Guest blog - A pro-growth roadmap for business-tax reform

The difficult choices taken by the chancellor at last month’s Spring Statement were a clear reminder of just how tight the UK’s fiscal position has become. The chancellor was forced to cut spending – particularly on welfare – just to undo the damage to the public finances caused by five months of disappointing economic news.

Faster growth is the only sustainable route out of this bind. But to stand a chance of reigniting growth, the government must reinvigorate business investment and restore business confidence. Here, it faces an uphill battle. The Autumn Statement’s bumper tax rises have cast a long shadow over sentiment and, according to the British Chambers of Commerce, tax is now the top concern for UK firms.

To win back the trust of the business community, the government needs a new plan. Its Corporate Tax Roadmap, published in the autumn, was a plan for stability. The hope was that this would remove uncertainty, calm nerves and encourage investment. But stability alone now looks insufficient. What is needed is a clearer sense of direction: a strategy for how the system will evolve – and how it can do more to support growth within tight fiscal constraints.

A Three Pillar Strategy

Our recent paper ‘A Pro-Growth Roadmap for Business-Tax Reform’ sets out a three-pillar strategy for tax reform that would boost growth, simplify the tax system and reduce compliance costs for business. Crucially, this can all be done on a revenue-neutral basis.

Pillar 1: Pro-Growth Business Tax Reform

To kickstart business investment, we propose two significant reforms. First, we recommend enhancing capital allowances. From April 2026, businesses should be allowed to deduct the full cost of all capital investments from their taxable profits. Applying the methodology used by the OBR to assess the impact of applying full expensing to investment in plant and machinery, this reform could raise GDP by 0.3% by the end of this parliament and 0.5% in the long run. This would provide a clear and consistent incentive to invest, while also simplifying the tax treatment of capital across the board.

Secondly, we propose replacing the current business rates with a commercial landowner tax, starting from April 2028. Only the unimproved value of land would be taxed, thereby removing the penalty on development and upgrading property. Applying the same methodology used by the OBR, this change could lead to a 0.25% increase in long-term GDP. Businesses would benefit from greater availability of commercial property and lower rents.

Pillar 2: Better-Targeted Business-Tax Reliefs

To pay for these pro-growth tax changes, we advocate for the elimination of business tax reliefs that are intended to boost growth but have proven to be ineffective over time. These changes could free up £9.3 billion by the end of this parliament. For instance, the Patent Box, which was designed to incentivise innovation, has not achieved its intended goals. Similarly, National Insurance employment incentives for young workers and apprentices and Business Asset Disposal Relief have not delivered significant economic benefits. By abolishing these reliefs, the government could save £4.7 billion a year in short order.

We also suggest phasing out sector-specific business-rate reliefs once the commercial-landowner tax is in place. These reliefs largely benefit landlords by inflating rents and provide little sustained benefit to the businesses they are intended to support. The savings from abolishing these reliefs would be £4.6 billion a year.

The UK also has a number of tax reliefs that benefit businesses that are in some way ‘small’ – the small profits rate of corporation tax, the employment allowance in NICs and the UK’s high VAT registration threshold. These are justified at present because tax compliance costs are a greater burden for smaller businesses. However, if the reforms to streamline the tax system outlined below were implemented, these reliefs could be gradually abolished early in the next parliament as the case for blanket reliefs for small businesses is generally weak. There are other policy levers that are better suited to address concerns around small businesses’ access to capital or distributional objectives. Removing these reliefs could potentially save up to £11.1 billion a year. The funds generated from this measure could be recycled into targeted support for growing firms or used to fund broader pro-growth tax measures.

Pillar 3: Tech-Enabled Modernisation

The UK’s tax system remains too complex, too costly to comply with and too easy to defraud – placing a heavy compliance burden on businesses, particularly smaller firms. We propose adopting a modern, digital-first approach to tax administration to cut costs for businesses, improve enforcement and create the infrastructure for more targeted support. As a first step, the rollout of Making Tax Digital (MTD) for both income tax and corporation tax should be accelerated. But to be effective, the system must be tweaked to be less burdensome and more accessible. The government should remove onerous requirements such as the forthcoming quarterly reporting requirement for income tax, and provide more tailored support for businesses to help make the digital transition.

Another key aspect of our modernisation strategy is the introduction of Digital ID for Business by 2030. This unique identifier for each firm would facilitate seamless interactions with government agencies and improve fraud detection, reducing administration costs for businesses by reducing data-entry duplication, help detect fraud and help join up services across government departments. For example, a digital ID could enable a more tailored support service for firms by highlighting eligibility for grants and issuing reminders for tax filing deadlines or nudges to prompt action – particularly useful for small businesses that often miss out on support simply because they don’t know it exists.

Finally, we propose launching a national e-invoicing programme. The government should mandate its use for all business-to-government (B2G) transactions from 2027 and extend it to business-to-business (B2B) and business-to-consumer (B2C) transactions for all VAT-registered businesses by 2030. The potential benefits of this initiative are substantial. It would result in faster invoice payments, improving cash flow for firms while also helping to reduce error and fraud in the tax system.  Evidence from the introduction of e-invoicing in Italy suggests that it may have helped to reduce the VAT gap by nearly 50 per cent – if a similar reduction was achieved in the UK this could boost tax revenues by £4 billion each year.

Conclusion

The business-tax system is a barrier to growth in the UK. Poor tax design has led to an over-complicated system that reduces investment, with many expensive reliefs that have little positive effect on growth.

By refocusing support for business through the tax system where it will have the greatest impact, our reform strategy has the potential to raise national income by 0.75 per cent – more than twice the estimated effects of the government’s flagship planning reforms. Greater use of technology in the administration of the tax system to lower compliance costs is another important element of our strategy. This will benefit all businesses, but particularly smaller ones who bear the heaviest burden of compliance costs at the moment. It will also have consequences for the design of tax policy: linking data across government databases will allow support to be better targeted on growing businesses, rather than providing blanket support for small businesses that results in little benefit for economic growth.

Following this strategy will not be easy and there will always be a cohort of defenders who will resist reform. But by setting out a clear direction of travel and highlighting the size of the prize at stake, the government has a chance to deliver some long-overdue reforms and kickstart growth.

The CIOT publishes guest blogs to stimulate debate on tax policy and related matters. The views expressed in guest blogs are those of the writers and are not necessarily shared by CIOT.