Can Tax Be Simplified?
1 January 2007 Jon Symonds
Does Gordon Brown's acceptance of the Varney report represent an overdue change in the UK's tax regime? Finance directors are uncertain. However, Astrazeneca's Jon Symonds, a key member of the Varney Review Committee, tells Nigel Ash he is confident that things will improve.
UK Chancellor Gordon Brown has fully accepted the potentially ground-breaking reforms to UK corporate taxation put forward in November 2006 by a review chaired by Sir David Varney, who recently stepped down as chairman of Her Majesty's Revenue and Customs (HMRC).
Finance directors may well be asking whether this represents an overdue change in the difficult relations between large corporates and the taxman in an effort to restore dwindling UK competitiveness.
Jon Symonds, finance director at AstraZeneca and a member of the Varney Review Committee, sees taxation as a competitive tool. In his view, a sound tax system boosts business, which in turn boosts the national economy and increases the tax take.
Symonds believes that recent business uncertainty over tax treatments has led to a negative downward spiral. Investments have been diverted away from the UK because of this uncertainty. In response, HMRC has sought to boost its tax income, specifically by chasing potential leakages. The resulting clampdown has led to a vigorous debate about what constitutes tax avoidance.
Symonds says: "From the Revenue's perspective, there have been some outrageous examples of tax avoidance, which I would not support in a million years.
"One argument in the Varney Report, which I support very strongly, is that while I am clear what my fiduciary duty is in terms of maximising the value of AstraZeneca, it is also quite clear that if nobody pays tax in the UK it is going to be very hard to say to the government that we haven't got the transport or the security or the education infrastructure to support long-term prosperity. This is because there is an investment content to paying tax as well as a tax on profits."
A Confederation of British Industry survey released just after the publication of the Varney Report showed that three-quarters of its membership believed the corporate tax regime had worsened in the last five years, despite the 3% cut in the basic rate of corporation tax to 30%.
Two-thirds were dissatisfied with the Blair government's handling of tax, which they believed had damaged the UK's international competitiveness. A fifth said they were thinking of relocating to a more benign tax regime, though none was currently planning to do so.
It has also been pointed out that Varney was in charge of the revenue at a time when its policies became most aggressive and that Brown is the chancellor who has degraded the quality of UK corporation tax with a steady flow of complicating legislation.
Is this conversion for real? There are doubts. It has also been noted that these changes will require the deployment of more resources from the corporate taxman at the very time that Revenue costs and jobs are being shed. Even if the change of heart is genuine, can HMRC deliver?
Brown's reaction to the CBI survey was to assert that Britain had the lowest corporate tax in the G7 and the fifth lowest in the OECD. He cited KPMG research indicating that British business also faced a low burden of tax administration and compliance - representing 0.4% of GDP, half that of the Netherlands.
Nevertheless, implicit in Brown's immediate and total acceptance of the Varney Review Committee findings (2006 Review of Links with Large Business) there is surely an admission of some serious problems.
One of Varney's most important proposals is that businesses should be kept informed about their transactions at an earlier stage through a combination of advance warnings and the extension of existing clearances.
The aim is that by 2008 British companies will be able to obtain a binding ruling from HMRC on significant issues relating to all transactions within 28 days. No threshold has been stipulated, but it is likely the new system will apply to companies with over 100 annual transactions worth at least £100m.
The increasingly thorny issue of complexity is to be addressed by consultation. After the Budget 2007, HMRC will take into account the business perspective in everything it does, from implementing policy decisions to designing systems and processes.
By 2008 the revenue will be working to a programme agreed with business to revise and update all the often-ambiguous official guidance available to large businesses.
This new and closer relationship is also expected to affect the way HMRC approaches investigations. Trusted 'low-risk' firms are likely to be subject to enquiries just once every three or four years. This will give investigators more freedom to challenge companies pursuing aggressive tax policies.
Disputes will not be allowed to drag on. If after 18 months no resolution has been found, the files will go to senior HMRC management for a settlement. This will have particular impact on transfer pricing deals between multinational subsidiaries, where some arguments with the taxman have dragged on for years.
Admitting that, as one of the people who worked with Varney on the report, he would naturally be enthusiastic about the proposals, Symonds also acknowledges that the changes are substantial: "The Varney Report is a huge step forward for the UK. It represents a major shift in the relationship between HMRC, the treasury and business. It moves us ultimately towards the simplification of tax collecting and towards a more competitive UK.
"The implementation will have a significant effect on how, over time, people think of the relationship with HMRC. There is still a policy issue. A lot will deal with the administration and collection of tax, but it gets firmly on the agenda the two things that business is concerned about: one is the 'administrative tone' and the second is being satisfied that the policy discussion is founded on a sound economic analysis of how to improve the UK's competitiveness."
