HAMISH MCRAE: Taxation needs an urgent rethink

The Government wonders why the economy is growing so slowly. It should look in the mirror, for it is curiously naive about the way its own actions have unintended consequences for growth.

Jeremy Hunt is preoccupied with the de-banking scandal, an over-reaction to its own money-laundering legislation in 2017 that put pressure on banks to be much more careful about customers they took on. But when the Chancellor gets some space of mind he should have a rethink about business taxation.

There is one immediate issue that we have highlighted in this newspaper: the Treasury’s decision to stop the rebate on VAT for visitors who buy stuff here.

There has been a huge wave of protest from businesses large and small about the impact on the economy, not only by discouraging visitors from buying goods in the UK, but also by deterring tourists from coming here altogether.

Now the Centre for Economics and Business Research has put some numbers on the cost. It concludes that removing tax-free shopping has cut gross domestic product by £10.7 billion and discouraged two million people from coming to the UK.

Shopping spree: Reintroducing tax-free shopping, far from cutting revenue, would increase the tax-take

Reintroducing tax-free shopping, far from cutting revenue, would increase the tax-take. The additional tax revenue would be greater than the VAT rebates. The CEBR calculates that the Government would have gained £2 billion in total taxes in 2022 and £2.3 billion this year.

You can argue with the detail of the numbers, but its assumptions look pretty solid to me.

So it does seem overwhelmingly likely that ending the rebates has exactly the opposite effect from the intended one. I can see the political attraction of ending a tax concession for foreigners, but if they end up going somewhere else, that is not very bright. In public finance terms, the VAT rebate scheme is small stuff, though given how slowly the economy has been growing, an extra £10 billion of GDP would be more than welcome.

A much bigger issue is corporation tax. It is the fourth biggest tax, bringing in some £80 billion last year. Increasing the rate from 19 per cent to 25 per cent would seem a politically attractive way of raising revenue, were it not for the fact that companies, like tourists, can go elsewhere.

As far as I can see, there has been only one high-profile example so far of a company making a significant investment in a lower-tax regime: AstraZeneca locating a £280 million plant in Ireland, where corporation tax is 12.5 per cent.

But AstraZeneca is the UK’s largest company by market capitalisation, and it explicitly cited taxation as the reason for the decision. There will be many other firms that don’t want to make a fuss but quietly invest elsewhere.

Wisely, Ireland has kept its commitment to low corporate taxation. It is under pressure to increase the rate to 15 per cent but it looks as though it will do this as a top-up tax of 2.5 per cent for major firms, enabling it to keep the headline figure at 12.5 per cent – the rate it has been since 2003. This gives a signal to the business community: we are committed to low corporate taxation. Ireland understands how business people think.

By contrast the UK has been all over the place. There was a drive to push down corporation tax, with chancellors preening themselves about the lowest rate in the G7, getting it down to 19 per cent. Then, bang, we were in a mess and jacked it up to 25 per cent.

What does that do to the US executives that persuaded their boards to invest in the UK on the grounds that it was committed to low corporate taxation? It cuts them off at the knees, and they will do their utmost not to trust a British government again.

I am afraid Rishi Sunak, the then Chancellor, was seriously unaware of the damage he was doing.

Actually, there are lots of loopholes in our company tax system, notably the outrageous one where foreign owners load up their UK operations with debt and take out the money in interest payments.

That cuts profit and they end up paying hardly any corporation tax, maybe none. If we need more corporate revenue, that is a practice that needs to be clobbered, rather than hitting companies with conventional financial structures.

It is hard to know whether, in the long run, the UK would get higher overall tax revenues from lower headline corporate tax rates, but that is the calculation that the Treasury needs to make.

If we had Ministers and civil servants who were more aware of how the world works, we would make fewer damaging decisions – and fewer plain silly ones such as ending the VAT concession for tourists.