A CBT report published in February 2015 describes and evaluates the measures taken by the 2010-15 Coalition government to reform the UK business tax regime. The government’s aims, set out in its original agreement in 2010 were: “We will reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries”. The UK tax system in 2015 is much more competitive internationally than it was in 2010. By cutting the main rate of corporation tax from 28 per cent to 20 per cent, by 2015 the UK had the equal lowest statutory tax rate in the G20 – compared to 7th in 2010. The UK has also cut its effective average tax rate - a measure of how attractive the UK tax system is for inbound foreign direct investment - substantially, although this has only improved its ranking within the G20 from 7th place to 5th place. Building on reforms introduced by the last Labour government, the Coalition has also made the UK a more attractive location for multinational companies by reforming Controlled Foreign Corporation rules and introducing the Patent Box. Raising the threshold for the Annual Investment Allowance has created significantly better incentives for investment by small- and medium-sized companies.
However, the reduction in general rates of capital allowances have tended to offset the benefits of the lower corporation tax rate for capital expenditure by large companies – to this extent, the reforms have been targeted away from manufacturing industries, despite the Coalition’s aims. These reforms have also had a significant cost: using the government projections we estimate foregone corporation tax revenues in 2015/16 to be around £7.2 billion. The Coalition also introduced a number of measures to combat tax avoidance including the General Anti-Abuse Rule, the Code of Conduct for Banks, and the Diverted Profits Tax. But the government has been much less successful in trying to simplify the tax system. The Office of Tax Simplification recently identified that since 2010, the government has abolished 57 reliefs, but added 151 new ones. A large part of the problem of simplification stems from problems in fundamental structure of the tax system, which successive governments have been unwilling to address.
Giorgia Maffini
