UK tax system loosing competitiveness

Economy Nov 19, 2011

While the UK has a competitive tax system it risks being overtaken by other economies easing tax burdens for businesses, according to a new report from PwC. The latest global league table, compiled by PwC, the World Bank and the International Finance Corporation, shows that the UK's position is under pressure as other nations are making paying taxes easier. The UK is now in 18th position in the league table of 183 economies, down from 16th position last year and 11th place in 2006.

The report assesses tax regimes by measuring the total tax costs, number of payments and the time necessary to comply for a case-study flowerpot firm. In compiling the data, all the mandatory taxes and contributions that a medium-sized firm must pay in a given year were considered. Taxes and contributions measured include corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transaction tax, waste collection taxes, vehicle and road taxes, and other minor taxes or fees.

While the UK’s results on these measures have not changed since last year, tax reforms in 33 of the countries surveyed mean that the UK's relatively good ranking could now be under threat. Globally the Total Tax Rate for small and medium-sized businesses has fallen by 8.5% since 2006 and now stands at 44.8% of commercial profit. The UK fares comparatively well by this marker, with a rate of 37.3%. More than a week (54 hours) has been saved on time to comply over the same period, which now averages 227 hours per year globally. The UK average is 110 hours. The number of payments has reduced by 4.7 to 28.5, with the UK averaging 8.

Countries that do well in the league table tend to be high-income economies with more mature tax systems. Practices which have helped improve results globally include reductions in corporate income tax rates, with 133 significant reductions over the last five years. Having one tax base, which is now the case in 49 economies, has also made a difference, as has self-assessment, and electronic filing and payment systems, which are used in 79% and 66% of tax regimes respectively. Top of the Paying Taxes ranking was the Maldives, followed closely by Qatar, Hong Kong and Singapore, with Ireland rounding out the top five. Immediately above the UK in the table are Switzerland and Kazakhstan, in 16th and 17th positions respectively, while Norway and Macedonia occupy the two slots below the UK. Commenting on the findings, Mary Monfries, tax partner at PwC, said: “There’s no denying from these results that the UK has a competitive tax system, with some major economies trailing behind. When you see time spent on compliance in the UK is almost half the EU average of 208 hours you realise how much more difficult things could be. But the trouble is we need to be right at the top to attract maximum inward investment.”

“Other countries have specific resources or markets that bring in businesses; for us the financial and business environment is the key attraction. Our tax regime needs to stand out from the crowd when it’s a crucial factor for businesses choosing where to locate. Costs to comply, complexity and uncertainty are all significant factors in that choice. Particularly given the shift of capital from west to east, we can’t afford to have the likes of Hong Kong and Singapore in third and fourth position with us moving towards twentieth. Even when looking at European hubs, Luxembourg and Ireland come out ahead.” Neville Howlett, external affairs director for PwC’s tax practice, added: “The overall improvement in tax systems globally is particularly impressive given the difficult economic backdrop. For the UK, a challenge will be reducing the tax burden if the Chancellor wants any changes to be revenue neutral. Corporation tax makes up a large chunk of our total tax rate and reform here is underway. However, any reduction to corporate tax rates is likely to be paid for elsewhere by businesses. The question is whether it’s worth the Exchequer taking a short-term hit on tax contributions to attract and foster enterprise, bringing longer term benefits.”

“There’s more scope when it comes to reducing the compliance burden, which would benefit both government and business. Employment tax continues to account for a significant 41% of the 110 hours spent on compliance, so anything that can be done to cut red tape here would stand us in good stead. We’re heading in the right direction on tax reform, but the league table changes show we need to move faster.”


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.