22 October 2021

Britain is slipping down the tax league table – and that’s a real cause for concern

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The UK has traditionally prided itself on being one of the best places in the world to invest and do business. Particularly in the Cameron-Osborne era, the Conservatives focused on heavily on making Britain competitive and business-friendly, with significant cuts to the headline rate of corporation tax. And in his recent Tory conference speech, Boris Johnson trumpeted the virtues of an ‘open society and free market economy’, promising that his was a government committed to creating a ‘low tax economy’.  

Unfortunately, when it comes to UK tax policy the direction of travel is concerningly divorced from the rhetoric. The latest iteration of the US-based Tax Foundation’s annual International Tax Competitiveness Index placed the UK 22nd out of 37 OECD countries when it comes to the overall performance of our tax system. That is already pretty low; we are below countries like Sweden (8th) and Germany (16th), who we might think of as having higher taxes and a bigger state. That’s partly because the Index is not just based on how heavily a country is taxed, but on the structure of its tax system – whether revenue is raised in a way that is non-distortionary and encourages investment and entrepreneurship.

Nor does the UK’s current ranking factor in the Government’s plans for future tax rises. Over the last year or so major revenue-raising measures have been announced, which together will make a significant difference to the UK’s competitiveness. This, in turn, could have major implications for our longer-term prospects for economic growth and rising living standards. 

Under George Osborne’s original plans, the headline rate of corporation tax had fallen to 19% and was set to fall to 17% by 2020. That further fall had already been cancelled during Sajid Javid’s brief stint as Chancellor, in order to pay for additional NHS spending. At the last Budget, Rishi Sunak went much further, setting out plans to gradually raise the rate from 19% to 25% in April 2023. That is a huge tax measure by anyone’s standards: estimates suggest it will raise an additional £17bn or so in revenue within a few years.

On top of that we have the recently announced Health and Social Care Levy, which will raise roughly £12 billion a year. It’s not all headline rises either – Sunak’s decisions to freeze income tax thresholds until 2026 should raise another £8 billion or so. These are huge sums, and there are still rumours of further tax rises in the coming Budget. 

If we factor all these new measures into the Tax Foundation’s Competitiveness Index, the UK falls to a dismal 30th out of 37 countries. It’s hardly the image of a buccaneering ‘Global Britain’ the Government claims to aspire to.

It is not only on the headline tax rates that policy is heading in the wrong direction. The way we tax investment spending by private firms also has a huge impact on our growth prospects. As it stands the UK performs poorly compared to its international peers when it comes to rates of capital expenditure by companies, and we have one of the least investment-friendly corporate tax systems. 

The well-publicised ‘super deduction’ which the Government introduced this year was, in part, a recognition that this is an area which can make a big difference. The super deduction, however, is only a temporary measure and runs out in 2023. Rather than marking a sea change in the way we treat investment, the main effect of the super deduction will be to encourage companies to shift investment forward a few years. For firms considering the UK’s attractiveness, what really matters is the long-term cost of capital. What they are now facing, after 2023, is a much higher rate of tax on their profits, and capital allowances which will actually be less generous than they were before the pandemic (because temporary increases in the Annual Investment Allowance, a tax-free threshold which covers most investment spending on plant and machinery, are due to expire). 

The Chancellor is, rightly, committed to fiscal responsibility. Pandemic spending, commitments to spend more on public services, the ‘Levelling Up’ agenda and Net Zero all mean the Treasury is facing endless demands for ever more cash. Sunak is right to hold firm to the principle that these things have to be funded and that the Government should not be borrowing to fund day-to-day spending. At the same time, raising taxes and making the UK less attractive to private investment risks dampening our long-term growth prospects, with a knock-on effect on tax revenues.

That Britain is falling so far behind on tax competitiveness should be a major cause for concern. How much further these tax rises can go – and, just as importantly, the methods chosen for raising that extra revenue – will be one of the most important economic policy questions in the coming years.

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James Heywood is Head of Welfare and Opportunity at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.