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Article / 21 April 2015 at 11:00 GMT

UK Election: Labour's alarming corporation tax policy

Managing Partner / Spotlight Group
United Kingdom
  • Governments don't create wealth, policies do
  • Current chancellor balances competitiveness with probity
  • Labour refuses to be explicit about its plans

Promises, promises, promises. Source: Party websites 

By Stephen Pope

In a general election that is proving too close to call, the main parties are all striving to present their cases for delivering growth and prosperity to the UK economy. From the outset it is important to be clear. Governments do not create lasting wealth or growth; they can simply create the conditions that will encourage the private sector to invest, employ and deliver the goods and services that the economy requires.

Government has a role, however, that should be limited to being the incubator for pro-business conditions, enforcing sensible regulations so that consumer welfare is protected and providing the societal infrastructure to protect the nation's citizens i.e. armed forces, emergency services, education, health and of course justice through the law.

A good place for business

The UK ranks ahead of low tax rivals such as Ireland, Luxembourg and Switzerland to become multinationals’ favourite tax regime so underling the efforts made by the coalition since 2010 to make the country more attractive to foreign investors.

The current Chancellor of the Exchequer, George Osborne, has overseen a drive to increase the UK’s tax competitiveness while bowing to political pressure to clamp down on corporate tax avoidance if not outright evasion. Mr Osborne said he had made great progress in fulfilling his pledge to make the UK the most attractive corporate tax system in the G20.

The coalition has overseen a significant reduction in the corporate tax rate from 28 percent in 2008 to 20 percent and coupled this with radical reforms to the way that foreign profits are taxed; however, the Treasury has proposed that rule changes to eliminate the relocation of profit to lower tax regimes need to be agreed internationally. Most corporations are well behaved and comply with the law when it comes to paying the appropriate share of tax. Sadly it is the bad cases such as Amazon and Starbucks that grabs the headlines.

In a 2013 survey of tax executives from 57 companies drawn at random from the FTSE 100 and FTSE 250 the Financial Times reported that six out of 10 executives said they favoured a voluntary code in response to pressure for greater transparency on tax. Over than three-quarters of businesses say the attractiveness of a tax regime has at least some influence on where they locate. The main factors are low-tax rates, stability, system simplicity and a good lead time on warnings as to big changes.

The Labour way

The Labour party began its election campaign with an advert in the FT featuring several comments from prominent business leaders.

Labour took out a full-page advert in the Financial Times featuring quotes from six of the UK's biggest business leaders warning about the risks of leaving the EU. The advert had the tag-line:

"The biggest risk to British business is the threat of an EU exit. Labour will put the national interest first. We will deliver reform, not exit.”

However, the quotes used in the advert were up to two years old and several of the companies quoted have raised concerns. Company spokesmen were swift to issue statements making clear that they were not linked to Labour.

A statement from Kellogg's said the quote used by Labour in the advert was made over a year ago by its UK managing director.

A spokesman from the German engineering firm Siemens said:

"Siemens has profound concerns about a possible UK exit from the EU. We are also on record of expressing our concern about the uncertainty that a referendum would create – particularly as it is not clear what options would be presented. …We are however very clear that a referendum
might be called, and if it is, we will support efforts to get a better deal and stay in the EU. We do not, however, endorse any political party." 

Corporation tax calamity

Ed Balls

Never says never. Shadow Chancellor didn't promise not to hike tax. Image: Sky News

The Shadow Chancellor Ed Balls has not really followed up on the pro-business approach as he has left the door open to increasing corporation tax if Labour wins the election. On the Sky News Murnaghan show, Sunday April 19, Mr Balls refused to rule out an increase in corporation tax on large companies. That was the second time in the past week that he refused to rule out increasing corporation tax.

Mr Balls said the New Labour administration had cut corporation tax from 33 percent, and he had offered its support for the reductions to 21 percent under the Tories, but fell short of ruling out an increase when repeatedly pressed.

“I have made a commitment which is that we will keep corporation tax rate, the main one at the lowest level of any of the big G7 countries,”

All Mr Balls has pledged to do is keep the UK level of corporation tax the lowest in the G7 in order to remain internationally competitive. However, this is a pledge that is designed to give Labour substantial latitude to raise the tax level and not have broken its word.

• This is because the next lowest rate is in Canada’s at is 26.5 percent.

Since coming to office in 2010 the coalition has cut corporation tax from 28 percent to 20 per cent. Mr Balls has clearly set his sights on corporation tax as he has been explicit about not increasing VAT and the basic rate of tax.

Naturally, the Conservative Party would not let opportunity pass them by and David Gauke, the Conservative Treasury Minister, said a rise in corporation tax to by 4 percentage points could cost nearly 100,000 jobs over four years.

“It's clear Ed Miliband and Ed Balls are leaving the door open to a damaging tax rise that risks costing jobs, risks costing investment and risks the economic recovery,”

Of course the Labour Party love to keep returning to hit the financial community and it is estimated that a 5 percentage point rise in corporation tax would create a large extra expense for big  banks and established liquidity providers alike. Last week, Michael Spencer, CEO of ICAP plc stated that he may relocate his firm to North America should the Labour Party become victorious on May 7th.

Labour’s paymasters – the trade unions – see no link in low tax and job creation 

The Trades Union Congress’s Corporate tax reform and competitiveness report further cuts to the UK’s already low corporation tax rate would not have any significant impact on job creation or the economy, and would further reduce revenues at a time when the government is most in need.

They claim that the government has been seduced by employer calls for more corporate tax cuts but the argument that simply cutting corporation tax will fuel jobs and growth does not stand up to scrutiny.

However, this is a view that believes the state should be at the centre of steering the economy. It favours the meddling hand of the state as against using supply side policies to let the private sector be incentivised to employ more people and undertake investment so boosting aggregate demand that will in turn stimulate aggregate supply and deliver GDP growth on a non-inflationary trajectory.

This election is close, too close to call, however, the economic visions between the two main parties is wide apart. May 7th will prove to be a pivotal day in UK economic history.

– Edited by Clare MacCarthy

Stephen Pope  is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.


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