CONSISTENCY AND COMPETITIVENESS ESSENTIAL STEPS TOWARDS A UK TAX REGIME THAT SUPPORTS ECONOMIC GROWTH

Transcription

1 CONSISTENCY AND COMPETITIVENESS ESSENTIAL STEPS TOWARDS A UK TAX REGIME THAT SUPPORTS ECONOMIC GROWTH

2 Introduction The Government has made good progress towards a more competitive tax regime, in particular with regard to lowering corporation tax rates. However, the dominance of services in London s economy and its status as an international talent hub demands a greater focus on delivering a competitive personal tax system than has been the case to date. Companies increasingly locate high value-added activities in places where high-skilled and knowledge-based professionals want to live and work. Today over one-third of all European Fortune 500 firms have their corporate headquarters in London. 1 By excelling in the service economy the capital has become a global hub for talent. To retain this talent edge London needs a personal income tax regime that attracts (or, more to the point, does not discourage) top talent, underpinned by a corporate tax system that is competitive in terms of rate, and where the tax system as a whole provides stability, predictability and transparency. Providing a clear process and framework for tax policy costs the Exchequer nothing but provides an environment that is conducive to growth. However, the image of the UK tax regime as stable, predictable and transparent has been damaged by the political and media condemnation of the tax payments of a number of high profile businesses operating in the UK. While it is clearly imperative that the Government and HMRC ensure those subject to UK tax comply with the rules, a regime in which compliant companies are still vulnerable to attack is one that creates uncertainty and deters investment. This report, which updates London First s November 2012 paper UK Tax Regime: Taxing London for Investment and Growth, sets outs the key competitiveness considerations in relation to the tax system and their relationship to London s economy. Its principal recommendations are: a clear public commitment from government to the restoration of the top rate of income tax to 40 per cent, on grounds of competitiveness and yield; a clear public commitment from government that the Tax Code will be applied consistently, arbitrary policy changes will not be implemented and compliant companies will be recognised, by government at least, as such; the Bank Levy being raised as a stable, predictable and transparent tax rather than one whose level varies from Budget to Budget; and the devolution of property taxes to London Government, matched pound for pound by a reduction in grant, to enable the system to be better designed to meet London s needs. 1 Deloitte (2013), London Futures Globaltown: winning London s crucial battle for talent 2

3 Attracting global talent London s competitiveness is at least, if not more, dependent on the competitiveness of its personal tax system. This is a consequence of London s ability to attract top talent, which underpins its success in securing international business and capital. Despite the recent recession London has continued to grow as a centre for employment, and since the 2008 the number of jobs in London has increased by 270,000 (6.8 per cent) compared with overall UK employment, which has fallen by 0.7 per cent 2 The mix of workers in London is skewed towards the highly skilled and highly paid, as shown by the average wage of workers in London being 40 per cent higher than the UK average (it is important to note that this high average masks a higher unemployment rate than the UK as a whole and very high levels of deprivation across a swathe of London council wards). 3 London is the largest global talent hub for the knowledge-based industries, which are increasing demand for more highly-skilled workers and tend to be the most dynamic parts of the economy in terms of output and employment growth. 4 These data are supported by many other surveys that show the depth of London s skills pool to be one of its key competitive advantages. For highly-skilled workers, personal income is obviously a key influence on where they choose to work and live. Figure.1: Total numbers employed in knowledge-based industries Percentage of working population London 1,471,869 29% New York 1,163,039 29% Los Angeles 783,643 20% Hong Kong 629,822 16% Boston 425,377 24% Source: Deloitte (2013), London Futures Globaltown: winning London s crucial battle for talent 2 Deloitte (2013), London Futures Globaltown: winning London s crucial battle for talent 3 Annual Survey of Hours and Earnings, Office for National Statistics, Median hourly earnings excluding overtime of all employees, UK and London, Data showed workers in London were paid an hourly rate of compared to the UK average of Workers who also reside in London were paid an average per hour 30 per cent above the UK average

