Priorities for corporate tax reform

Big UK multinationals want a level playing field

Attention has been focused on changes to personal taxation, but corporate tax reform should figure high on the chancellor's Budget agenda, says John Whiting of PriceWaterhouseCoopers.

---

By John Whiting

Reforming business taxation isn't an obviously populist measure - but Chancellor Gordon Brown can do much to ensure his long-term popularity by introducing some tax changes for business in the coming Budget.

Prime Minister Tony Blair and the chancellor have often said that they want the UK to be the best place to do business - especially "new economy" business.

Taxation is an important factor in companies' choice of location. And with an increasingly mobile economy, an unfriendly tax climate can damage the UK's attractiveness.

Corporate taxes

There are factors in the UK's favour. Social security taxes are modest compared with countries such as France and Belgium.

Gordon Brown promised consultation on business taxes

We have no local or state taxes to add to central levies as in Germany and the USA.

But despite a low headline rate of 30% for corporation tax, UK business pays twice as much corporation tax as a percentage of GDP compared with French and German businesses. Allowances available there simply aren't matched in the UK.

The three key areas of corporate tax reform are:

• Allowances for research and development (R&D) remain uninspiring for many organisations. Capitalising R&D spending delays any tax write-off and, although last year's changes gave enhanced write-offs for small and medium-sized businesses, that system needs to be extended to all companies.

  With countries such as the US and Japan offering generous tax credits for R&D spending, it is all too attractive for R&D to locate away from the UK.

• Intellectual property is the cornerstone of the knowledge economy - but the UK tax system gives few allowances for intangible assets. The result is that most companies hold such assets in friendlier tax regimes such as the Netherlands.

• Companies increasingly buy and sell other companies as they grow and shift emphases. Most sales are to generate funds to invest in other businesses - but in the UK such sales generate capital gains tax bills. Not so in many of our EU neighbours - including Germany with current reforms.

Consultation

A common thread on all these three areas is that they are the subjects of consultation by the government.

Gordon Brown needs to bring forward changes to make sure the UK business climate is what he says he wants it to be.

Some generous gestures now could restore the confidence damaged by last year's double tax relief changes - where, incidentally, there are still many loose ends in a regime that starts at the end of March.

With corporate tax rates falling - Ireland, for example, is heading for a 12½% rate - the UK's rate may need attention as well.

But changes to the tax system could make a real difference - and contribute to Mr Brown going down as a chancellor who really did help business and in doing so, did a lot for jobs and wealth in the UK.