On course for competitiveness Budget survey 2014
Executive summary With an election looming next year and EY s ITEM club predicting a modest upgrade to the short-term forecast for economic growth, the Chancellor may well be making plans for a Budget full of measures building on his drive to maintain UK competiveness. But is that what business wants? Should he be focusing his attention elsewhere? Our Budget survey reveals much good news but some challenging messages for the Chancellor: 65% of respondents list the low mainstream rate of corporation tax as the factor that has most improved the competitiveness of the UK. Other elements of the corporate tax roadmap changes to the rules for controlled foreign companies, the patent box and above the line R&D tax relief are also listed. While 21% responded very positively when asked to rate the extent to which the changes to enhance the competitiveness of the tax system caused their organisation to consider locating or expanding activities in the UK, just under a third of respondents said the changes had no impact at all. The commercial risk posed by uncertainty is a theme running throughout our survey results, particularly in the context of: the forthcoming election political tinkering generally the OECD s action plan on base erosion and profit shifting (BEPS) the influence of the OECD/EU more generally the complexity of our system the prospect of Scottish independence personal tax rates (particularly the prospect of a 50% rate) Almost 80% of respondents listed certainty as one of the top three factors that should be driving the UK s tax policy choices 44% as the top factor. Of those, only 18% think certainty has been delivered in recent decisions around tax policy. What the Chancellor can most usefully do to help businesses is actually to do nothing. As far as corporate tax is concerned, businesses want boring. Instead, it s time to think about a personal tax roadmap: Almost half of respondents to our survey think that the costs associated with employing staff should be reduced. Taken together with those who would like to see the rate of employees national insurance lowered, the results show that 84% of respondents think that national insurance contributions need to change. Almost half of respondents think that income tax rates are too high and taken with those who think allowances should be increased, 74% of respondents would like to see income tax changes. Survey details Our survey had 143 respondents from a broad range of sectors 43% were from organisations with turnover in excess of 1bn 54% of respondents were Tax Directors or CFOs 27% were from organisations headquartered outside the UK EY 1
On course for competitiveness? When the Chancellor stands up to make his Budget speech on 19 March 2014, he will be doing so safe in the knowledge that his corporate tax roadmap now in place for four years is helping to secure the UK s position as a place to do business. Our 2014 Budget survey provides him with evidence to support that view. With 65% of respondents listing the low mainstream rate of corporation tax as the factor that has most improved the competitiveness of the UK, the corporation tax roadmap is clearly having a positive impact. The next three items listed by respondents in this free text question were also elements of the roadmap. Indeed, even an often forgotten component the administration of the tax system was also part of the top six factors mentioned by respondents. What factor has contributed most to improving the tax competitiveness of the UK? 70% 65% 60% 50% 40% 30% 16% 8% 4% 2% 0% CT rate CFC changes Patent box R&D Income tax - reduction to 45% HMRC approach In response to the question specifically around the mainstream rate planned for 2015, 85% of respondents indicated that they consider it to be about right compared to 66% last year. Our 2013 UK Attractiveness Survey confirmed the UK s position as Europe s top destination for Foreign Direct Investment (FDI) projects and even a brief look at corporation tax rates around the world illustrates why this is the case (see overleaf). With the UK rate set to drop even further by 2015, it is easy to see why the UK is such an attractive investment location. Do you think the current rate of mainstream corporation tax for 2015 is: 84.6% 9.1% 6.3% Too high Too low About right EY 2
The international landscape corporation tax rates around the world 45 40 35 30 25 20 15 10 5 0 Top 2013 tax rate (%) Top 2014 tax rate (%) Source: EY s Tax Policy and Controversy quarterly www.ey.com/tpc Not quite full steam ahead for the corporate tax roadmap With the individual elements of the roadmap being so clearly appreciated, it is perhaps surprising that the package of measures taken together has yet to convince some respondents to commit fully to expanding operations in the UK or locating activities here. While 21% responded very positively when asked to rate the extent to which the changes to enhance the competitiveness of the tax system caused their organisation to consider locating or expanding activities in the UK, just under a third of respondents said the changes had no impact at all. One a scale of 1 to 5, to what extent have the changes to enhance the competitiveness of the tax system caused your organisation to consider locating or expanding activities in the UK? 18.2% 1 (not at all) 31.5% 2 7.0% 3 4 14.0% 11.9% 5 (Considerably) We are predominantly UK based 17.5% EY 3
