Ahead of the Chancellor’s Autumn Budget announcement on 22nd November, and in the wake of the release of the ‘Paradise Papers’, Grant Thornton UK LLP suggests that a fundamental review of the more than 1,100 current tax reliefs could have a net positive impact on the public purse and economic growth. Rebuilding the tax regime to ensure its fit for purpose in a post Brexit world would also foster a better understanding of how tax works and make it harder for those who wish to abuse the tax regime to do so.
The plethora of UK tax reliefs enacted for individuals and businesses are estimated to cost just over £400bn each year. Analysis suggests that simplifying the system by removing many of these reliefs would offer both clarity and efficiency for taxpayers, and enable the Treasury to focus its resources in ensuring a more streamlined and effective revenue collection process is in place and direct spending on reliefs towards proven market failures.
Jonathan Riley, head of tax at Grant Thornton UK LLP, said: “Whilst suppositious and extreme, the example serves to highlight the complexities of the UK’s tax regime. Tax reliefs are designed to help maintain the competitiveness of the UK tax system and as a mechanism for governments to redistribute wealth and influence good, long term, behaviours. They play a significant role in defining the scope of tax and determining where the burden of tax falls. In principal, they should be of great benefit but as with the rest of the UK tax system, they are shrouded in complexity leaving them open to abuse or closed off to those that are eligible.
“In 2011, the Office of Tax Simplification (OTS) reviewed the number of reliefs in the UK, which at that time totalled 1,024. Following a recommendation that 47 reliefs (of 155 reviewed) were removed, the number of reliefs in fact rose to 1,128 by 2014 (per NAO). These reliefs totalled a forecasted cost (at March 2017) of £407 billion without any reliable estimates of the behavioural impact of them. This begs the question as to whether they are in fact beneficial to the UK at all.
“For tax reliefs to be used efficiently and for their intended purpose, the government needs to clearly outline its plans for the UK economy, the behaviours it wants to encourage and the sectors that it wants to grow and then create the reliefs that will support this. This work needs to be closely aligned to the detail of the government’s Industrial Strategy. This is more important than ever as we move closer to exiting the European Union and to ensuring we have the reliefs in place that support a flourishing post-Brexit economy. Tax reliefs can be relevant – for example, if we want to develop a stronger export culture then the government should introduce tax credits that support businesses in researching and entering new markets, whilst eliminating aspects of tax code which often inhibit growth through their complexities.”
“In addition, this would act as a wake up call for some businesses to accept that wider tax stakeholders – society at large – now expects corporates to do the right things on tax, irrespective of what convoluted laws might allow them to do.
“Finally, whatever the tax regime looks like, it is clear that even a basic understanding of how tax works, its role in society and the impact it has on individuals and companies, is essential. Grant Thornton asks that mandatory basic tax education is provided to all pupils at Key Stage 2 so as to provide a foundation of tax and its purpose for future generations.
Grant Thornton’s Budget 2017 recommendations, focused on the areas of Trust, Growth and Place.
Trust: unleashing purpose in business and financial markets
A tax regime fit for purpose, fit for a post-Brexit Britain, is essential. Our UK regime is overly complex and provides scope for abuse by some; wilful misinterpretation by others.
In addition to a fundamental review of existing tax reliefs, Grant Thornton believe the forthcoming Budget should build on the government’s Mission-led Business Review last year, setting an ambition for 'profits with purpose' to become the new normal. To support this we recommend Budget:
- Endorses the reports from Elizabeth Corley’s advisory group on Creating a Culture of Social Impact Investment and Savings and from the UK National Advisory Board on Impact Investing: providing Government support to make impact investing become a mainstream retail product, to enable UK savers to decide what societal or environmental outcomes they want their savings to achieve (as well as providing a financial return)
- Makes a commitment to fully utilising the Social Value Act in central government as well as local government, giving a firm commitment that all future government contracts will be with businesses that make a positive contribution to society.
Growth: putting collaboration at the heart of the UK’s industrial strategy
The review of current tax reliefs, representing £400bn of revenues foregone, could enable more focused support to those businesses and individuals so as to boost growth now, as well as provide for the future needs of our society.
In addition, the government’s industrial strategy should incentivise collaboration to boost exports and skills. We recommend Budget 2017 should:
- Prioritise action to boost the UK’s exports, promoting a new collaborative model of exporting that encourages smaller and larger firms to work together, supported by a new export tax credit for the costs of researching a new market. France and China already provide a similar tax credit, indicating that this is compatible with EU and WTO rules. Further details on our export proposals can be found in the attached paper: Unlocking Export Growth
- Incentivise collaboration between employers and educators with the introduction of a new school performance target for every pupil to have at least one interaction with an employer every year. This would help incentivise all schools to link up with employers – something all the employers we speak to are keen to encourage (and which schools are often keen to do but have to prioritise the areas where their performance is measured).
- Moreover, the provision of tax education should be made available to all Key Stage 2 children in schools. This would support a better understanding of how the system works and how their future contributions are used, and reinforce civic responsibilities at a younger age.
Place: equipping towns, cities and rural areas to create vibrant local economies
Government should continue to devolve powers from Brussels and Westminster to local areas, in ways that encourage innovation, collaboration and trust. Demographic change and budget pressures mean that local innovation in delivery models for public services is vital to maintain sustainable services in the future. We recommend that Budget 2017 should:
- Prioritise new local devolution deals in England that focus on flexibility and tools for local experimentation and innovation in models of delivery of public services, including: immigration, skills, health and social care, housing, local and regional transport – with freedom to develop holistic solutions across these areas
- Set out a firm commitment to financing cross-Pennine transport links, including a new coast-to-coast east-west rail link and local connections to tackle congestion and provide the infrastructure needed to help boost productivity, jobs and international trade in the Northern Powerhouse. This is a priority in every discussion we have with employers in the North of England.
Riley concluded: “We ask that the government is brave in its approach and strip our tax system back to one that supports the UK economy. They must clearly define and shape a tax system that is fit for purpose now and in a post-Brexit future. Only then will tax reliefs perform their intended function.”