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Are Jaffa Cakes truly biscuits or cakes? In 1991, McVitie’s invested significant time and resources to prove that these treats were indeed cakes. By doing so, they were able to avoid a sales tax on chocolate-covered biscuits, despite being sold alongside them in supermarkets.
Taxes have a profound impact on business behavior. While the distinction between a cake and a biscuit may seem insignificant, the cumulative effect of various levies and reliefs in the tax system influences companies’ decision-making and, consequently, economic growth. Corporation tax, specifically, has a significant influence.
By increasing the cost of doing business, this tax affects investment plans and the choice of international locations for groups. Allowances, on the other hand, enable businesses to deduct certain expenditures from their pre-tax profits, thereby alleviating the negative impact of taxes on investment decisions.
Despite raising the rate to 25%, the UK currently has the lowest corporation tax rate among G7 countries. This tax generated £83 billion for the UK Treasury last year, making it the fourth-largest revenue stream. However, the country’s permanent investment allowances are among the least generous among advanced economies, creating distortions that hinder economic performance. Addressing the flaws in the corporation tax system is crucial, considering the UK’s sluggish business investment and productivity growth.
Three key reforms could make a significant difference. Firstly, the UK should make “full expensing” a permanent measure. This allows businesses to deduct 100% of plant and machinery investment expenses from their taxable profits. Secondly, a wider range of capital investments, including buildings and green structures, should qualify for full expensing. Lastly, the bias towards debt in the corporation tax system should be reduced, as it discourages investment and innovation.
Currently, the corporation tax system limits business dynamism and investment, which are essential for long-term productivity and revenue growth in the UK. By implementing reforms to mitigate these negative effects and promote economic growth, the government can achieve its goals.
This is the second in a series of editorials on reforming the UK tax system. The first, on the need for reform, can be found here.
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