Tax Devolution: making growth the goal

Tax Devolution: making growth the goal Policy briefing # 6 Discussions on the further devolution of tax powers must be assessed against whether the proposals will nurture growth and preserve the single market for business taxation. With devolved governments and local authorities gaining further fiscal powers, it is vital that devolution is underpinned by a focus on driving economic growth. Devolved governments and local authorities should set out clearly how new and existing devolved tax powers will be used to improve their business environments and encourage investment. Discussions on the further devolution of tax powers must be assessed against whether the proposals will nurture growth and preserve the single market for business taxation. Devolution presents an opportunity to help drive growth and enhance productivity across the UK. When implemented appropriately the devolution of fiscal powers has the potential to create more attractive business environments which enhance growth in all regions and nations of the UK. However, fiscal devolution which is hastily implemented and lacking sufficient business consultation carries risks for firms operating across the UK. Businesses want to work with government to ensure that fiscal devolution is designed and implemented in a way which creates stronger local business environments which increase inward investment without harming the benefits that the UK s economic union offers. In this paper we argue that: Fiscal devolution should complement the UK s well-functioning economic union Devolved and local governments should use their new and existing fiscal powers as levers to drive growth A single Great British Corporation Tax rate drives investment across the country Firms need clarity on variable business rates to help them focus on investing in local economies

Fiscal devolution should complement the UK s wellfunctioning economic union The benefits of the UK s economic union underpin our economic prosperity. A stable macro-economic framework, common economic institutions and shared financial services regulations are integral to the ability of businesses across the UK to invest and grow with certainty, and the pooling of tax revenues and sharing of risks between all regions and nations gives people and businesses economic security. As tax powers are devolved it is essential that these benefits are preserved. Devolution must not undermine UK wide fiscal credibility, which businesses rely upon The CBI supports the government s focus on deficit reduction to return the public finances to balance. Sustainable public finances are the foundation for business confidence and private sector growth. As devolved governments, combined authorities and local authorities gain tax powers, maintaining fiscal credibility will require increased co-operation between institutions and policymakers across the UK. Firstly, the UK government must work together with devolved governments and local authorities to ensure commitment to and accountability for balancing the books. Secondly, businesses need further clarity about the new fiscal framework agreed between the UK and Scottish governments and the borrowing powers to be agreed between the UK and Welsh governments. Thirdly, following the announcements that English and Scottish councils will be able to keep the full receipts from business rates and vary the rate, the UK and Scottish governments must work with local authorities to implement the reforms in such a way that does not increase local government borrowing and undermine creditworthiness. Devolved governments should use their new and existing fiscal powers as levers to drive growth Businesses are committed to driving growth across the UK and are looking to see how new and existing tax powers for devolved governments and local councils will be used as levers to support that goal. Consultation between business and governments of all levels is key to ensuring devolved policies can deliver this. Devolved governments should each set out a tax roadmap with the vision for how their fiscal powers will be used to drive growth Tax Powers in the devolved nations Scotland Existing - The Scottish Government currently controls Business Rates, Stamp Duty Land Tax and Landfill Tax. Imminent - Income tax will be partially devolved and a new Scottish Rate of Income Tax (SRIT) created - in April 2016. Future - Further powers will be devolved before 2020. These include: full income tax (including rates and bands), Air Passenger Duty and 50% of VAT receipts (to be retained). Wales Existing - Business Rates are devolved to the Welsh Assembly. Future - Stamp Duty and Landfill Tax will be devolved in 2018. Income tax will be partially devolved at an unspecified date. Northern Ireland Existing - Business Rates are devolved to the Northern Ireland Assembly. Future - Corporation Tax will be devolved in 2018, when the rates will be cut to 12.5%. 2

The devolved governments have a good opportunity to continue building reputations as pro-enterprise nations with modern and efficient tax systems, which will give businesses the confidence to invest and create jobs. A roadmap should set the way ahead on devolved taxes to give businesses the clarity and certainty required when making long-term decisions. Roadmaps in Scotland, Wales and Northern Ireland should set the way ahead on devolved taxes to give businesses the clarity and certainty required when making long-term decisions: Having recently set a direction for Air Passenger Duty (APD) after it is devolved, the Scottish Government should set out a roadmap for the Parliament for all other taxes which are devolved or soon to be devolved. As the Welsh Government gains control of stamp duty and business rates in 2018 and partial income tax at a future date - business would welcome a roadmap which sets out a clear pathway of reform for those taxes. Business welcomes the rate and date that have been set for the devolution of Corporation Tax to the Northern Irish Executive. All parties should continue to work together to ensure that this new fiscal power is underpinned by a commitment to sustainable public finances. New proposals for further devolution of tax powers should go through a proper policymaking process, including a cost-benefit analysis and proper consultation with the affected parties. Tax collection regimes should be simple and effective for businesses Tax collection regimes for devolved taxes should be simple, fully-functioning and effective for businesses. New tax authorities should have sufficient resources and institutional expertise to collect devolved taxes. Ensuring sufficient recruitment of relevant tax specialists within government will increase effective policy making and collection. HMRC should also offer its staff secondment opportunities in the new bodies as they are set up, to share best practice. New tax authorities should work with HMRC on how introducing devolved taxes can support and not impede business operations, in particular avoiding duplicated functions and activities. For example, it is important that digitisation strategies are consistent as we move to more simplified tax collection systems fit for the 21 st century. Any major changes to devolved tax rules should be based on UK coordination allow sufficient time for meaningful consultation with relevant stakeholders. Consistent and fair compliance frameworks and penalties regimes underpin effective tax systems. For example, there must be a UK-wide approach to Disclosure of Tax Avoidance Schemes (DOTAS) and the General Anti Abuse Rule (GAAR). Where further changes to taxation are being planned, devolved governments should allow sufficient time for meaningful consultation with businesses. Giving businesses clarity will give them the confidence to invest. The Office for Tax Simplification should be empowered to comment on whether any changes to taxes by devolved governments meet the tax principles that underpin the roadmap. As well as seeing how the new powers can be best used to support growth, providing assurances about devolved tax collection will allow businesses to get on and invest and create jobs. Success will depend on strengthening capabilities within the Scottish and Welsh governments and their agencies Revenue Scotland and the Welsh Revenue Authority. The UK government should work with the devolved governments to embed the changes in the relevant tax authorities and ensure that processes and systems are ready. The CBI has set out a number of processes we would like to see followed to ensure that new regimes do not add cost and complexity for firms: 3

