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Last Updated: Monday, 5 March 2007, 02:23 GMT
Tax 'risk' to UK competitiveness
BMW car factory at Cowley
Foreign companies may turn away from the UK because of its taxes
The UK is in danger of becoming less competitive because of its complex and uncertain tax regime, accountancy firm Ernst & Young has claimed in a report.

In a separate report, the CBI called on the government to get a "tighter grip" on spending to ease the tax burden.

The Tories said the CBI study was more evidence of a complicated tax system.

But the Treasury said a stable economy and low burdens on business made the UK a highly attractive location for overseas investors.

Cutting conflict

The issue of taxes has dogged the government in the past couple of years as critics questioned how Chancellor Gordon Brown would fund his spending plans.

According to Ernst & Young, a key way to improve tax revenues would be if the government and HM Revenue & Customs were less adversarial with business.

Instead they should look at business more like a "partner in pursuit of investment and expansion", it said.

In its report, called "Helping Britain Thrive", Ernst & Young said Britain was becoming less attractive as an investment destination, getting 18% of foreign projects in 2005, compared with 31% in 1997.

The UK's corporate tax rate was now the 18th lowest out of countries in the Organisation for Economic Cooperation and Development (OECD), compared with the 10th lowest in 2000, it said.

Over the same period, the UK had slipped into third place from second as the preferred destination for the foreign headquarters of US and Canadian companies. Germany had now taken over the second place.

"There are three key issues here - the corporate tax rate, the system's complexity and the lack of certainty," said Paul Davies, head of tax at Ernst & Young.

"There is a very real danger that the UK's competitiveness as an investment location will be seriously compromised and we will hear more stories of major corporates threatening to move their headquarters out of the UK," he added.

'Light touch'

One problem has been the speed of growth in tax laws, Ernst & Young said.

"Other countries and regions in Europe have stolen a march on the UK by offering fiscal incentives and tax breaks that are proving to be a great success," Mr Davies explained.

"If the chancellor is going to talk about a 'light regulatory touch', we'd like to see evidence of it."

While the CBI has long argued for less regulation, it said that it would now like to see a much firmer grip on public spending.

"As UK tax competitiveness continues to slide, companies are waiting for a signal from government that it is prepared to act and will create the necessary financial headroom," said CBI deputy director-general John Cridland.

The CBI argued that "even a slight restraint in the pace of spending growth, which need not impact on frontline services, would be enough to halt the steady decline in the UK's tax competitiveness".

It concluded that "this would be the signal that the business community has been waiting for".

George Osborne, the shadow chancellor, said: "Here is further evidence that Gordon Brown has landed British business with a hugely complicated and burdensome tax system that makes it difficult to compete in the new global economy."

But a Treasury spokesman said that according to a recent PricewaterhouseCoopers and World Bank report, the typical UK business faced the lowest overall tax rate in the G7, and the fifth lowest in the OECD.

He added: "This government has reduced corporation tax to its lowest ever rate - the lowest in the G7 - and has ensured the UK has one of the most competitive business climates in the world."

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