The principles of tax policy

Written evidence submitted by the City of London Corporation

1. This memorandum is submitted on behalf of the City Corporation in the context of its role in promoting and reinforcing the competitiveness of the UK-based international financial services sector, for which ‘the City’ is now commonly used as shorthand. The City has a wide variety of consultation mechanisms by which the views of business are sought and incorporated into the policy-making process. The consultation process extends beyond the boundaries of the historic City – the "Square Mile" – to include companies and trade bodies located elsewhere in London and in important regional centres.

2. The central assumption of the City Corporation’s work on attracting and retaining business, and on facilitating the optimum business environment, is that the City brand is internationally-owned, internationally-managed and internationally-staffed. Much of the business done could be undertaken in other centres where the two key factors, capital and expertise, are present. Nevertheless the fact that it is done in London has positive benefits in terms of corporate profits, tax receipts and export earnings.

3. A study recently commissioned by the City of London [1] showed that in 2009/10 the financial services industry contributed £53.4bn to the Exchequer in corporate and employment taxes, representing 11.2% of the total UK tax take. In broad terms, however, the City is less concerned with the absolute rates at which tax is charged, and more with the stability and predictability of the system by which tax is assessed, levied and collected. In recent years there has been little such stability. In contrast, other countries, some of them attractive locations for financial services business, have offered a stable environment in which companies have been able to plan strategically.

4. As a consequence of this, some internationally-owned companies, which carry out business worldwide, recruit their workforce globally and which have no particular corporate loyalty to the UK, are looking at other jurisdictions as locations for some areas of business. Several insurance companies for example have already changed their domicile and there is speculation that some major UK-based banks are assessing the benefits or otherwise of being domiciled in the UK. Furthermore, some other institutions, including US investment banks, have already moved away from their previous settled view that London is the best placed centre for their operations in Europe, the Middle East, Africa and in some cases Asia as well.

5. Taxation is not of course the only factor in location decisions made by financial services businesses. International tax competitiveness does however become especially important when other key business factors such as regulation, access to skills and effective infrastructure - are also themselves in a state of flux and under scrutiny.

6. In order to meet its aims of reducing the deficit and keeping the United Kingdom "open for business, it is in the Government’s best interests to widenthe tax base, by attracting and retaining business activity which might otherwise be undertaken elsewhere, and by encouraging entrepreneurs to establish new businesses.

7. A phased reduction in rates of taxation and, over time, the abolition of special measures introduced in response to the financial crisis, including the bonus tax and the banking levy, will be likely to encourage international business to locate here and to build up their capacity rather than eroding it. In the medium to long term this will generate more revenue, directly through corporate tax and indirectly through income and other taxes and national Insurance charges on employees.

January 2011

[1] The Total Tax Contribution of UK Financial Services - Third Edition , Report prepared for the City of London Corporation by PwC, December 2010