Written evidence submitted by TheCityUK
ABOUT THECITYUK
The purpose of TheCityUK is to champion the international
competitiveness of the financial services sector and to promote
the sector globally.
— Overseas—by
promoting the UK in overseas markets as a world-class centre for
financial services.
— At
home—by working to increase understanding of, and ensure
the effectiveness of, the contribution that the financial services
sector makes to the wider economy and society as a whole.
— In
regulation and market access negotiations—by providing a
voice for the sector and working to improve access to overseas
markets for UK firms.
TheCityUK's strategic priorities are set by the Board
of Directors, chaired by Stuart Popham, Senior Partner at international
law firm, Clifford Chance.
Oversight is provided by the Advisory Council, chaired
by Sir Win Bischoff, Chairman of Lloyds Banking Group.
1. INTRODUCTION
AND EXECUTIVE
SUMMARY
1.1 TheCityUK welcomes the opportunity to submit
views as part of the Treasury Select Committee Inquiry. The competitiveness
of the UK tax regime has been identified by the TheCItyUK's membership
as a key priority for the UK Financial Services Industry.
1.2 This is reflected in the recommendations
of various industry reports in recent years, including the Bischoff
Reporti and the Wigley Reportii, both of
which highlighted the significant role played by the taxation
system in sending signals to foreign investors about the attractiveness
of the UK as a place to do business.
1.3 TheCityUK welcomes the Coalition Government's
commitment to promoting the competitiveness of the UK tax system
in a measured way reflecting the fiscal challenges currently facing
the UK.
1.4 This submission has three sections including
this introduction. The second section examines how UK taxation
impacts the business environment that financial services firms
operate in, and assesses the impact of the current tax framework
and recent changes in tax policy on the competitiveness of the
UK as a location for Financial Services firms to do business.
1.5 In the final section, the report identifies
three specific priority areas for changes in tax policy which
could substantially improve the business environment for the UK
Financial Services sector, recover some of the recent loss in
competitiveness of the UK, and in so doing support growth in Financial
Services and the wider economy.
1.6 TheCityUK looks forward to working with the
Select Committee throughout its enquiry. If the Committee has
any questions on this submission, or would like further evidence
from TheCityUK, please contact Howard Miller, Director of UK Strategy.
2. TAXATION AND
THE BUSINESS
ENVIRONMENT FOR
UK FINANCIAL SERVICES
FIRMS
2.1 Taxation has been identified as one of the
most important factors taken into consideration by Financial Services
firms when making investments, and affects firms' decisions from
locating particular teams, activities and businesses, through
to the location for their European or global headquarters.
2.2 The significance of the taxation environment
has been reflected in many studies into the competitiveness of
the Financial Services industry, for example a recommendation
of the Bischoff report was "to generate strong engagement
between the Government and the industry, in order to ensure that
the UK tax system remains stable, sustainable and competitive
in the long term".
2.3 Financial Services firms and employees are
highly mobile, and choose to locate in jurisdictions which are
conducive to their business activities. Important considerations
include the legal, regulatory and taxation system, openness to
trade, immigration and foreign ownership, and a globally-connected
communications infrastructure.
2.4 This international mobility has allowed the
growth of UK Financial Services into a global leader. The UK environment
of stable & competitive taxation has historically been extremely
attractive to financial firms and to the highly skilled financial
services workforce. There are in fact a number of examples of
unfavourable taxation regimes elsewhere causing financial services
activity to migrate to the UK, such as the establishment of the
Eurobond market in the UK in the 1960s in response to the US Interest
Equalisation Tax.
2.5 Accordingly, the impact of UK tax policy
on the Financial Services industry must be set in an international
context. There are many countries that are seeking to emulate
the UK's success in building a leading financial services sector.
These countries are engaged in a global "war of attraction"
and are making substantial investments, and reshaping their legal,
regulatory and taxation environment in order to attract Financial
Services firms and employees.
2.6 Against this backdrop of increasing international
competition for financial services investment, recent changes
to the UK tax regime have undermined the competitive position
of the UK.
2.7 Speaking at the Deloitte Tax Directors Academy
on 23 November 2010 David Gauke, the Economic Secretary to the
Treasury, commented that "If we look back to 1997, the
UK had the tenth lowest main rate of corporation tax among the
current EU27 countries. By the time we came to office, we'd slipped
to 20th". As Mr Gauke comments "Other countries
had cut their rates further and faster than we had, with the UK's
competitive advantage being slowly eroded away".
2.8 In its Global Competitiveness Survey for
2010, the World Economic Forum ranks the UK 95th out of 139 countries
in its league table of the impact of taxation on incentives to
work and invest.
