Reform the tax system to ‘rebalance’ the economy

justice-scalesThe UK’s tax regime requires a major overhaul if the economy is to be balanced and competitive.

The call has come from the EEF, the manufacturing bosses’ organisation.

Its report, ‘Tax reform for a balanced economy’, highlights several areas where reform is needed.

The EEF’s proposals centre on two priorities: changes to boost high-tech investment and innovation, and medium-term reforms to create a more competitive tax system.

In the short term, the EEF wants to see a modernisation of the capital allowances system. The business group said that a simple way of recognising the true cost of modern machines with shorter lives would be to extend the time restriction on short-life asset election from four to eight years. This would allow a wider range of assets to be written off at the end of their useful economic lives.

The research and development tax credit programme should also be examined with a view to making the credits easier and less expensive to reclaim.

And capital gains tax must be more sustainable, in the EEF’s view. Compared with a 50p top rate of income tax, the current 18 per cent capital gains tax rate is an unsustainable ‘welcome’ sign for tax evasion. The regime should be reformed so that current incentive to avoid paying tax is replaced by incentives to make long-term investments in business.

In the longer-term, the overall business tax system must be streamlined and made more efficient.

Specific recommendations included in the EEF’s tax manifesto would see a cut in headline rate of corporation tax to 25p over the next five years, provided it does not come at the expense of a reduction in allowances for legitimate business costs.

Raising the VAT rate to 20 per cent would encourage further savings, while weaning the economy off debt-fuelled consumption.

While returning the top income tax rate to 40p would send a signal that the UK was serious about attracting investment and encouraging entrepreneurship and innovation.

Steve Radley, the EEF’s director of policy, said: “There have been some helpful changes to the tax regime in recent years, yet we still lack a coherent tax system that encourages manufacturers to invest and sends the signal that they should be doing it here.

“In the short term it means developing a modern, efficient tax system that helps to grow a diverse and dynamic manufacturing base. In the medium term, it means creating a more competitive tax environment to help reduce the number of hard choices we have to make when repairing the public finances.

“A modern, competitive tax system would not only re-balance our economy but attract mobile multinational investment to the UK and send the right signal to would-be investors.”

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