The Current UK Tax Reform

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Introduction

It is an obvious fact that one of general aim for government is to collect taxes as much as they can in most fair and objective method. In aspect of ‘fair’, reappraisal of corporation tax is arising because there are some doubtful points on current corporation tax system. Corporation tax is in boundary of direct tax and ordinary tax and as regular profit is chose to be a taxable object; corporation tax has a characteristic of income tax. Period of regular profit is normally one year and UK domestic corporation and multinational enterprise with domestically generated income have duty of tax payment to the UK (HM Government). Corporation tax is a very important feature of a modern society which is a compulsory levy imposed by government on UK resident companies.

Government’s role is to set an optimal tax rate in regular period to be suited in a globalised trading world and to modern business practice (HM Government). Therefore optimal corporation tax rate will encourage foreign investment and thereby contributing to economic growth. However setting an optimal rate of corporation tax is very difficult as the expectation highly vary between different stakeholders and government cannot meet expectation for all companies. Therefore such alternatives are raised to tax on corporation profits.

This essay will discuss current UK tax reform up to date and critically evaluate necessity of corporation tax for UK economy. Furthermore, this essay will appraise validity and effectiveness of alternatives on UK corporation tax.

Body

As size of economy rapidly increased over several decades, therefore increase of corporations are natural and tax reform is also inevitable subject to economic situation. From 2011, UK government gradually designs and announces new corporation tax reform scheme which decreases main rate down to 20% at April 2015 (Seely, 2014). It is indicated that purpose of reduction in corporation tax is to enhance tax competiveness among G20 such as US, China, France and Germany. By lowering corporation tax rate to 20% in 2015, UK’s main rate becomes lowest with Turkey, Saudi Arabia and Russia (Seely, 2014). This reduction focuses on longer term effect to enhance foreign investment and furthermore, it is the approach to adapt the new globalised and much more open economic environment. To be more specific in numeracy, it is forecasted that UK corporation tax reform will increase business investment between 2.5% and 4.5% throughout 20 years and within impact from higher investment, effect of decreased tax rate would decrease the cost of the policy between 45% and 60%. Furthermore in terms of its business regime, UK ranked 14th out of 189 economies in the Paying Tax 2014 report, which is a fairly high ranking and it states positive impact from tax rate reduction (Seely, 2014).

Figures mentioned above generally indicate positive possibility of boost in UK’s tax competiveness by UK’s corporation tax reform. The aim of tax competitiveness is presumed to ultimately contribute to a competitive economy by attracting more international investors who prefer maximised post-tax returns, as tax regimes and tax rates potentially have significant impact on deciding the location of production and investment. In order to reach high tax competiveness, along with deduction on corporation tax rate, reformed tax system needs to be competitive to sustain and attract highly mobile capital and high wealth individuals, thereby maintaining and improving tax revenue and public finance. However, deduction on UK corporation tax rate does not have only positive indicators. In Northern Ireland, business does not seem to stimulate as the gap of corporation tax between Ireland is significant. As Ireland’s corporation tax is 12.5%, large companies such as Google and Apple move across the border to Ireland to take advantage of lower corporation tax rate (Fuller, 2015). Tax deduction may act effective in England, but applying same rate to Northern Ireland may destabilise the tax system.

Following to UK tax reform above, there were gradual reduction on main rate of corporation tax until April 2015. It is forecasted to increase business investment and decrease cost of policy in long term therefore to enhance tax competiveness of UK. However there are not only positive impacts but also problem arises in Northern Ireland. Corporation tax reform aims to meet various demands from different companies by providing optimal tax rate, but typically it is realistically difficult to please the demand of each company. In certain point of view, consequently either reduction or increase in UK corporation tax rate is not the only answer to enhance UK tax competiveness. Also, the corporation tax revenue only takes up around 7-8% of HMRC’s total revenues in the UK, and the other 22-23% business revenues come from VAT, business rates and national insurance contributions and so on (Knight, 2012).

Therefore the question mark arises whether UK should have corporation tax at all.

Issues on necessity of UK corporation tax arise in terms of inefficiency. Different to original intention of corporation tax, problem is that practical person responsible for corporation tax is ambiguous. Such people who have progressive tendency may recognise rich corporation shareholders burden corporation tax or some other people may recognise workers burden it in terms of lower wage form. Also consumers may burden due to product price increase (Kotlikoff, 2014). Different perspective arises because autonomous capital movement is frequent in current days compare to past days which capital owner burden corporation tax when capital movement were not frequent. With the inefficiency of corporation tax, companies can raise considerable amount of funds through loans not from stock market in order to avoid obligation to pay corporation tax (Sablik, 2013). As a consequence, debt financing becomes much preferred and it increases the debt ratio of company which also increases bankruptcy risk on the other hand.

Even though there are doubtful points on corporation tax, it is important to maintain corporation tax. As incorporated enterprises increase proportion in domestic economy or increase contribution on economic growth, corporation tax becomes not only a part of tax revenue but also the means of control to achieve policy goal. For example, imposing progressive taxation and excess-profit tax throughout corporation tax can regulate monopoly as well as product price and worker’s wage. Also introducing systems such as tax reduction and exemption or investment tax amount reduction will accelerate enterprise activity. Following to above economic benefits, corporation tax is strongly needed as it forms its content depends on UK’s financial situation and economic policy. It is indicated that UK corporation tax reform accelerates enterprise activity and investment in UK.