Symonds has long argued that HMRC's focus on tax avoidance - it had pledged to make this 'not worthwhile' by 2008 - was the wrong target.
"Business has been telling the government that five years ago the UK was competitive," he says. "But it has since become consistently less competitive, partly because of the uncertainty that has been introduced through the administration of tax, but also because Germany, the Netherlands and other European states have moved their position. This is particularly true of Ireland, which is a major European success because of its simple tax regime and 12.5% rate. Therefore, the UK has actually moved backwards in two respects."
EUROPEAN TAX UNION
The European Commission has already recognised corporation tax as a tool to increase the EU's international competitiveness. EU tax commissioner Lazlo Kovacs is seeking both political and technical agreement to create a common consolidated corporate tax base (CCCTB) out of the existing 25 national systems by 2008.
Seven member states, including the UK and Ireland, have dismissed the plan as unworkable. Before a consolidated tax policy can even be considered, a substantial range of fairly basic tax accounting issues have to be aligned, such as the definition of taxable profit.
A senior UK treasury adviser has said that work on CCCTB was absorbing a great deal of policy-maker time and energy with no clear promise of a plan that would ever be politically acceptable.
"I don't believe that the Commission will get us to tax harmonisation," says Symonds. "But I think that we will get there by recognising that the investment opportunities in the new accession states of Eastern Europe are more compelling than in Western Europe. Eventually governments will realise that they have to compete on those terms rather than by protecting their tax revenues."
The new EU members had the advantage of starting with a clean legislative sheet. They were able to set flat rates of corporation tax and establish simple incentives.
"Governments have to recognise that there is tax competition within Europe and outside of Europe," explains Symonds. "Governments also have to recognise that long-term the trend is only going one way and that ultimately they are going to have to reduce rates and simplify the legislation. Harmonisation will come from the positive route that tax regimes will have to follow because it is becoming a competitive disadvantage not to do so."
Symonds suspects that change in the EU will begin with a small core of members who will drive harmonisation within their own systems: "States committed to competition will start to gravitate towards a simpler outcome."
It is also Symonds's view that when investment opportunities in Eastern Europe become more compelling than elsewhere in the EU, governments with high and complex tax environments will wake up and respond to the challenge with simpler and lower tax regimes.
The level and simplicity of tax are not the only issues. Symonds adds: "If you are faced with a 10% tax in Eastern Europe compared with a 20% tax in the UK, you would probably still stick with the UK because it offers the infrastructure in which to do business competitively. You do not always seek the lowest tax because business decisions are founded on broader criteria."
Even with the current fiscal disincentives, the London market continues to attract Asian and Eastern European listings, partly because of the now unattractive US listings criteria.
It was not part of Varney's task to consider the impact of decisions by the European Court of Justice on UK tax, which in the last decade has developed its role to intervene in national tax affairs. In that its judgements are supposed to apply across the EU, it is a force for harmonisation. However, since it can only deal piecemeal with the cases that are brought to it, its overall impact has been seen as unhelpful.
ROOM FOR DEBATE
The Varney Report also sets out the need for HMRC people to get out into business so they can understand the demands of competition and risk, and the way companies need to function based on fiscal certainties. It is hoped that this will foster better relations between the taxman and the taxed.
The report further recognises the desirability of a formal independent body where revenue collectors and providers can debate. It backs the Oxford University Centre for Business Taxation (OUCBT), established by business last year, for this role.
"This is a major opportunity," says Symonds. "The OUCBT will be an independent vehicle through which business and the government can explore different policy options."
He says this will not take away the government's right to set policy in a way that meets a much broader political agenda, but it should lead to better dialogue.
He explains: "When we started having this discussion with the Revenue we found that there was no objective vehicle within the corporate world, HMRC and HM Treasury that could collect data to improve the quality of the argument. Clearly, this was because there was always a suspicion that business would put forward proposals that supported business and the government would reject anything that did not fit its political aim.
"The OUCBT is a very important part of the machinery that sits between business and government because it is independent and objective, and it has been set up in such a way that business cannot influence the academic judgements that it reaches."
As one of big business's most trenchant past critics of government policy, Symonds is confident that Varney has addressed most of the issues: "I think we are on a new path. Those companies with aggressive tax policies may think that it will become even more adversarial, but those that actually recognise the business benefit in resolving tax issues rapidly will benefit from the new environment that is coming through."
Although finance directors may be wary, the signs are that HMRC is serious about encouraging a new climate of debate with corporate taxpayers. If this is the case, we should see moves towards a simpler tax regime, boosting confidence and competitiveness. In turn, corporates will need to accept their tax responsibilities, as HMRC has made no secret of its intention to vigorously pursue those avoiding tax payment.