Of course, that is only part of the story in their comments, some respondents indicated that their organisations are in the early stages of planning to locate or expand activities in the UK. However, it is clear that something is causing business to hesitate. Uncertainty is the biggest threat to UK competitiveness The overwhelming message coming through from the comments made by respondents to our survey is that uncertainty is limiting the impact of the corporate tax roadmap. In fact, almost a quarter of respondents listed uncertainty as the biggest threat to UK competitiveness. What do you consider to be the biggest threat to UK tax competitiveness and/or investment in the UK? 25% 24% 15% 13% 11% 5% 8% 8% 7% 5% 3% 3% 0% Delving down into the detail, the theme of uncertainty actually runs through a number of the other responses made to this free text question. In particular, uncertainty was mentioned in the context of: the forthcoming election political tinkering generally the OECD s action plan on base erosion and profit shifting (BEPS) the influence of the OECD/EU more generally the complexity of our system the prospect of Scottish independence personal tax rates (particularly the prospect of a 50% rate) EY 4
The degree of this underlying uncertainty is illustrated by the issue of the forthcoming Scottish referendum. A number of respondents mention the impact of the referendum in their comments particularly in the context of uncertainty and almost a quarter of respondents think that independence in Scotland would have an impact on their decision-making going forward. On a scale of 1 to 5, to what extent has the prospect of an independent Scotland featured to date in your organisation s decision-making? Will it going forward? 70% 65% 60% Impact on current decision-making Likely impact going forward 50% 42% 40% 30% 16% 11% 8% 6% 6% 4% 14% 7% 9% 0% It follows that certainty should be driving the Chancellor s tax policy choices As we might expect, with uncertainty emerging as the principal theme running through our survey results, almost 80% of respondents listed certainty as one of the top three factors that should be driving the UK s tax policy choices 44% as the top factor. After certainty, the next most popular factor was stimulating the economy with opportunities for jobs and growth. Respondents also commented that simplicity and transparency are other factors that should be considered. EY 5
What should be driving the UK s tax policy choices? Third 80% 70% 60% 50% 40% 30% 0% 15% 15% 34% 44% 27% 23% 17% 12% 16% 12% 9% 8% 6% Second First 3% It will be a cause of some concern for the Chancellor that only 21% of respondents think that factors such as certainty and growth have been delivered in recent decisions around tax policy. On a scaled of 1 to 5, to what extent do you think recent decisions around UK tax policy have delivered on the factors selected in the previous question? 2.1% 10.5% 18.9% 29.4% 39.2% 1 (not at all) 2 3 4 5 (considerably) EY 6
In fact, for those respondents who listed certainty as the top factor that should be driving tax policy choices, the proportion that think that has been delivered in recent decisions around tax policy drops to 18%. To what extent do you think recent decisions around UK tax policy have delivered in terms of key factors responses for those who selected certainty as the key factor 40% 30% 33% 40% 16% 2% 0% In their comments, respondents mentioned a range of issues. Some respondents felt that there is a disconnect between policy makers and on the ground practicalities. Others indicated a perception of reluctance on the part of HMRC to enter into advanced agreements. With the Budget providing a unique opportunity to build confidence around the roadmap and ensure it achieves its true potential, what can the Chancellor do to ensure that the roadmap continues in the right direction? Businesses want boring We asked respondents what the Chancellor could do to encourage their organisation to accelerate investment plans in the UK. As one might expect, we received an incredibly wide range of responses but certainty was by far the most common. Some of the causes of uncertainty listed earlier in this paper are beyond the Chancellor s control. For example, the Scottish referendum and the forthcoming election are not something he can change. Similarly the OECD s action plan on BEPS will continue regardless, although the Chancellor should think carefully before introducing measures to pre-empt BEPS as these would inevitably bring complexity and, with it, further uncertainty. One area where the Chancellor can actively add certainty is around capital allowances. Calls for clarity and certainty around the capital allowances regime ran throughout our survey responses. Respondents talked about a constantly changing regime characterised by the changes to the annual investment allowance (AIA). In 2012, the AIA was reduced from 100,000 to 25,000 but it was then temporarily increased for two years to 250,000 for qualifying investment in plant and machinery made on or after 1 January 2013. Businesses, particularly those in the manufacturing sector, want a regime that will last beyond short-term incentives they want to be able to plan further ahead than two years. EY 7
