Economic Co-operation and Development countries, 28.25% for Latin America and 29.99% in the Asia Pacific region. In the UK, the rate was unchanged at 30%. The countries with the highest tax rates were Japan with 40.69% and the US with 40%. Lowest was the Cayman Islands with a corporate tax rate of 0%. Of the 86 countries surveyed, the majority had either kept their tax rates unchanged since 2004, or had reduced them.
Global head of KPMG's tax practice, Loughlin Hickey, said, 'The accession of ten new members to the EU in 2004, and the continuing efforts of the EU judicial system to break down barriers to free movement of capital, seem to have combined to increase tax competition among EU Member States. There is a clear contrast with other parts of the world where borders are less permeable, but even so, the global trend seems to be stable or declining tax rates'. But Mr Hickey stressed that 'a low tax rate does not necessarily mean a low tax burden'.
KPMG International's Corporate Tax Rates Survey has been run every year since 1993. It covers 86 countries, including the 30 member countries of the OECD, the 25 EU countries, 19 countries in the Asia Pacific Region and 19 countries in the Latin America Region.
