Tax system 'tilted against manufacturing'

The UK’s tax system is tilted against manufacturing, stands in the way of growing a more balanced economy and needs major reform, according to a new report.

The document published today by EEF, the manufacturers’ trade body, suggests alterations to provide an immediate boost to high-tech investment and innovation. It also sets out a number of medium-term measures that EEF believes would create an internationally competitive tax system that would help to repair public finances.

The organisation claims an immediate extension to the time restriction on short-life asset election from four years to eight, at a cost of £620 million in 2015/16, would allow a wider range of assets to be written off at the end of their useful economic lives.

Making the research and development tax credit less costly to claim and reflect a wider range of costs could be achieved through a revenue-neutral package that focuses on high-tech R&D, says the EEF paper, Tax Reform for a Balanced Economy.

It also sets out proposals for more sustainable capital gains tax regime, priced between £400 million and £500 million per year until 2016, with the ‘current incentives to avoid paying tax replaced by incentives to make long-term investments in business’.

In the longer term, EEF calls for a cut to the headline rate of corporation tax to 25p over the next five years, a return to the 40% top rate of income tax and an increase in VAT to 20%, which the trade body estimates would raise £12 billion per year and ‘mitigate the potentially savage cuts to government capital spending’.

‘While there have been some helpful changes to the tax regime in recent years, we still lack a coherent tax system that encourages manufacturers to invest and sends the signal that they should be doing it [in the UK],’ said EEF’s director of policy, Steve Radley.

‘A modern, competitive tax system would not only re-balance our economy but attract mobile multinational investment to the UK and send the right signal to would-be investors. The next government of whatever colour must make this a priority.’

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