Tax notes: is a generational change in the approach to taxation on the way

Taxation seems to have rarely been off the front pages during the last year, with an apparent fundamental challenge to past orthodoxies emerging.

A few examples amongst many are:

• Corporation Tax rates are increasing in the UK; 
• there has been serious discussion about the potential alignment of Capital Gains Tax rates with Income Tax rates; 
• the Financial Times has come out in favour of a Wealth Tax; 
• we have seen the Biden proposals for minimum Global Tax; and 
• a report by Cambridge University and the Centre for Business Research at the end of May suggested that the R&D tax credit scheme had failed to encourage innovation.

Many believe that tax reform is long overdue and that our tax system needs more work to encourage long term investment for a strong, creative and innovative mid-market sector. There could be lessons to learn from other jurisdictions where the tax system is more fit for purpose.

We intend to continue to be advocates for positive change in the tax system, which supports the mid-market sector but want to go beyond knee-jerk reactions. Over the next few issues, we thought it would be interesting to comment on a regular basis, how the tax landscape is changing to give context to the stories you'll read in the press and how they could affect you and your business.

So, let's start with the Biden minimum tax proposals that were attracting plenty of attention in the period up to the G7 in Cornwall. Many in the mid-market sector have dismissed this as not being of any relevance to them as the proposals are to do with large international businesses.

Amazon's recent tax filings in Luxembourg were reported as booking €44bn sales income with zero Corporation Tax paid. The story is always more complex than the headlines but the competitive tax advantage that multinationals (MNE's) have over mid-market businesses broadly comes from two things:

• first, they can route income through low tax jurisdictions; and 
• second, digital sales models locate their taxable activity outside of the country where sales are made.

All perfectly acceptable under current tax rules but not something most UK mid-market businesses can do. As a result, effective tax rates tend to be much higher for mid-market businesses than for many MNE's.

The Biden proposals combine a minimum Global Tax rate, which would significantly reduce the scope for shifting profit to low tax jurisdictions (even where some low tax jurisdictions don't sign up to it), with a call for tax payable to more closely reflect sales in each country.

If this can be achieved, it would increase the tax contribution from MNE's and remove some of their tax advantage compared to mid-market businesses. Therefore, so far as the proposals go (and we see them as just a start) the discussions look positive for the mid-market. MNE's have immense resources to understand complex tax and regulatory proposals and then to lobby for results which favour their business. Therefore, it could be beneficial for mid-market advocates to mobilise more fully in support of these reforms.

Reducing the opportunity for MNE's to reduce their tax in this way would also reduce pressure to increase the tax burden in other areas. It could also make available more resource for public investment in infrastructure, energy transition, education and health, and for improving UK tax super-deductions for innovation and investment.

Over the next few months, it is likely that there will be plenty to talk about as we see a new approach to business and personal taxation emerging. If it is necessary to increase taxes to pay for Covid-19 measures, where would you like to see it come from and what would be the most valuable tax incentives for your business?

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If you would like to comment on anything mentioned in this article and or require advice regarding your tax obligations, please complete the form below. We would be delighted to hear from you. 

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