The system of business taxation should seek to be fair in its impact on different kinds of businesses and on different kinds of taxpayers, while supporting employment, wages and investment. The system we have today fails these tests in important respects. The principal rate of corporation tax in the UK has fallen from 30 per cent in 2008 to just 19 per cent in 2018, and the proliferation of reliefs and allowances has eroded its base. At the same time, the rate of employers’ National Insurance contributions has increased. These changes have shifted the burden of taxation away from profitable but low-employment businesses to those with more staff but lower profits. The vast majority of businesses pay their taxes, but some multinationals have been increasingly able to avoid tax altogether through ‘profit shifting’ to low-tax jurisdictions, requiring more of the burden of taxation overall to be borne by domestic companies which cannot avoid tax in this way.
This report sets out a series of reforms to address these issues. First, it proposes a fiscally-neutral rebalancing of the two principal business taxes. It recommends an increase in the rate of corporation tax from 19 to 24 per cent, alongside a reduction in employers’ National Insurance contributions from 13.8 to 11.8 per cent. This would ensure that the burden of business taxation falls primarily on shareholders rather than workers, and allow for an increase in wages. A higher rate of corporation tax would also raise the value of investment allowances, creating a larger incentive for investment. Second, an Alternative Minimum Corporation Tax (AMCT) should be introduced in order to reduce tax avoidance through profit shifting. This would be levied on a portion of a multinational firm’s global profits based on its sales or turnover in the UK. Third, reliefs and allowances for corporation tax should be reviewed and reduced. Fourth, the UK should support international efforts to combat tax avoidance, including by implementing all the recommendations of the Base Erosion and Profit Shifting (BEPS) programme and clamping down on tax avoidance in the UK’s crown dependencies and overseas territories.