Among discussion of necessity of corporation tax in UK, alternatives should also be considered in taxing corporate profits. It is indicated above that corporation tax reduction will boost the investment by companies. Then hypothesis can arise in terms purely economic perspective that if there were no corporation tax, companies will invest much more than before and it will be helpful to invite foreign capital. Firstly, in financial point of view, if there is no corporation tax, dividend income can be completely taxed on aggregate taxation. Secondly, transfer income tax can be levied from gains on stock transfer (Kotlikoff, 2014). However, within prevalence of borrowed name financial transaction, aggregate taxation on total dividend income and transfer income tax from gains on stock transfer will not properly operate. Appropriate refurbishment of income tax system and complete settlement of real-name financial transaction system will enable the operation. It is very difficult to forecast the amount of transfer income tax as it will be hard to find fundamental statistic data to refer. Source of taxation is forecasted to increase due to change in size of economy which states increase in number of firms, but the change is dependable on various global economic factors. It is important for government to manage increased source of taxation. To fully set up alternatives to tax on corporate profits, it has such prior conditions to meet. It requires building a new platform to manage new tax revenues within alternatives. It is crucial to predict change for company’s attitude on investment due to elimination of corporation tax burden.

Conclusion

The reform of the UK corporation tax reflects government’s will towards tax competitiveness. Reform is necessary in order to adapt the current trend of a globalised economic environment. Final goal of gradual reduction on corporation tax is indicated to accomplish UK’s economic revitalisation along with enhancing activity of foreign capital. However, corporation tax has both significant advantages and disadvantages which cannot satisfy all of the companies and stakeholders. It is highly likely that corporation tax is treated as a political issue because there are definite difference of opinion between conservative and progressive. Corporation tax can be viewed as key tool for investment activation but it can also be viewed as abuse of privilege for rich people. If there is no corporation tax, it is crucial for UK government to reorganise tax system in order to properly operate alternatives. Compare to other developing countries, UK’s history of trial and error on tax system will act as an advantage to reorganise it. It is carefully anticipated that using alternatives to levy corporate profits by eliminating corporation tax rate will achieve huge stimulation on economy more than expected. To conclude, whether to reduce main rate or to set up an alternative of corporation tax, consideration must aim tax competiveness as vital objective.

Reference list:

  1. Devereux,M. and Fuest,C. (2009), ‘Is the Corporation Tax an Effective Automatic Stabilizer?’, National Tax Journal, vol. 62( no.3), pp 429-437 [Online]. Available at: http://www.jstor.org/stable/41790516 [Accessed on 16th February ,2015]
  2. Lymer A. and Oats L., 2014, Taxation, Policy and Practice, Southampton: Fiscal
  3. Seely,A. (2014), “Corporate tax reform”, [Online]. Available at: http://www.parliament.uk/briefing-papers/sn05945.pdf [Accessed on 15th February ,2015]
  4. HM Government, March 2014, A guide to UK Taxation
  5. Meeks.G (2014), ‘Why Are Banks Paying So Little UK Corporation Tax?’, Fiscal Studies, vol. 35( issue.4), pp 511-533
  6. Fuller,C. (2015), “Ulster corporate tax cut could destabilise UK tax system”, [Online]. Available at: http://www.accountancyage.com/aa/analysis/2395346/ulster-corporate-tax-cut-could-destabilise-uk-tax-system?utm_term=&utm_content=Ulster corporate tax cut could destabilise UK tax system&utm_campaign=AA.Daily_RL.EU.A.U&utm_medium=Email&utm_source=AA.DCM.Editors_Updates [Accessed on 20th February ,2015]
  7. Knight web (2012)
  8. Kotlikoff,L. (2014), “It’s time to eliminate the US corporate income tax”, [Online]. Available at: http://www.voxeu.org/article/win-win-eliminating-corporate-income-taxes [Accessed on 15th February ,2015]
  9. Sablik,T. (2013), ‘Taxing the Behemoths’, Econ Focus, (Third Quarter), pp 28-30, [Online]. Available at: http://www.richmondfed.org/publications/research/econ_focus/2013/q3/pdf/feature4.pdf [Accessed on 15th February ,2015]
  10. Devereux,M. Griffith,R. and Klemm,A. (2004), ‘Why Has the UK Corporation Tax Raised So Much Revenue?’, Fiscal Studies, vol. 25( no.4), pp 367-388
  11. Johnson.P (2014), ‘Tax without design: Recent developments in uk tax policy’, Fiscal Studies, vol. 35( issue.3), pp 243-273 [Online]. Available at: http://www.scopus.com/record/display.url?eid=2-s2.0-84906818183&origin=resultslist&sort=plf-f&src=s&st1=UK+corporation+tax&sid=A40932DC04B58E1D3FCB0519627C948A.aXczxbyuHHiXgaIW6Ho7g:280&sot=b&sdt=b&sl=33&s=TITLE-ABS-KEY(UK+corporation+tax)&relpos=2&relpos=2&citeCnt=1&searchTerm=TITLE-ABS-KEY(UK+corporation+tax) [Accessed on 16th February ,2015]

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