In general though, what the Chancellor can most usefully do to help businesses is actually to do nothing. Businesses want the Government to remove uncertainty where possible but failing that, they want to be able to make informed business decisions and take informed business risks. Businesses want boring. What could the Chancellor do to encourage your organisation to accelerate investment plans in the UK? 18% 18% 16% 14% 12% 8% 6% 4% 6% 5% 4% 3% 2% 0% Certainty Improve capital allowances Reduce costs of employment Reduce top rate of income tax Widen R&D relief Improve investment incentives It s time to let the corporate tax roadmap bed down and turn to personal tax If the Chancellor leaves the corporate tax system alone, that does not mean he can sit back and relax. A personal tax roadmap should be the next item on his agenda. With 54% of tax revenues coming from income tax and national insurance alone (compared to 9% and dropping for corporation tax), the personal tax system impacts a significant proportion of the population. However, with income tax, national insurance, capital gains tax, inheritance tax, stamp duty land tax alongside complex rules for pension contributions, share schemes and employer provided benefits, the personal tax system is unquestionably difficult for taxpayers to navigate. If the Government is looking to reduce the tax burden, where should it focus? 80 70 71 67 65 60 50 49 41 40 30 20 10 0 National insurance (employers ) Business rates Income tax (rate) National insurance (employees ) Income tax (allowances) Number of respondents. Some respondents indicated more than one issue. EY 8
Almost half of respondents to our survey think that the costs associated with employing staff should be reduced. Taken together with those who would like to see the rate of employees national insurance lowered, the results show that 84% of respondents think that national insurance contributions need to change. Almost half of respondents think that income tax rates are too high and taken with those who think allowances should be increased, 74% of respondents would like to see income tax changes. At the same time, more than a third of respondents think that any increase in the tax burden should be focused at capital gains tax and a further fifth think any increases should focus on inheritance tax. Alongside these two surprising results, the inclusion of VAT as an area where tax increases should focus is similarly unexpected, particularly since the last increase was so recent. If the Government is looking to raise revenue, where should it focus? 49 48 47 50 45 40 35 30 25 20 15 10 5 0 Capital gains tax 40 Landfill tax VAT Climate change levy 29 Inheritance tax Number of respondents. Some respondents indicated more than one issue. Leaving aside the question of rate, the UK s personal tax system is incredibly complex. With some rules going back hundreds of years and others introduced in response to recent developments, it is an increasingly difficult system for taxpayers to understand. Despite running alongside each other and being largely operated through the PAYE system, distinctions between income tax and national insurance remain. In particular, they differ in the definition of earnings, the period of assessment, the treatment of multiple employments, self-employment, savings and pensions. There are six different classes of national insurance including the charge on employerprovided benefits. In fact, employees national insurance alone takes up 25 lines of HMRC s rates and allowances tables compared to 12 for income tax. Income tax has its own degrees of complexity. The calculation of the taxable amount of employerprovided benefits dates back to a time when a higher paid employee was one earning more than 8,500 and an expensive property was 75,000. Merging the two systems would be politically difficult, particularly as it would bring the true rate of tax starkly into focus. A review of the administration of both PAYE and NIC commenced in 2011 with a call for evidence around integrating the operation of income tax and NICs but the Office of Tax Simplification's previous suggestion of a reform of the NIC basis, to align it to that used for employment taxation, seems to be worthy of further consideration. This could have significant benefits from the perspective of simplicity. More practically, it could result in lower administration and compliance costs. EY 9
More broadly, one could argue that capital gains tax and inheritance tax, which between them represent just 2% of total tax revenues (compared to 32% for income tax and 22% for national insurance), should be reviewed. Although capital gains tax was introduced in 1965 and inheritance tax in 1975 (as capital transfer tax), both systems are arguably outdated. Only 3% of estates paid inheritance tax in 2010/11 while capital gains tax now largely applies to the taxation of gains on shares and second homes. With just over 7bn of receipts between them, the Chancellor may not be able to afford to abolish them particularly given the associations with wealth for both taxes. However, both systems are complex and cumbersome so inclusion in a personal tax roadmap would bring efficiencies and direction. 1 Inheritance tax statistics 2010-11 Learn from the lessons of the corporate tax roadmap There is no question that a personal tax roadmap would be a huge undertaking but that is not a reason to delay. In fact, the extent of the challenge illustrates perfectly just how complex the system has become. Added to that, in approaching a personal tax roadmap, the Chancellor already has an exceptional example to follow in the form of the corporate tax roadmap. By analysing the elements that have made that project so successful, the Chancellor has a formidable process to use as a starting point. Of course, it is essential that he also learns from the challenges that have arisen along the way. As our survey shows, it is not enough to put together a series of promising elements. The real impact of the package as a whole comes from providing certainty. Certainty should be the benchmark of policy decisions going forward alongside simplicity in structure and clarity around objectives. In this way, businesses and individuals alike will be able to plan ahead with full knowledge of the associated tax implications and the UK will remain truly open for business for a long time to come. EY 10
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. 2014 Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk