Liberal Democrat conference in Bournemouth backed radical changes to corporation tax, including restrictions to reliefs, a boost to capital allowances and extending the tax to cover highly profitable partnerships and other unincorporated businesses. For multinationals the party wants a wider definition of permanent establishment and, longer term, a global system of business taxation. In an autumn election a penny on income tax for health and social care, and restoring the 20% rate of corporation tax to increase funding of public services, would likely be key policies.
Goodbye Corporation Tax, Hello British Business Tax – but still taxing profits
Liberal Democrat members passed a motion calling for the UK to work with other major economies to develop an international system of business taxation with a global minimum rate of tax on profits. However the party acknowledges that international reform will take time, and that reform of the domestic business tax system is necessary in the meantime. So they propose replacing corporation tax with a new ‘British business tax’. Is this just a rebranding? Not quite. While broadly similar to existing corporation tax (ie it would be levied on business profits) it would differ significantly in a number of ways in its calculation and scope (see below).
The working group which produced the motion clearly carried out some careful examination before deciding whether a profit-based tax should be retained for business. A 20 page paper providing background to the motion says society (ie the state) is entitled to ‘a royalty on business activities’ because it provides the physical, legal and social infrastructure that businesses rely on and benefit from (as well as public services for their customers, suppliers and employees). That royalty is best captured through a tax on business earnings, the group says, dismissing the argument that businesses have met their obligations to society through the other taxes they pay and collect.
A switch from taxing profits to taxing revenues is also examined and dismissed in the paper. Taxing revenue would discriminate against SMEs and lower margin businesses, would entrench the position of highly profitable incumbents at the expense of challengers, and would in any case ultimately end up delivering a tax which looks very like VAT, the working group argue. Business profits are deemed the closest proxy to ability to pay. The paper also dismisses suggestions that businesses should be taxed differently based on their size or level of profits in a particular year, arguing that this would add complexity and create distortions.
A wider tax – partnerships as well as corporations
The change of name from ‘corporation tax’ to ‘business tax’ is significant. The party plans, over time, to bring “highly profitable unincorporated businesses, such as wealthy city partnerships and consultancies”, and high earning sole traders, within the scope of the tax. It would accompany this with changes in the income tax and national insurance systems to ensure that individuals are treated equitably irrespective of whether they receive their earnings in the form of salary, drawings, dividends or otherwise. However the party would continue to tax freelance workers and small unincorporated sole traders through the income tax and national insurance systems (noting that the party has existing plans for reform of these areas – see below).
The Lib Dems believe the current system gives “unfair structural advantages” to unincorporated businesses by taxing them differently from other businesses. The party argues that its reforms would create a “single rate of tax on all business activity” which would be “easier to administer, minimises compliance costs, and would avoid distortions that discourage businesses from expanding into higher tax brackets”. The party promises extensive consultation before introducing legislation to make these changes, as well as three years notice to give businesses time to prepare for the change. It also proposes consultation on removing and reforming “unnecessary exemptions and deductions that mean that some businesses do not pay their fair share”.
Stable 20% rate promised
The Lib Dems favour a long-term rate of 20% for the new business tax, positioning the party between Conservative plans to cut the CT rate to 17% and Labour’s proposal to raise it back to 26%. Compared to Conservative plans the party estimates having a 20% rate would bring in an additional £8 billion a year, which would be available for funding public services.
The paper also comments that while the average corporate tax across European countries is 23% to 26%, many of their tax systems feature deductions that enable many businesses to pay substantially less than the headline rate. “A tax rate in excess of 20% combined with fewer deductions and fewer opportunities to unfairly minimise tax would likely be uncompetitive and disadvantage British businesses,” it states. An amendment proposing that British corporate tax rates “be brought better into line with our European neighbours” was rejected after critics argued that the range of rates across the EU rendered this meaningless.
Calculating the new tax – new restrictions on reliefs
In an attempt to simplify the calculation of the new business tax, it would be based on accounting profits with a minimal number of adjustments. The party criticises the existing approach not just for its complexity and associated “excessive compliance costs” but also for leading to errors (from both taxpayers and HMRC) and disputes. It argues that divergence between accounting profits and taxable profits under the current rules undermines public confidence in the tax system.
The Lib Dems also want to introduce further restrictions on reliefs and allowances. Standard tax incentives would be restricted to a maximum of 50% of taxable profits, meaning that no established profitable business should have an effective tax rate of less than 10%. “[I]f a business is generating profits… it can and should pay tax,” asserts the paper. The party is clear though, that it would retain cash R&D tax credits to support businesses as they develop.
Investment incentives targeted for reform
The Lib Dems are proposing substantial reforms to investment incentives, driven by a desire to both simplify and to get a ‘bigger bang for their bucks’ through more effective targeting. The working group paper attacks the current incentives regime for the extent of dead weight costs (ie subsidising things businesses were going to do anyway), for pushing businesses to take “sub-optimal planning decisions” to tick boxes, for sometimes enabling undeserving businesses to shelter profits from taxation, for unnecessary complexity and for a lack of transparency that makes it hard to judge whether incentives are providing value for money.
So what do they propose? In addition to the restrictions mentioned above – which limit the total incentives that may be claimed by any one business to 10% of business profits - the party wants greater transparency, a standardised approach for incentives (so that they do not need to be designed from scratch each time) and a more targeted approach so greater support can be provided in tax credits to early stage businesses. On the latter the party proposes replacing “the over-generous patent box and entrepreneurs’ reliefs that favour global multi-nationals and wealthy individuals with new incentives that better support early stage businesses”.
Additionally the party has some specific proposals to encourage productive investment:
- Simplifying capital allowances by establishing a single pool for capital expenditure on all tangible fixed assets other than land and buildings, as recommended by the Office for Tax Simplification;
- Gradually increasing the annual investment allowance to £2 million and making this increase permanent;
- Gradually increasing writing down allowances on productive assets from 18% to 25% a year.
The ultimate destination – a global system of business taxation
The Lib Dems are committed to continuing the OECD BEPS project, to tackle base erosion and profit shifting, but conclude that, ultimately, there is only so much that can be done through piecemeal reform, and the current international system of business taxes needs to be replaced by “a global system of business taxation based on the principles set out in this policy paper.” This would be neither the existing ‘origin’ system that attributes taxable profits to a deemed place of value generation, nor a ‘destination’ approach, where taxable profits are attributed to the jurisdiction of sale, which the party argues would penalise many poorer countries.
Instead the Lib Dems seek: “an agreed international tax system that shares taxes on business fairly between the jurisdictions involved. This would recognise that businesses generate value from all the societies in which they operate and not just in their ‘home’ country (or adopted low-tax ‘home’). Business taxes should be allocated between jurisdictions equitably, based on the principle that business activities involve more than one party – and where those parties are based in more than one jurisdiction, the tax paid attributable should be fairly allocated between those jurisdictions.”
Taxing multinationals in the meantime – changes to PE rules
While acknowledging the limits put in place by international tax law there are a number of particular changes the Lib Dems would seek to make in the meantime “to ensure that businesses operating in the UK pay tax in the UK, preventing multinational businesses from being able to structure themselves to minimise the tax they pay in a particular jurisdiction such as the UK.”
Specifically the party proposes:
- Taxing profits where the business activity takes place following actual commercial reality and not legal form;
- Revising permanent establishment rules to capture online businesses that are operating in the UK, ensuring that businesses selling advertising aimed at UK consumers or generating value from UK subscribers are captured within the UK business tax system (the party reckons this will raise an additional £2 billion a year);
- Further steps to restrict the ability of multinationals to avoid taxes or shift profits inappropriately, in particular looking at royalty charges and debt interest;
- Changes to the tax system to prevent public utilities and outsourced service providers attributing profits made in providing public services within the UK to other jurisdictions.
