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July 11, 2014
Opposition Party Unveils Plans for 'Fairer' Tax System
by Stephanie Soong Johnston

Full Text Published by Tax Analysts®

Labour Shadow Chancellor Ed Balls on June 30 unveiled a new "pro-business but not business as usual" plan to promote long-term investment, under which the U.K. would maintain the lowest corporate tax rate among G-7 nations and introduce a lower capital gains tax rate for long-term investors.

Speaking at the London Business School, Balls announced that he and Shadow Exchequer Secretary Shabana Mahmood have published a policy review paper  that lays out the center-left Labour Party's plans to reform the U.K.'s business taxation regime, which he said "must be competitive, promote long-term investment and innovation, and be simpler, predictable and fair."

Balls pledged to maintain the U.K.'s competitive corporate tax rate among G-7 countries, but he said his party would reverse current plans to drop the rate from 21 percent to 20 percent in April 2015.

Because companies are also concerned about other facets of the business tax regime, including capital allowances and business rates, the Labour Party does not plan on cutting the corporate tax rate further next year if it wins the next U.K. general elections on May 7, 2015, according to Balls.

Instead of further corporate tax cuts, Balls pledged to cut and then freeze business rates for more than 1.5 million business properties in order to support more businesses and keep the overall business tax regime competitive.

To boost the U.K. tax system's competitiveness and long-term investment, Balls said the Labour Party will consider introducing an allowance for corporate equity, as suggested in the Mirrlees Review of the U.K. tax system. The review, published in September 2011, was chaired by Nobel laureate Sir James Mirrlees for the U.K. Institute for Fiscal Studies and is considered the deepest and broadest analysis of the U.K. tax system in more than 30 years.

Such an allowance for corporate equity would extend tax relief available on debt finance to equity financing and "offer a strong incentive for long-term investment," Balls said, adding that the party would consult with stakeholders, including the business community, on the execution of the scheme.

The party will also consider a lower capital gains tax for long-term investors to make "long-term investment attractive to the investor as well as to the recipient of funding," he said.

The next Labour government will tackle tax avoidance "through international leadership in the G-20 and the OECD and by closing loopholes, increasing transparency and ensuring we have tougher independent scrutiny of the tax system," Balls said.

Specifically, he proposed eliminating the quoted Eurobond exemption, which excludes corporate debt listed on recognized stock exchanges from U.K. withholding tax. The exemption was intended to allow companies to receive financing from international bond markets more easily, but some companies have used the exemption to avoid taxes by shifting profits out of the U.K. in the form of interest payments.

"The purpose of a competitive tax system must be that companies view Britain as a great place to do business, not simply a cheap place to shift their profits," Balls said.

Other anti-tax-avoidance measures include increasing tax transparency and encouraging deeper examination of the tax system by independent investigators.

"Our tax system must tackle the short-termism that has become an entrenched feature of the U.K. business environment and instead promote the long-term investment we need to create more good jobs for the future," Balls said.

Katja Hall, deputy director-general of the CBI, the U.K's top business group, welcomed Balls's speech in a statement, saying that a competitive business tax system is a key component of future economic growth. She praised plans to increase business investment, which she said would "help firms of all sizes harness their potential," especially midsize enterprises and manufacturing companies.

"It is also important that the tax system encourages and rewards a long-term investment focus," Hall added. "The best way of ensuring the recovery benefits all is through a thriving private sector and businesses of all sizes will deliver this growth."

However, Matthew Hancock, minister of state for skills and enterprise, and a Conservative member of Parliament for West Suffolk, criticized Balls's speech in a June 30 op-ed for, saying that the Labour Party has "demonstrated conclusively that they are the anti-business party."

Hancock pointed to Balls's pledge to reverse the planned corporate tax cut to 20 percent in April 2015, noting that while Balls was in government between 1997 and 2010, the U.K. corporate tax rate increased from the 20th highest in the OECD to the 10th highest.

The Labour and Conservative parties are "trying to show that they are on the side of business while leaving room to extract every penny they can from the rest of us," Ray McCann of Pinsent Masons LLP told Tax Analysts. "Both parties at times pursue pointless policies, such as Labour reversing the cut in corporate tax."

Labour's proposal to reverse the corporate rate cut will reportedly fund a reduction in business rates that are hurting smaller "Main Street" businesses, according to McCann. "The other tax breaks would simply add to the clutter here that has been criticized by Parliament," he said, noting that long-term investment is already encouraged by the existing 10 percent capital gains tax rate on up to $15 million in gains.

"It is all intended to try to win back the south of England vote, which is very tax-aware since it pays a high proportion of tax due to higher wages and property values, and has a high proportion of small businesses," McCann said. "Overall I expect that Balls has his work cut out to convince business that these policies are the right priorities."

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