A single Great British Corporation Tax rate drives investment across the country A single rate of Corporation Tax in Great Britain provides clarity, simplicity and consistency at scale to businesses operating across regions and nations. It allows firms to trade and invest easily across the UK. The UK s single market for business taxation provides clarity, simplicity and consistency to businesses operating across the UK s regions and nations. It allows firms to trade and invest easily across the UK and is one element helping to make the UK Europe s number one FDI destination. It is vital that the debate on further devolution of tax powers is based on strong economic evidence as to whether it will improve the UK economy and our international attractiveness further. Policymakers should assess whether devolving a particular tax power will strengthen growth and maintain the strengths of our single market for business taxation. The UK government s proposed devolution of Corporation Tax rates to Northern Ireland reflects unique conditions, specifically, that Northern Ireland is the only part of the UK that shares a land border with another country, and that the Republic of Ireland has a rate of Corporation Tax that makes Northern Ireland s rate uncompetitive. These conditions do not exist in Scotland or Wales and so the costs of devolving Corporation Tax outweigh the potential benefits. Creating a multiple-rate Corporation Tax regime within Great Britain would add cost and complexity to doing business, undermining rather than strengthening growth. Firms with pan-gb operations would have to restructure to deal with activities equivalent to working across international borders. HMRC would have to work out where economic activity is located and what should be taxed in each nation. This process would be complicated (as the OECD BEPS project has highlighted), and could penalise growing firms in particular. These firms often already lack the resources for tax administration and find cross-border taxation a huge barrier to growth. Research conducted in the CBI s Stuck in the middle: addressing the tax burden for medium-sized businesses found that 45% of MSBs said tax was a factor in slowing down commercial decisions. 1 Firms need clarity on variable business rates to help them focus on investment and growth The announcements that English and Scottish councils will be able to set and vary - business rates in their areas gives capable local authorities an opportunity to take action to support private sector growth. The potential for variable rates is an opportunity for growth, but must avoid complexity The CBI has supported other schemes that already exist to promote private sector growth through incentives for local authorities and businesses, such as Enterprise Zones with financial incentives. Allowing local authorities to keep the business rates raised in their area is a further opportunity for local authorities to improve their business environments. Business rates devolution to councils England All local authorities in England will be given powers to collect and lower Business Rates by 2020. Grants from central government will stop, so councils will be responsible for the cost of any Business Rates cuts together with being able to reap the benefits. Elected mayors in city-regions will be able to add a 2p premium onto Business Rates to fund local infrastructure projects. Scotland Since November 2015, Scottish councils have had powers to collect and lower business rates. Councils will also be able to reduce rates for businesses based on criteria they choose, such as the type of property, its location, occupation or activity. However, businesses are concerned by the potential for variable rates within England and Scotland. Clarification is needed over how the new systems will work in two key areas. Firstly, tax departments would have to deal with multiple rates across local authorities. The CBI awaits further detail from the UK and Scottish governments on how cost and complexity can be 4

minimised to allow businesses to focus on investing in local economies. Secondly, councils will need to be supported to manage the regional tax competition and tax volatility that may result from these changes. Business rates in the devolved nations must be made simpler, fairer and more competitive The CBI has set out a broad list of reforms to simplify to the business rates system in a separate paper in this series. A vision for a simple, fair and competitive business rates system offers a package of reforms which can support private sector growth across the country. It is important that these tenets should also drive policymaking in the devolved nations. Businesses operating in Scotland, Wales and Northern Ireland want to see certainty through publishing of rateable values and relief thresholds well in advance to help their budget planning. It is also important that devolved governments monitor developments and ensure their rates are competitive with the poundage rate in England. Footnotes 1 CBI, Stuck in the middle: addressing the tax burden for medium sized businesses, May 2014 For further information or a copy in large text format, please contact: Ed Richardson, Policy adviser, CBI T: 020 7395 8121 E: edward.richardson@cbi.org.uk Copyright CBI 2016 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI. www.cbi.org.uk @cbitweets linkedin.com/company/cbi 5