Changes to UK taxation could add billions to the economy

18 February 2020 Consultancy.uk

A new report by professional services firms Alvarez & Marsal Taxand and Capital Economics has identified several post-Brexit tax changes that could provide the UK economy with billions in new economic value.

Following the exit from the European Union at the end of last month, the UK is now able to review and reshape its tax policy as an independent economy following the transition period. In their analysis, researchers from the two consulting firms looked at nine key taxation areas that could benefit from possible changes, including R&D, free ports, energy tax, income tax, corporation tax rate, VAT and ‘free trade’ rules.

According to the report, the UK government faces a major opportunity to reshape its tax system to ensure the economy becomes more internationally competitive. For instance, a combination of three high-impact measures – increased R&D incentives, creation of free ports, and a regional corporate tax system with lower average rates – could provide a 7% boost to GDP, amounting to £150 billion, or nearly £5,500 per household over a 20-year period.

Meanwhile, a decrease in VAT on electricity of five percentage points and an increase in VAT on domestic energy derived from fossil fuels of five percentage points would lower domestic energy consumption in the U.K. by 1.2% and lower domestic fossil fuel use by 1.5%.

Changes to UK taxation could add billions to the economy

An overview of the eight tax changes analysed and their impacts:

Increase in R&D and IP incentives

Currently spending is lagging behind other developed countries such as France and Germany. Increased incentives would drive UK business investment in R&D while both increasing international competitiveness and boosting productivity. Each £1 of tax saved with tax credits stimulates £1.62 of higher R&D spending and each 10% rise in R&D spending drives an average 1.3% increase in output.

Creation of free ports

The UK’s ports currently account for 96% of all trade volumes and 75% of trade value. The reintroduction of free ports would build on the strength of existing port infrastructure, encouraging regional productivity and prosperity. Each free port in the United Kingdom would create an average of 13,500 jobs and £800 million of GDP per year over a 20 to 25-year period.

Introduction of a regional corporate tax system

A 10-percentage point reduction in the rate of corporate tax leads to an increase in GDP of 1.2%, driving growth in regions across the country. The change would also raise foreign direct investment by 1.6% post-Brexit, equivalent to £34 billion.

Changes in the energy tax

After Brexit, the UK will be free to set its own rates for energy taxes, which could help reduce the UK’s carbon footprint. A decrease in VAT on electricity by five percentage points and an increase in VAT on domestic energy from fossil fuels of five percentage points would lower domestic energy consumption in the UK by 1.2% and lower domestic fossil fuel use by 1.5%. A lower rate of VAT on energy-saving materials could also make the economy greener.

Lower income tax

A one percentage point decrease in the rate of income tax raises national gross domestic product, on average, by 1.4% over two years.

Changes to / possible overhaul of VAT

Reducing the VAT threshold from £85,000 to £43,000 would affect about half a million businesses and increase Treasury receipts by up to £1.5 billion a year.

Simplification of the current tax system

A single consolidated tax could save small businesses £7,700 per year, on average, in administrative and compliance costs and free up twelve days per year for more productive work.

Establishment of a ‘unilateral free trade’ model

A partial unilateral free trade approach, reducing tariffs to their ‘most favoured nation’ levels, would reduce annual household bills by £113 a year, with a fall in prices of 0.5%.

“The government now has numerous levers it can use to position the UK as a more attractive place to invest, support domestic business and attract talent. Tax policies can accelerate national and regional growth and should be considered as a priority,” said Marvin Rust, a Managing Director at Alvarez & Marsal Taxand.


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