Tax: Impact on industrial strategy
By Donald Drysdale for ICAS
12 March 2019
Donald Drysdale discovers that tax is viewed as an important policy lever in industrial strategy, whether throughout the UK or in a devolved jurisdiction such as Scotland.
Britain’s industrial strategy
In November 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published a White Paper entitled Industrial Strategy: building a Britain fit for the future.
The document set out, at length, a long-term plan to boost the productivity and earning power of people throughout the UK. It noted that new technologies were transforming the way we live our lives as workers, citizens and consumers.
It explored how the UK government would build on the strengths of its population, extend these into the future and capitalise on the opportunities ahead – whilst also addressing any weaknesses that might keep the UK from achieving its full potential.
The industrial strategy said very little about tax – other than to comment favourably on the international competitiveness of the UK corporate and personal tax regimes, and to commit to increasing tax incentives for research and development (R&D) and innovation.
It recognised that many of the policies capable of driving productivity were devolved. For example, in 2015 Scotland had published its own Economic Strategy (referred to below) setting out how it would boost investment and innovation, support inclusive growth and increase internationalisation.
IFS conference
Every two years, the Institute for Fiscal Studies (IFS) holds a residential conference, encouraging high-level exchanges of knowledge amongst practitioners, policymakers and academics on key areas of policy and practice.
The conference last September, sponsored by PwC, looked at the part which tax plays in the industrial strategy. It explored the importance of tax compared with other policy levers; how tax policies might be designed to support the industrial strategy; and which aspects of tax policy are valued by different types of business.
The conference addressed how the tax system might be adapted to cope with the digital economy, and to deal more appropriately with new business models and digital companies. It also asked whether new technology provided opportunities for tax authorities.
PwC report
A new report from PwC, recently published, contains several articles summarising ideas discussed at the conference.
The report acknowledges imminent challenges on a scale which the UK hasn’t seen for decades. It cites factors such as Brexit, weak productivity growth, technological change, an ageing society and shifts in global economic power – all raising questions about how Britain should go about shaping its future.
When should tax be used?
In the report, Helen Miller, Deputy Director of the IFS, questions when taxes should be used to steer the industrial structure. She refers to the benefits of a neutral tax system, in which all business profits are taxed in a uniform way and all business expenditure is also treated consistently.
Deviating from a neutral tax system adds inevitable complexity. Where an outcome needs to be changed, tax may not always be the right tool for government intervention. As with support for R&D, where differing strategies have been used, direct business subsidies may be an alternative mechanism.
Miller suggests that removing existing distortions might be sensible. For example, she suggests that a multiplicity of business rates reliefs could be swept away by replacing business rates with a land value tax (see my article Should we expect a land value tax in Scotland?).
Tax as a policy lever
Stella Amiss, PwC UK Tax Partner responsible for Policy, Regulation, Media and Reputation, explores how tax policy sits alongside many other policy levers.
She writes that tax alone cannot shape an industrial strategy, but that tax reform is needed to ensure that the tax system is fit for the future.
Digitalisation and Artificial Intelligence
Julian Sansum, Employment and Equity Lead at PwC, examines how the evolution of technology at an unprecedented rate could affect taxes levied and the way in which they are collected.
He writes of the possibility that AI deployment might cause capital to become a relatively more important production factor than labour, changing the mix of revenues collected from different taxes.
AI is expected to impact on jobs – displacing some and creating others. Resulting polarisation of the workforce may bring new opportunities at unskilled and highly-skilled levels, with a loss of middle-income jobs and perhaps a consequent growth in the gig economy.
Tax systems will need to evolve to cope. Internationally, there is currently an absence of consensus on how cross-border digital businesses should be taxed. Furthermore, in the UK, many issues around how best to tax gig workers are still unresolved.
Achieving fairness and attracting investment
Neville Howlett, Tax Director for External Relations at PwC, focuses on how the tax system should achieve the right balance between, on the one hand, fairness, and on the other, the UK’s need to attract inward investment by large businesses.
Given the public perception that large companies are not paying their ‘fair share’ of tax, he notes the difficulty in assessing fairness in tax.
Discussion at the conference had identified the importance of competition in the tax system, and associated risks. Businesses are also looking for stability and certainty.
Tax reliefs over the business life cycle
Writing about tax and business ownership in the final part of the PwC report, Paul Morton, former Director at the Office of Tax Simplification (OTS), refers to the OTS Review of the Business Life Cycle published in April 2018. This had identified that the number of tax reliefs available increases over the life cycle of a business.
With no tax reliefs on start-up, the number of reliefs gradually increase at subsequent stages – through incorporation, financing, succession and disposal. Morton discusses whether this balance of reliefs is appropriate.
He notes that the Resolution Foundation think tank had described entrepreneurs’ relief from capital gains tax on certain business disposals as one of the worst of Britain’s main tax reliefs, although views on this at the IFS conference had clearly been mixed.
A Scottish perspective
Tax featured strongly in Scotland’s Economic Strategy published in 2015. Within the constraints imposed by the then recently-published Smith Commission Report, it referred to tax as a key policy lever to tackle inequality.
The strategy also sought to boost Scotland’s productivity – to close the gap between Scotland and the UK. It aimed to achieve this by making better use of all Scotland’s resources – including its people, infrastructure and natural assets.
Much has changed since 2015, including the enactment of the new devolution settlement in Scotland Act 2016. Tax continues to be an important policy tool of the Scottish government, on which it publishes periodic updates.
Article supplied by Taxing Words Ltd