3. TAX POLICY
RECOMMENDATIONS TO
RESTORE COMPETITIVENESS
3.1 TheCityUK has identified three areas of priority
for changes in tax policy which can help to restore UK competitiveness,
and enable the UK to continue to be an attractive location for
investment by global financial services firms. These priorities
are to increase consultation and transparency, to remove disincentives
on investment in SMEs, and to set out a road map for increasing
UK tax competitiveness.
Increased consultation and transparency
3.2 The tax system must offer transparency so
that taxpayers have certainty over what they are required to pay
in advance, to allow for proper financial planning, and to ensure
that the government's process of taxation is not seen to be arbitrary.
UK tax policy has departed from this path on several fronts in
recent years with a lack of transparency and certainty in respect
of changes to Capital Gains Tax, the taxation of non-domiciled
workers and the much debated levy on bank bonuses.
3.3 In a report prepared for the International
Regulatory Strategy Groupiii, Charles River Associates
assesses the way in which the predictability and competitiveness
of the UK tax regime impact upon the financial services industry.
The report concludes that "Whilst the scale of overall
tax burden is a key consideration, it is clear from this report
that our top priority must be to restore the perception of predictability
and certainty that has for so long underpinned the UK tax regime".
3.4 TheCityUK welcomes the approach taken by
HM Treasury in assessing reform of corporate taxation. The pre-legislative
consultation of tax professionals promises to be highly constructive
in the development of good tax policy and in restoring trust between
taxpayers and policymakers.
3.5 Whilst the approach taken to corporate taxation
reform is a positive step, the Select Committee should be aware
that the investment decisions of Financial Services firms take
all elements of taxation into account. Although the Financial
Services sector makes the largest contribution to corporate tax
receipts, personal and other taxes represents 90% of total taxation
on the industryiv.
3.6 TheCityUK proposes that the consultative
approach to reform of corporate taxation should be extended by
HM Treasury to all future reviews of taxation.
Remove disincentives for investment in small and
medium sized enterprises (SMEs)
3.7 TheCityUK believes that increasing the access
to finance for SMEs forms an important part of the Government's
growth agenda, and proposes the removal of barriers and disincentives
to investment in SMEs, such as relaxing restrictions on the Venture
Capital Trust (VCT) regime and allowing unlisted securities (eg,
AIM and Plus-quoted markets) to be held in Individual Savings
Accounts.
3.8 In its response to the joint HMT/ BIS Green
Paper on "Financing a Private Sector Recovery", the
London Stock Exchange Group observes that changes to the VCT regime
in 2006 had a negative effect on investment in SMEs. "These
restrictions are putting artificial caps on growth as they may
prevent businesses from recruiting more staff or expanding through
acquisition because, in many cases, they become ineligible for
investment by the VCT managers that have provided their initial
funding."
3.9 Other taxes on equity investment include
Stamp Duty Reserve Tax, levied as 0.5% of the value of every purchase
of UK shares, and the withdrawal in 1997 of the right of Pension
Funds to reclaim tax withheld on payment of corporate dividends
(Dividend Tax Credit). These taxes reduce returns for individual
investors and pension funds investing in UK companies, and a large
amount of research exists showing how their removal would increase
investment in UK companies, and reduce their cost of capital.
A road map for increasing UK tax competitiveness
3.10 By tax competitiveness we refer to both
the overall level of taxation and to the complexity of the tax
system. By both of these metrics, the direction of travel has
been a worsening in competitiveness, with an increase in personal
and employment tax rates, and greater complexity such as the proposed
pension reforms.
3.11 The CityUK welcomes more recent moves by
the Government to address concerns over the need to simplify the
UK tax code. The work of the Office of Tax Simplification has
revealed that there are over 1,000 reliefs in the UK tax system
adding to the complexity of tax administration and compliance.
The Government's commitment to assess the benefits of these reliefs
and the streamline the tax system where possible is to be welcomed.
3.12 Whilst the current fiscal environment may
limit the scope for reductions in the overall level of taxation
in the short-term, TheCityUK believes that Government should provide
a clear road map for reducing the overall tax burden as the economy
and public sector finances recover. The road map should include
a commitment to review the 50% rate of income tax in this Parliament.
3.13 Government and the corporate sector have
a shared interest in stimulating economic growth. A firm commitment
to restoring UK tax competitiveness would be a significant step
to creating a positive environment for business investment in
the UK, forming the basis for future growth.
January 2011
REFERENCES
Bischoff Report: UK International Financial Services—the
Future, May 2009
Wigley Report: London: Winning in a Changing World—Review
of the Competitiveness of London's Financial Centre, June 2008
Charles River Associates "Taxation of the Financial
Services Industry: Predictability and Competitiveness", October
2010
PwC, "The Total Tax Contribution of UK Financial
Services, Third edition", December 2010
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