But they are not keen on a digital services tax
Perhaps surprisingly the party does not endorse the government’s plans for a digital services tax, or the EU’s plans for a similar levy targeting the revenues of large digital firms. Partly this reflects scepticism about taxing companies based on their revenues, but the party is also keen not to complicate the tax system with new taxes. Additionally the working group’s paper notes – surely with the reaction of the US government in mind - that these sector-specific taxes “face many practical, legal and political difficulties and look likely either to be unsuccessful or, if implemented, unlikely to significantly address the ‘lost’ tax revenues.” Instead the party puts its faith in broader, non-sector specific international tax reform.
Business tax transparency
It isn’t just on reliefs the Lib Dems want greater transparency. The party proposes country-by-country reporting for all businesses operating in the UK. The party appears to go further than Labour in this respect. While Labour propose country-by-country reporting for the ‘largest corporations’ the Lib Dems would make all listed companies, offshore companies bidding for public contracts, all public utilities and large private companies disclose this information. However the Lib Dems believe their requirements will be less punitive than Labour’s, promising the required disclosures will be “not overcomplicated and… straightforward for businesses to prepare”.
An amendment to the motion accepted by the proposers added a requirement for providers of outsourced public services to publish their beneficial ownership and a clear tax policy with a commitment not to use tax havens, as well as country-by-country reporting information.
Taking account of developing countries
Two amendments to the motion passed by conference are designed to help developing countries. The first, accepted without a vote, advocates a tax system “which minimises disruptive effects on developing countries, to be established by a spillover analysis of the system, and in particular the UK's tax treaties.” The second, proposed by chartered accountant turned journalist Neasa MacErlean, resolved that HMRC should continue offering help to developing countries through its Tax Capacity Building Unit when the current programme ends in 2023. This was passed with overwhelming support.
No fans of free ports
An amendment was passed to the business tax motion “noting with concern Conservative plans to establish up to ten new so-called free ports in the UK”. The amendment claimed this would create tax havens that would increase unfairness in the tax system and undermine public finances, and pointed to a European Commission report published in July 2019 which, it said, identified free ports as potentially vulnerable to counterfeiting, VAT fraud and money laundering. A motion explicitly opposing the creation of free ports was considered alongside other potential ‘emergency motions’ but lost out in a ballot of conference attendees to identify priorities for debate. It would almost certainly have passed had it been selected.
Reminder – Lib Dems already have radical personal tax plans
The wide-ranging changes to business taxation described above supplement far-reaching changes to personal taxation agreed by the Lib Dems at last year’s conference. These still stand and include:
- Taxing capital gains and dividends through the income tax system, abolishing the separate tax-free allowances for both;
- Abolishing capital gains forgiveness at death;
- Introducing a flat rate of relief on pension contributions;
- Turning inheritance tax into a progressive large gifts tax.
Further information on these proposals can be found in our report on last year’s Lib Dem conference.
- In the near-term, raising a further 1p on the £ from income tax (around £6 billion a year) in addition to matching last year's increase to NHS budgets;
- In the medium-term, establishing a cross-party commission to set a realistic long-term funding settlement for the NHS and Social Care, and introducing a dedicated Health and Social Care tax to fund it (the party has suggested this could be based on a reform of national insurance contributions).
And don’t forget land value tax
Lib Dem conference wouldn’t be Lib Dem conference without a fringe debate on land value tax, as well-attended this year as ever (that is, it was full to the room’s capacity of about 60, in case anyone thinks this is a subtle dig!) Andrew Dixon, a founder of the Lib Dem Business & Entrepreneurs Network, is leading a cross-party campaign for land taxation, and spoke at the conference alongside data scientists Dominic Humphrey. Their message was that introducing land value tax for residential property could create what they called a ‘People’s Land Dividend’ with property/land tax being reduced for the majority. Broadly speaking the beneficiaries would be people outside London and the south east. Supporters thought the measure might bring more supply onto the market. But there were concerns that it might reduce local democracy if rates were set centrally (as proposed).
