Corporate tax system ‘not fit for purpose’ say manufacturers

Posted on 27 Mar 2009 by The Manufacturer

EEF calls for overhaul of UK corporate tax system to create high value, balanced economy

The UK’s corporate tax system needs a strategic overhaul if investment in manufacturing is to drive the upturn and help build a better balanced, high value UK economy, according to a review of the current approach published today by EEF, the manufacturers’ organisation.

According to the report ‘A Manufacturing Future – Competitiveness and taxation in the UK’, much of the UK’s business tax system remains rooted in the past and is actively constraining manufacturers’ investments, compounding the credit crunch and limiting the extent and benefits of a balanced economy.

Drawing on the views of EEF’s Business Tax Panel, EEF is urging government to adopt a more coherent tax strategy that is explicitly aligned with the Manufacturing Strategy. This will promote investment by domestic companies and encourage greater levels of inward investment in the UK by overseas companies

Commenting on the report, EEF chief economist, Steve Radley, said:

“Government must match its commitment to promoting a more balanced economy in which manufacturing plays a greater role by addressing the current failings in our tax system. We need a system which continually evolves to reflect the realities of rapidly changing technologies and global competition. In particular, the government must ensure that the taxation of investment reflects the true costs of high-value manufacturing investment”

According to the report, the current treatment of capital expenditure reflects neither advances in technology, nor the investments manufacturers need to remain competitive. Furthermore, the rising administrative and compliance burdens placed on business, the attitude of the tax authorities and uncertainty over the direction of tax policy all add a premium to doing business in the UK.

This is not only hitting investment by smaller companies based in the UK and pushing larger more mobile manufacturers overseas, it is damaging prospects for inward investment. This threatens harsh consequences for UK supply networks which are essential to attract and retain investment by key industrial sectors such as automotive and aerospace.

In response, EEF is calling for strategic reforms of the corporate tax system to be based on two fundamental principles: competitiveness and predictability. This encompasses immediate reforms and longer term changes that would guide the development of tax policy over the next decade.

Key recommendations:

• Immediate changes to the tax system to align and support the government’s manufacturing strategy including a more realistic treatment of capital expenditure to reflect rapid changes in technology and longer term investment
• A more deliberate policy development and consultation process to improve the quality of legislation, minimise unintended consequences and the need to rapidly reverse or change new measures.
• A long term commitment to improve the international competitiveness of the business tax regime. This should begin with a commitment to modernising the system and reducing the effective tax rate over time.
• A commitment to moving towards a system that allows for immediate expensing of all capital expenditures. This would reflect the critical role that continual reinvestment plays in manufacturers’ competitive position.
• A commitment to resolve the taxation of foreign profits issue by introducing the dividend exemption in the coming Budget.

Andrew Churchill, managing director of JJ Churchill and a member of EEF’s Business Tax Panel, commented:

“Running a sub-contract precision engineering business, surviving the recession will be painful. The much more substantial challenge will be surviving the upturn. In a high-labour cost economy, the only reason we remain in business is through process innovation that is inseparably hitched to the rapid evolution in machine tool technology. Quite simply, if we fail to aggressively re-invest in capital equipment we are accepting a rapid erosion of our competitive advantage – in essence we increasingly compete on our cost of labour, a battle we know we can’t win.

“Currently, our tax system fails to recognize the importance of capital investment to manufacturing or the advanced technologies and short lives of modern machinery. In buoyant times, this puts a hidden brake on the abilities of companies to re-invest; in recession it positively discourages the one thing the government must catalyse if, in the upturn, we’re to have a balanced economy.”

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EEF Business Tax Panel was created to set out an agenda for change to the UK’s tax system in order to best support manufacturing in the UK. Chaired by Tony Pedder, chairman of Sheffield Forgemasters International, the panel members represented the breadth and depth of UK manufacturers.

The panel met at a series of workshops during the autumn of 2008 and early in 2009 and was supported by accountants PricewaterhouseCoopers. The panel would like to thank the officials from BERR, HM Treasury, HMRC and opposition parties that participated in the workshops.

Chair: Tony Pedder, Sheffield Forgemasters International Ltd

Members from:
PricewaterhouseCoopers, Siemens, Caterpillar Inc, JJ Churchill Ltd, Marshall Group of Companies, Harwin plc, B&W Group Ltd, Caparo plc, Smiths Group plc