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22 July 2015

How can Labour be more pro-business?

Increasing the amount of money ringfenced for genuine investment, rather than further cuts to corporation tax, is a better idea, argues Jolyon Maugham.

By Jolyon Maugham

Yesterday I argued that spending £4bn on further rises in the Personal Allowance would deliver extra cash to the pockets of those who needed it least. The tax which hit the poorest, I observed, was Council Tax which, even net of relief, absorbed 13.5 per cent of the earnings of the poorest 20 per cent of households. That £4bn would be better spent alleviating those hugely regressive effects.

Nor was raising the Personal Allowance how to end what Cameron described as the “ridiculous merry-go-round” of taxing the poorest and giving them that money back in benefits. A worker on minimum wage can presently work 32 hours a week without paying income tax but only 24 hours before paying National Insurance contributions. It’s the NICs not the income tax floor Osborne should be looking to raise.

Today I want to look at one of the choices made in the Summer Budget around how business is taxed.

Eight years ago the rate of Corporation Tax was 30 per cent; today it is 20 per cent. In his Budget Osborne announced plans to cut it further to 18 per cent. That will cost £2.5bn in its first year – about five times as much as he’ll save by lowering the benefit cap to £23,000 in London and £20,000 outside.

The argument for cutting corporation tax is, as the IFS noted, explicitly one of “increasing the competitiveness of the UK’s corporate tax system.” But let’s put politeness aside – this is out of our enthusiastic leadership of a beggar-thy-neighbours race to the bottom: a pitch to business to base yourself here because we’ll ask less tax of you than anyone else.

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And the evidence it will deliver is poor. KPMG’s December 2014 survey of tax competitiveness revealed only 8 per cent of respondents saw favourable tax policies as the factor with the most impact on our recovery; and only 18 per cent saw tax as having a high influence on where companies base themselves. Moreover, there is simply no correlation between foreign direct investment into the UK and corporation tax cuts. In the latest decade for which figures are available the highest FDI into the UK in the last decade was in 2005 – more than double that in 2013 despite our higher rates of corporation tax then.         

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Moreover, we already have a corporation tax rate which is by far the lowest in the G7 and the joint lowest in the G20. Those other G20 nations with a 20 per cent rate? Russia, Saudi Arabia and Turkey. Even if you accept the argument for tax competition, are there really businesses contemplating setting up in Saudi Arabia who might be induced here instead with a 2 per cent cut in corporation tax?

But the real failing of the policy is its targeting. Around 6 per cent of corporations pay around 80 per cent of all corporation tax. Cutting corporation tax amounts to a transfer to those largest businesses. And through targeting profitable rather than growing businesses its potential to deliver growth is diffused. Our real focus should be on, as Andy Burnham has rightly observed (in the only substantive pitch on tax of any of the leadership candidates), measures which “help address our low rates of investment relative to the rest of the G7.”

Both the Institute of Directors and the British Chambers of Commerce have called for the Annual Investment Allowance – a tax relief which encourages long term investment targeted at small and medium sized business – to be retained at £500,000 per annum. Instead it was allowed in the Summer Budget to fall to £200,000.

By arguing for a retention of the higher Annual Investment Allowance, which would be more than funded by abandoning the unnecessary further cuts to corporation tax, Labour would send a clear message that it is explicitly aligned with the interests of growing businesses.  

Jolyon Maugham​ is a barrister who specialises in tax. He advised the Labour party on tax policy, and blogs regularly on taxation here.