Current Lib Dem policy (as passed at autumn conference 2018) is, however, for a land value tax on business property only, putting in place what is dubbed a Commercial Landowner Levy (CLL) to replace business rates and non-residential stamp duty. The party’s plans for taxing residential property are, as agreed at last year’s conference, in the short-term, additional, higher, council tax bands, with long-term consideration of replacing council tax with a percentage-based annual property tax.
Tax priorities – what will they be campaigning on?
So, the Lib Dems have all these tax policies but relatively little opportunity to communicate them to voters. Which would be the party’s campaigning priorities in an autumn election? That was the gist of the question put to the party’s new Treasury spokesperson, and deputy leader, Sir Ed Davey, by CIOT. Sir Ed replied that he was keen not to have a long list of tax rises. He was not convinced that would help at this particular election, given the overwhelming focus likely to be on Brexit, and the potential for the party to point to what he called the ‘Remain Bonus’ (see below) as a source of funds for additional investment in public services. However he did point to two tax policies as potentially having particular prominence in an election campaign: the penny on income tax for health and social care, and the 20% rate for corporation tax – the latter not for its own sake but for how the money would be used.
Positioning on economic and industrial policy
At a briefing session on the party’s economic policies, Chris Fox, who speaks for the party on business matters in the Lords, framed the choice as between a Boris Johnson government backing big business, Jeremy Corbyn who has ‘doubled down’ on socialism and the Lib Dems who are seeking from business a better way of performing, encouraging good behaviour. Susan Kramer, Treasury spokesperson in the Lords, said that with the Conservatives flirting with a no-deal Brexit and both Conservatives and Labour engaging in ‘magic money tree’ strategies, the Lib Dems would try to hold the reputation for being responsible on the economy.
Sir Ed Davey said Labour policies such as forcing large firms to hand 10% of their equity to employees were extremely left wing and unacceptable. Another clear distinction from Labour on economics was that Labour wants to put up taxes by considerably more than the Lib Dems do, he said. Susan Kramer added that the Lib Dems did not take an ideological pro-state or pro-private approach, but rather asked: “What’s in the public interest?”
The first Liberal Democrat Budget
In his keynote address to the conference, Sir Ed set out the economic priorities which would go into the first Budget of a Liberal Democrat government: offering opportunities for – in particular – parts of Britain that feel ignored and left behind, investing in education and training to boost productivity and tackling climate change.
On the first of these he explained that, when the Lib Dems stop Brexit (see below), “Britain will get a Remain Boost and a Remain Bonus. Imagine what we could do if, we weren’t wasting billions on preparing for a No Deal Brexit. Imagine if all the energies going into Brexit, were going into our NHS. Our schools. Our police service. The extra investment. The extra growth. The extra tax receipts for the Exchequer.” He said the Lib Dems would spend this extra money on “tackling inequality and solving the causes of Brexit. We will make Britain a fairer country, a more equal country, a less divided country.”
Specifically, as a Lib Dem Chancellor, he would: relaunch the Regional Growth Fund promoted by Lib Dems in the coalition government; regionalise the British Business Bank, which the Lib Dems set up in government; fund major investment for East-West railway links in the North and Midlands; restore high streets, reforming business rates (see above); embark on a new affordable homes programme; give every adult the chance to invest in their own education and training, with Vince Cable’s proposal for lifelong learning.
A Climate Emergency Budget – and a tax system to match?
Sir Ed told the conference his first Budget would be a Climate Emergency Budget, with investment in new technologies, well-paid green jobs, climate risk reporting and a new Green Investment Bank. He argued for the ‘decarbonisation’ of capitalism - that is, moving the financial markets away from investing in pollution, into investing in renewables. The party would, new leader Jo Swinson later announced, establish a UK Citizens’ Climate Assembly “to drive a national debate about how exactly we will reach net-zero by 2045 - and earlier if possible”.