4 While income tax is the most important individual tax to the Exchequer - accounting for 32 per cent of total receipts ( ) - when combined with the other key employment tax i.e. National Insurance Contributions ( NICs ), the total personal tax burden accounts for over 50 per cent of total receipts (NICs accounts for 22 per cent of total tax receipts). The 2010 Mirrlees Review of the tax system by the Institute for Fiscal Studies (IFS) found that an overall tax rate of 56.6 per cent was revenue maximising. The overall effective tax rate includes National Insurance contributions and indirect taxes, so the report concluded that the income tax rate on its own should be no higher than 40 per cent 5 At 50 per cent, the UK top rate was sub-optimal and a disincentive to growth and investment. Lowering the rate to 45 per cent made UK more attractive to a degree but the UK (and hence London) is still one of the most expensive in comparison to other G20 countries when personal tax and employee NICs are taken together. The levy of a temporary top rate of 75 per cent on earnings over 1 million euros has pushed France into most expensive in the Eurozone in While the levy is largely symbolic and affects fewer than 1,500 people it has created a perception that Paris is a less attractive location for high earners. President Hollande has conceded that tax increases have been too much and that much off the future effort to reduce the budget deficit in 2014 will fall on public-spending cuts rather than tax increases. 6 Figure. 2: Source: OECD tax database showing top marginal tax rate plus additional social security costs. Note: data not available for Argentina, China, India, Indonesia, Russia, Saudi Arabia and South Africa

5 In determining a competitive level of taxation that would also support the UK s public spending needs, it would be unrealistic to expect the UK to match the low rates applied in jurisdictions such as Singapore and Hong Kong. However, the UK must be sensitive to comparisons with other key competitors such as Germany, France and the US in order to win the competition for talent. London First therefore recommends a return to the 40 per cent top rate. This is a crucial issue for London s growth as recent figures released by HMRC show that in , the best-paid 1 per cent of workers will contribute 29.8 per cent of all income tax. 7 Nearly half of those earning over 160,000 (considered the 1 per cent) live in London or the South East. 8 It is essential for the UK public finances that London continues to support high level jobs and competes in the global talent market per-cent-of-all-tax.html 5

6 The importance of stability and predictability of the tax regime The Government is delivering on its commitment to ensure the UK has the lowest statutory rate of corporation tax of any G20 country. The current rate of 23 per cent places the UK marginally above the EU average and higher than Russia, Saudi Arabia and Turkey, Assuming the announced reduction to 20 per cent in April 2015 takes place, the UK will have the equal lowest corporation tax rate by the end of this parliament (assuming other G20 countries do not reduce their rates below the 20per cent). Figure. 3: Source: KPMG tax tables While London First recognises that attaining the lowest corporation tax rate in the G20 at a time of major fiscal consolidation has been a welcome success, we are also aware that the headline rate is only one aspect of competitiveness. The amount of tax paid or not paid by certain high profile businesses operating in the UK has captured the headlines and undermined the reputation of the UK tax system. Google, Starbucks and other household names have been in the media spotlight in 2013 for managing to pay very little corporate tax. Consequently the media and the Public Accounts Committee have commented on individual businesses tax dealings and highlighted the use of complex, but legitimate, tax strategies by multinationals to minimise tax obligations. In some cases this has led to a public backlash and reputational damage to the company. 6

7 Creating uncertainty in the tax regime can deter investment 9 because it is expensive for business or individuals who have to factor in contingency options in the event of the current operating regime not being applied as anticipated. To help dispel concerns that the Government may be pushed into tax policy changes in response to adverse media comment, we recommend that the Government make a public statement that confirms UK tax payers (businesses or individuals) will be assessed only against their compliance with the UK tax code, and if any changes are required to ensure that the use of certain reliefs is curtailed or certain activities taxed, then these will be made in accordance with the proper process set out in the Treasury's 2010 Tax policy making: a new approach document. As well as counteracting the instability caused by external sources, the Government should ensure its tax policy decisions comply in practice with its stated policy making approach, to prevent a repeat of the March 2012 Budget where VAT changes had to be reversed and legislation needed to be amended 10. Likewise any new taxes created should be designed in a way that supports stability or they risk creating an additional cost burden above and beyond the revenue yielded. The UK bank levy places an additional burden on the UK s banking sector a globally mobile industry which still contributes significant revenues to the UK exchequer and supports jobs and supply chains throughout the UK. Additional to the direct burden of the bank levy is the cost of the uncertainty inherent in the levy s structure. The levy is set at a rate that targets a total revenue of 21.5bn each year, but since the bank levy was first introduced in 2011 the rate at which it is charged has changed six times in order to meet this target. 11 It introduces inefficiencies in the banking sector, which impair its ability to set budgets and plan investment in a rational manner. Removing the unpredictability of the tax rate would reduce its burden and should be the first step towards the removal of the tax altogether, on competitiveness grounds, once the deficit has been brought into balance. 9 Political Uncertainty and Corporate Investment Cycles, Brandon Julio (London Business School) and Youngsuk Yook (Sungkyunkwan University), February 2010 showed impact of political uncertainty around elections on corporate investment 10 SDLT on non-natural persons purchasing properties valued over 2mn legislation had an extended period of consultation post its announcement

