London First report “Taxing London for Investment and Growth”November 20, 2012
Five steps to a stable and competitive tax regime
Business leaders today put forward a five point plan for reforming the UK’s Tax regime, to support London’s international competitiveness and improve the stability of the tax system.
In a report, “Taxing London for Investment and Growth” the business membership group, London First, argues that London is the driver of the UK economy and getting the right tax mix for London will support UK growth, an essential element in reducing the deficit.
It notes that stability is the most powerful tool in delivering a competitive tax regime and raises concerns that, while some improvements have been made in the past two years to the UK, and therefore London’s, tax competitiveness, surprise tax changes, such as the changes to Stamp Duty Land Tax, and poorly designed taxes, such as the frequently-changing bank levy rate, have damaged the UK’s reputation for tax stability and place certain key London sectors at a competitive disadvantage.
To achieve a tax mix that supports London’s ability to attract global capital, investment and talent London First recommend five measures:
1. Commit to delivering a stable tax regime, free from shocks. Stability does not cost but yields benefits.
2. Commit to a revenue-maximising top rate of income tax. At 50%, the UK currently has the highest top rate of tax of the world’s 10 leading economies. The economic benefit of such a high rate is questionable; analysis from the Institute for Fiscal Studies suggests that a top rate of around 40% is the revenue maximising rate. So, while the planned reduction in the top rate of income tax to 45% in April 2013 is welcome, it should be viewed as an interim measure. The government should commit to a return to a top rate of income tax of 40% when the economic climate permits.
3. Heed the response to the recent consultation on the Stamp Duty Land Tax changes announced in the March 2012 Budget and ensure that legitimate businesses are exempt from the 15% SDLT rate and the proposed CGT exit charge and annual levy. Given these companies were never the intended target of this legislation, this amendment should not be a cost.
4. Remove the UK bank levy. Banks are already major contributors to the UK’s tax base through corporation, employment and other taxes. Further taxes should not be applied to this sector, particularly if poorly structured (so resulting in frequent rate changes). In the event that the bank levy is not removed, the Government should commit to make further changes to the rate and to undertake an analysis of how the structure of the UK levy compares to levies in other competitor jurisdictions, such as New York and Frankfurt, with the intent to amend the UK levy to support the competitiveness of London as a banking centre.
5. Prioritise tax cuts where they will deliver the most competitive advantage. The government is committed to reducing the corporation tax rate to 22% by April 2014. At that rate, while, the UK will not have the most competitive corporate tax rate in the G20, it would be more competitive than its key competitors. Given budget pressures and the need to prioritise tax cuts, we would recommend funds are targeted at taxes which put London at a competitive disadvantage (as mentioned above) before any further cuts to the corporate tax rate.
Jo Valentine, London First chief executive, said:
“We critically need to attract global businesses, capital and talent. Investors need to be confident that the principles underpinning our tax regime won’t be constantly changing and that the approach will support growth rather than penalise success.
“That means avoiding ill-considered new taxes, a competitive top rate of income tax, the removal of taxes that put key sectors of London’s economy at a disadvantage and corporation tax at a level that compares well with other G20 states.
“London contributes far more in tax than it receives back, so getting tax right will be good for London and good for the UK.”
A copy of the full report is available here.
Notes for editors
1. Institute for Fiscal Studies Briefing note BN84 (2209) concludes (section 10, p25) that taking on the assumption that behavioural responses to higher rates of income tax lead to genuine falls in income, and thus spending, amongst the very rich, the rate of 40% is estimated to be the revenue-maximising rate.
2. City of London Corporation report by PWC (Dec 2011) “The Total Tax Contribution of UK Financial Services” showed financial services contribute £63bn in tax, of which the majority is contributed by banks (p2: banks paid 72.8% of the total taxes borne; and 66.5% of the total taxes collected).
3. London is a net contributor to the UK economy and the most productive region in the country. London’s GVA is more than double that of any other UK region other than the South East, (1.5 times the size) and London and the South East combined provide more than a third of the UK’s GVA.
4. In terms of tax revenues, London is a net contributor to the rest of the UK. In the decade leading up to 2009/10an average annual contribution on £17 billion was made. During the recent challenging years, when the UK is running a sizeable deficit, London is still predicted to make a positive contribution (£1.9 billion 2010/2011 and £5.5 billion 2011/12). While the potential range of possible contributions is wide, projecting forward to 2019/20 the central estimate for London’s tax export is £43.1 billion.
5. London First’s mission is to make London the best city in the world in which to do business. It was established in 1991 to campaign for government policies and practical measures that will help London maintain its status as a leading World City. It is a not-for-profit organisation, entirely funded by its members. Its agenda is developed independent of party political motives or affiliations.
London First represents the capital’s leading employers in key sectors such as financial and business services, property, transport, ICT, creative industries, hospitality and retail. Membership also includes higher education institutions and further education colleges.