The principles of tax policy

Written evidence submitted by the Unquoted Companies Group

1. EXECUTIVE SUMMARY

1.1 The Unquoted Companies Group (UCG) is a group of approximately 30 Chief Executives of owner-managed (unquoted companies). The family businesses we represent are spread across the United Kingdom (not only in the prosperous South-East). The defining characteristics of our membership are a focus on continuity and delivering long-term sustainable value. Our area of particular interest and expertise is the whole of the unquoted sector of the British economy, which includes most of the UK’s small and medium-sized firms.

1.2 The UCG is pleased to have the opportunity to contribute to the Treasury Select Committee’s important and timely inquiry into the fundamental principles that underpin the UK’s tax policy.

1.3 As the Government recognises, private sector growth will underpin the UK’s economic recovery and the family businesses and unquoted companies represented by the UCG have a central role to play in this. The tax system has to play the role of enabler and facilitator and consequently it is essential that the opportunity to evaluate the strengths and weakness of the current tax regime is taken now to enable the private sector to fulfil its potential and for as many of the benefits of such growth to remain in the UK.

1.4 The key principles for tax policy are: stability; clarity; empowerment; certainty; transparency; and competitiveness, and we consider these principles in greater detail below. Tax policy must also better recognise the value of other forms of company organisation. Family businesses for instance, take a long-term approach to investment and the generation of growth and have clear commitments to the communities and environments in which they operate. Tax policy must recognise and encourage such wider contributions and longer-term perspectives.

2. KEY POINTS

2.1 Private sector growth (in employment and total tax take) will be central to the economic recovery – taxation policy must be geared towards supporting this. The tax system needs to be oriented towards the delivery of sustainable commercial activity which will secure job creation and wealth gain. That is not the case currently and the system needs to change as a matter of priority. The family business sector is one of the few sectors where the benefits are clearly seen to stay in the UK. The ultimate benefits and rewards of ownership of other forms are either less clear or are dissipated overseas.

2.2 Key principles of tax policy

- Stability

One of the key elements of a system of taxation that fosters private sector growth and development comprise stability and a clear direction of travel. Having been through a period of near-constant change, reform and tweaking of the tax system, the private sector needs this to cease so that it can plan effective growth and investment strategies.

- Clarity

As a consequence of the previous lack of stability in the tax system, uncertainty and confusion have hindered business decisions and added to business costs.

- Empowerment

Reducing the burden of taxation on businesses and individuals will reduce the level of dependency on the state. This will encourage an empowered culture with reward reflecting effort.

- Certainty

The Government needs to send a clear message to the business community that the UK is reverting to a low-tax environment and provide a clear timetable for it. A clear direction of travel must be set and this will provide the certainty required to encourage domestic and inward investment,

- Transparency

In line with the Government’s commitment to more open and transparent policy-making, the underlying principles of tax policy should be published in an accessible format and in an easily understood manner, with the result that everyone can identify the Government’s aims. There needs to be clarity as to those tax areas that may be abandoned or reduced. This approach would both foster activity domestically and attract new inward investment.

- Competitiveness

As a general point, the UK needs a tax regime that is fair and transparent and which is also competitive internationally.

2.3 How does tax policy support growth? By supporting:

- Organisations contributing to UK GDP

Sustained commercial activity will increasingly be generated by both long-term global investment and more locally-based enterprises. This process delivers continuity and commitment to the long-term future of businesses, providing, in turn, for the needs of the local community and the workforce.

- Enterprise

An entrepreneurial culture and an environment for investment require a tax system that explicitly recognises and facilitates the achievement of these goals. An enterprising economy fostered by a properly structured and incentivised tax policy, recognising equity investment as a fundamental starting point (especially with low banking confidence), would increase the international competiveness of the UK.

- A focus on the generation of long-term value rather than a pre-occupation with short-term (more concentrated) gains

Family-based businesses are the embodiment of long-term commitment and investment. Returns are not simply maximised to secure drawings for a few key individuals in the short-term; instead such businesses look to the vitality and viability of the company (and of the wider social role it plays) in the long-term. The adverse consequences of a pre-occupation with short-term gains, which are often ephemeral and occasionally notional, have been universally highlighted all too frequently in recent years. Family businesses need to be seen as a separate class from other unquoted businesses that have fundamentally short term objectives.

