Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

Under the chairmanship of GE Capital Europe's president, Charles Alexander, the CBI's independent Tax Task Force - consisting of 12 leading tax experts from some of the UK's largest international companies as well as smaller businesses, spanning every sector of the economy - has spent nine months collating intelligence and conducting detailed international research to produce a long-term vision for the UK tax system.

Its report UK business tax: a compelling case for change reveals that the UK has now reached a tipping point.

Root and branch overhaul

The CBI claims that the ever-rising business tax burden and the failure of the tax system to respond to increasingly global business activity is creating a corporate tax system which is unsustainable in the long-term.

To tackle this, the report proposes a root and branch overhaul of the UK corporate tax system, with a wide-ranging programme of reform to include:

• A headline corporation tax rate of 18 per cent within eight years, with the cut more than paying for itself over time through increased economic activity.
• Tax calculated on the basis of existing company accounts, scrapping the current system where firms have to maintain two sets of books. Allow all genuine business expenses to be properly recognised and replace complicated capital allowances with accounts-based depreciation.
• A 'no surprises' legislative and administrative process, with more time allowed for proper consultation on tax proposals, better resourced and effective parliamentary scrutiny, and limited budget secrecy.
• A non-political, independent tax law commission, established to monitor and review existing tax law and suggest improvements.
• Proactive UK government action on all cross border tax issues, co-ordinating with other governments, including on treaties to assign primary taxing rights.
• A simplified and improved tax system to stimulate the growth of small and medium-sized enterprises (SMEs), with an exemption from rules intended for multinationals, a small firms corporation tax rate brought back rapidly to 18 per cent within three years and the SME investment allowance doubled to £100,000.

Richard Lambert, the CBI's director-general, said that the UK’s traditional tax system was no longer fit for purpose and was making the UK look increasingly uncompetitive.

“We need bold action to restore a competitive headline rate of corporate tax. An 18 per cent business rate within eight years would help restore the UK's low tax credentials. But a radical shake-up is also vital if clarity, certainty and simplicity are to be reintroduced to the system so firms can plan with confidence and make Britain their long-term home,” he added.

Cuts to corporation tax

Lambert accused the Government of to-ing and fro-ing over capital gains tax and non-doms in recent months and said that knee-jerk, retrospective change was no way to manage a tax system.

He described the case for change presented by the CBI tax task force as “compelling” and called on the Government to “clear away the thick layer of silt that has built up over time in our tax system”.

"It needs to have the confidence to permit a serious, non-political, dialogue about where the business tax regime should be heading, what it needs to achieve, and what we want it to look like in ten years time. A clear government road map should follow, setting out the route to reform so business can plan with certainty,” Lambert explained.

The report makes clear that the advantages the UK gained from cuts to corporation tax during the 1980s and late 1990s have been lost.

It said that other countries have taken bold steps to cut their rate: The Netherlands and Portugal to 25 per cent and Ireland is famously at 12.5 per cent.

The UK's rate meanwhile has lagged and is now higher than the OECD average of 26.8 per cent, even after this April's cut from 30 per cent to 28 per cent.

Boost rather than reduce tax receipts  

In terms of the burden of corporate tax, the UK's effective average tax rate is now the eighth highest in the OECD. Corporation tax is not the only burden, with companies pay £1 in other taxes for every £1 of corporation tax.

According to the World Economic Forum, the UK has slipped from 4th place in 1998 to 15th in 2003 on the Global Competitiveness Index.

In a KPMG survey last year, only 2 per cent of business thought the UK could claim to have the most competitive tax system in the world. While the UK's corporation tax rate was third lowest among the EU15 in 1997, it is now the sixth highest.

New analysis conducted for the report supports the argument that cutting corporation tax can actually boost rather than reduce tax receipts over the long term, as has been the experience in Ireland.