8 Increasing taxes on wealth The continued pressures on both public spending and taxation to restore fiscal balance have led to a number of calls for an increase in tax on residential property, specifically high-value property the so called mansion tax. This debate is particularly relevant for London given that approximately four-fifths of UK properties valued over 2mn are located in the capital 12 ; and is founded, in part at least, on the misnomer that residential property is relatively undertaxed in the UK.. Comparing the UK s taxation of property with that in other G20 countries shows that the UK has the highest property tax as a proportion of GDP ofall countries for which data are available. While recurrent property charges (e.g. Council Tax) are relatively low the UK has high rates of transaction taxes 13. An upper rate of 7 per cent for 2mn+ properties was introduced to Stamp Duty Land Tax ( SDLT ) in and from April 2013, a new annual tax on enveloped dwellings 15 is levied on company owned homes worth over 2mn 16 Figure 5: 12 Homes worth 2M+ are charged the highest SDLT (7 per cent) and London raises 79 per cent of the total UK yield in this bracket. 13 See 14 See 15 Property held within a company 16 There are four bands, with the top band (for properties valued at more than 20 million) paying 140,000 per annum. Also capital gains tax is now chargeable on the disposal of high-value UK residential property applying to companies registered both in the UK and abroad 8

9 The high levels of tax already applied on UK property make it clear that property is not currently under-taxed. While these figures make a strong case for not increasing the overall burden of taxation on UK property, there are arguments for restructuring the application of UK property tax in order to smooth out inequalities. 17 However any changes to the taxation of UK property should not add to the aggregate burden of tax and need to be assessed in the context of the UK s ability both to attract talented indviduals to work here and encourage investment in London s property market. The need for increased residential development in London and the South East to meet the demands of an exanding population make it vital that development is not hindered by uncompetitive taxation. 18 The transfer of fiscal responsiblity for the full suite of property taxes to the London government, as proposed by the London Finance Commission, would allow it to design tax policy specific to London s needs. This could include a move away from the UK's slab tax approach to a progressive system of taxation where the amount paid is more closely related to the value of the property and therefore to the ability of the individual to pay. December 2013 ***** 17 There has been concern that the structure of property tax is inequitable. This view is based on the analysis of recurrent taxes as, while SDLT is a percentage of the property purchase price, there is a weak correlation between council tax bills and property value. The ratio of tax paid from Band A (the lowest) to Band H (the highest) is 1:3. Therefore, a home in a London borough with a 2013 value of 25mn will pay only three times the council tax of one with a value of 250,000. According to analysis by Knight Frank of the cost of owning a 2mn property in 15 prime locations around the world, London was one of the least expensive (11th place) in terms of recurrent annual costs, but 3rd most expensive in terms of initial purchase costs Building London, Building Britain: the economic impact of central London office construction London First and pwc,

10 London s contribution to UK public funds London is home to high quality business clusters in financial, professional and creative services, which stimulate economic activity across the UK economy. London represents 13 per cent of the UK s population, provides 16 per cent of jobs and accounts for 22 per cent of total UK GVA. This disparity between jobs and value-add is a function of the city s high level of productivity and a result of a complex interaction between physical capital, human capital and the concentration of economic activity. A vibrant business environment enables London to make a significant net contribution to overall UK tax revenues. While the UK economy as a whole has dipped in and out of recession since the financial crisis, the London economy has proved more resilient, reporting a higher rate of growth than the rest of the UK and positive year on year growth rates throughout the period (lowest being 1 per cent in 2009 before recovering to 2 per cent for 2010 and an expected 2.2 per cent 1 in 2013). Over the five-year period 2007 to 2011, London s sustained growth has resulted in it increasing its share of UK GVA from 20.7 per cent to 21.9 per cent. Prior to the financial crisis, London made annual contributions to public finances ranging from 10bn and 20bn. While this was reduced in the immediate aftermath of the crisis, it recovered in 2009 with a 5bn net contribution. Only two other regions the South East and East, both of which are closely linked to the London economy, have consistently delivered a fiscal surplus. As growth returns, London will continue to make a net contribution to UK tax revenues, an amount that it expected to grow significantly over the coming years. Data provided to the London Finance Commission predicted London s net contribution to increase to 22.8bn in 2015, 40.9bn in 2020 and 54.2bn in