What does this mean for tax? It’s not entirely clear yet. A motion and policy paper on tackling climate change – adopted at the conference – propose “greening the taxation system to make polluters pay and to reward progress towards net zero” without at this stage providing much detail. A proposal to reform the taxation of international flights to target the most frequent flyers was adopted. At the last general election the party argued for “a coherent tax and regulatory framework for landfill, incineration and waste collection, including reinstating the landfill tax escalator and extending it to the lower rate, and consulting on the introduction of an incineration tax”.
A wellbeing budget
Additionally, Jo Swinson announced that not only would a Liberal Democrat government put the wellbeing of people and planet at the heart of its agenda, this Autumn the party would set out its own ‘wellbeing budget’. This appears to be on the model of New Zealand where, in May 2019, finance minister Grant Robertson unveiled increases in funding for mental health services and tackling child poverty and family violence in such an initiative.
The most controversial vote of the conference was on a motion (which passed) to develop the party’s policy on Brexit to state that they campaign in any pre-Brexit general election to Stop Brexit, “with the election of a Liberal Democrat majority government to be recognised as an unequivocal mandate to revoke Article 50 and for the UK to stay in the EU.” Outside a general election campaign however (and including potentially in any non-Lib Dem majority post-election scenario), the party remains committed to fighting in Parliament for a referendum (at which voters would choose between ‘the deal’ and staying in the EU), and to attempting to revoke Article 50 only if the House of Commons has not passed a resolution approving a Withdrawal Agreement one week ahead of the date on which the UK is due to leave the EU.
HMRC under fire
In response to a question about IR35 Lord Fox accused HMRC of applying a ‘hostile environment’ to people in self-employment. Sir Ed Davey accused HMRC of being ‘a decade behind’ in tackling tax avoidance.
But in more positive news for HMRC the business tax motion (see above) also included a call for the investment of significant extra resources into HMRC to ensure that the tax system is fairly applied and administered.
A motion (accompanied by a spokesperson’s paper, though these do not formally become party policy) on support for tourism proved unexpectedly controversial. Alongside a range of non-tax measures the motion proposed removing 'rent a room' tax relief on rooms designated as short-lets and reducing VAT on visitor accommodation and attractions, while enabling local authorities to bring in tourist levies to fund local infrastructure through councils and destination management organisations. The aim of the proposers is for the VAT and tourist levy proposals to be broadly revenue-neutral.
However the Leader of Bath council urged members to vote against the motion, saying that while a tourist tax sounds a good idea, the UK tax system is different from those of other countries where existing taxation of the hospitality sector is much lower. She also argued that small shops and cafes would have to make big changes to cope, including to accounting methods. As an alternative she suggested a tax rebate based on the proportion of hospitality-related tax revenues received by central government from each area. The motion was, however, passed unamended.
Social security paper passed
A social security motion (and accompanying policy paper) was passed including a proposal to ‘make work pay by increasing work allowances, reviewing the taper rate and introducing a second earner work allowance at 50 per cent of the main earner. Among other amendments, one was agreed to ensure that claimants do not have to access the benefit system digitally.
Other tax-related proposals passed by the conference
A motion (accompanied by a spokesperson’s paper) on lifelong learning proposes a universal Personal Education and Skills Account (PESA) for adults in England, including the offer of tax relief or match funding to incentivise account holders and their employers to pay into the account.
A motion on continuing the fight for gender equality calls for the government to work within the EU to remove VAT on sanitary products across all Member States, including the UK.
A motion on music venues was amended to add a proposal to amend government guidance to ensure music venues are eligible for business rate relief.
Narrowly defeating an attempt to remove it, the motion on health and social care retained support for introducing minimum unit pricing for alcohol in England.
The full conference agenda can be read here.
Reports on tax content at the other main party conferences will appear in this blog following each conference.