A shifting – and increasingly complex – fiscal landscape is generating uncertainty and hampering planning for British businesses, new research indicates.
About half of the 1,453 changes in UK tax policy in the last 45 years were made between 2010 and 2016. And in the past two years alone, there have been 263 changes, according to research conducted by Martin Wheatcroft, author of Simply UK Government Finances 2016/17.
In November, the Chartered Institute of Management Accountants (CIMA) surveyed about 600 members. Among the findings:
- 46% believe that the ambiguity of forthcoming fiscal events causes as much or more uncertainty to their businesses than Brexit.
- 67% call for less frequent changes to regulations, subsidies, and taxes.
- 41% said changes to economic, tax, and regulation policy have disrupted long-term plans within their organisation.
The volume of changes to tax policy was the most significant finding from Wheatcroft’s research into the UK government’s financial position and policies.
The increasing number of tweaks, which began under the chancellorship of George Osborne, are largely down to two factors, Wheatcroft explained. One significant driver is that the UK has been going through fiscal contraction, so the government has seen a need to raise taxes.
“Of course, they wanted to do that in a way that doesn’t create negative headlines, such as raising the primary rate of income tax [would], so there has been a search for a little bit of additional revenue here and a little bit there,” Wheatcroft said.
Another significant factor: “The basic principle that has been adopted by government – that for every plus there needs to be a minus,” which led to a continual search for small tax changes to offset small tax breaks, he said.
Structural change to the tax system, rather than micro changes, would make it easier for businesses because “the impact on revenue is relatively small,” Wheatcroft added.
Wheatcroft’s research found that each tax policy change has affected the public purse by an average of £300 million ($366 million) a year in the five fiscal years following its announcement. “Overall it doesn’t add up to much, compared with the swings that you get through normal economic growth or inflation,” he said.
The burden on business
Although they may not be effective at raising revenue, the continual tweaks do place a strain on business. “A huge amount of money and effort is spent by corporate tax departments or their tax advisers on working out what each one means from a corporate point of view,” Wheatcroft said. “Even the smallest change can have a consequence and can spread right round the organisation in terms of cost.”
The government’s current approach to tax strategy also hampers long-term planning and investment decisions. “One of the most variable bits of that, particularly in the UK, is the tax system,” Wheatcroft said. “That causes uncertainty and causes you to be slightly more cautious and concerned about what’s going to happen in a tax event [announcement].”
Not enough thought is given to tax design, Wheatcroft said. He recommended that the government make the following changes:
Adopt a more strategic, long-term approach. “Rather than the chancellor [of the Exchequer] playing with something every six months, changing this rate or that, a focus on what sort of tax system or what sort of outcomes you want would be better – from an economic point of view as well as from a fiscal point of view in terms of revenue,” Wheatcroft said.
Phase in changes over a longer period. Current changes to business rates, which will have a big impact for many businesses on April 1st, are a prime example, Wheatcroft said. A phased approach over five years with graduated increases and decreases would have been more appropriate and allowed businesses time to adjust.
Reduce the number of exemptions on value-added tax (VAT). “If you look across other countries that have VAT systems, we have one of the higher levels of exemptions,” Wheatcroft said. “It seems very strange that if you buy an ebook, there is VAT, but not on a physical book.”
—Samantha White (Samantha.White@aicpa-cima.com) is a CGMA Magazine senior editor.