- Long term sustainability

Whilst the tax system is designed to secure revenue for Government, it is also an important policy-making tool in its own right. It should encourage the development of a long term and economically, socially and environmentally sustainable approach to growth.

- The broader economy (manufacturing, construction, service, financial services)

The principles of an effective tax system would foster growth across a range of sectors. We would encourage HM Treasury and HM Revenue & Customs to work closely with representative bodies from all sectors to consider how the tax system can be used to encourage greater levels of growth in the UK’s key industries and a balanced economy. We would discourage policies that fundamentally play to one sector as history has shown that it is not possible to second guess the market place.

- Recognising and encouraging diversity of economic actors and business models

The tax system needs to value the role that different types of organisations can play within the UK economy and society. Obviously we are thinking specifically of the family run company constituency that we represent and we have a number of specific recommendations to make as to how the tax system can better recognise the wider value that these represent, not least the concept of a ‘Family Business Trust’. However we would also note that the tax system will have an important facilitation role to play if the concept of the Big Society is to have any success.

2.4 Adaptation to support other policy goals

- Facilitating the Big Society – building social and community equity

The tax system tends to be more flexible or responsive to the requirements of larger, typically listed, companies than to other less prominent and less vocal types of company or organisation. As we understand it, the vision of the Big Society involves facilitating and enabling a range of formal and informal organisations to deliver socially and economically positive outcomes. The tax system has an obvious role to play in ensuring that such different ‘delivery models’ are realistic and are not hindered by burdensome taxation.

- Social and environmental sustainability

Encouraging a long-term approach (and commitment) to all aspects of the contribution and impact that businesses have.

Whilst the delivery of growth is, of course, a key role for business, that growth has to be sustainable and those that recognise their social and environmental responsibilities are more likely to take a long-term view and not be pre-occupied with short-term returns. Again, the tax system needs to be supportive of those organisations that are inclined to adopt this orientation.

- Promoting international growth & national self sufficiency

As highlighted above, a stable tax system based on clearly defined objectives will encourage growth and attract investment - the tax system can help promote the long term needs of the economy.

- International competitiveness

The tax regime has an essential role to play in supporting the competitiveness of the UK economy internationally as in many sectors we are competing for investment with jurisdictions that are more attractive in tax terms.

2.5 Importance of ease and efficiency

The tax system, as it currently operates, is too complex. The ease and efficiency of the system needs to be improved. The implications of the way in which the system works at the present time can probably best be demonstrated by reference to:

- Compliance costs – an ever increasing drain on valuable resources that would otherwise be available for investment.

- Impact on senior management time – any business would recognise the benefits of freeing up time so that senior management are able to deal with important issues which will deliver sustainable commercial activity. Time spent dealing with the tax system is time away from running the business and this especially affects family-run businesses.

- State apparatus – the growth of an impersonal and difficult to navigate bureaucracy.

2.6 Distorting aspects of current system

There are a number of ways in which the current tax system imposes distortions into markets. Some of these simply comprise unintended consequences but others appear to occur more through design. These include, for example, the capital tax treatment of JVs, which hinders their viability at a time when they could offer great benefits, especially to small and medium sized businesses and family businesses. The tax system, in effect, undermines the viability of entering into JVs for family-run businesses.

The operations of the tax system introduce distortions which need to be addressed:

a) sectorally – different sectors facing different tax regimes. Whilst this pattern has led to the active encouragement of some sectors, it has been to the detriment of others;

b) capital requirements – similarly a lack of consistency has hindered many capital intensive industries and undermined their investment.

c) geographically – a pre-occupation with London and the South East (and with financial services) means that there is now a clear requirement, as recognised by the Government, to rebalance the economy.

The tax system also needs to reduce the ‘transactional friction’ which places unnecessary obstacles in the way of efficient transmission of ownership, whether between generations or to third parties and the general freedom of movement of capital.

3. OVERALL

We welcome the Committee’s inquiry and the opportunity to contribute to this debate. It is especially important that the nature and focus of the tax system are comprehensively reviewed at this time so that it can be re-designed with the long term requirements of businesses and a healthy economy treated as key priorities.

January 2011