The UK’s tax competitiveness significantly impacts our industry’s contribution to growth. An internationally competitive regime allows firms to grow their businesses and balance sheets in the UK, which has a positive impact on tax receipts, productivity and employment. However, the quality and competitiveness of a country’s tax system is about more than tax levels. A stable and predictable tax regime that is simplified and streamlined for financial services will enhance the UK’s competitiveness and lower the cost of capital for investors and financial services firms, and add to the ease of doing business in the UK.
Recommendations:
a) Simplify and streamline the overall tax regime for financial services to make it administratively simpler, stable and predictable, and to lower the cost of capital for investors and financial services firms.
i. The government should delay the UK’s implementation of OECD Pillar 2 (multinational top-up tax), so that the UK is in step with global progress.
ii. The government should continue to monitor the plans of key competitor jurisdictions and not enact in advance of them.
b) The UK’s banking tax competitiveness does not compare well to competitor jurisdictions. The UK’s total tax for banks was 44.9%, notably higher than New York at 29.4% and Dublin at 30.2%. The recent fiscal event did not improve this situation.
i. The EU is expected to reduce their bank levy next year. There needs to be reform to the UK bank levy, which continues to discourage banks from growing their balance sheets in the UK. This would avoid a situation where banks are incentivised to move capital onto their balance sheets in EU and non-EU countries, rather than the UK.
ii. The government should also reconsider the status of the banking surcharge, given that it was not originally intended to be permanent.
c) Deliver recommendations from reviews of VAT treatment for financial services (particularly around zero rating for VAT purposes), and the taxation of UK investment funds. This would promote the UK’s position as an international financial centre, by preventing the UK from falling further behind other international centres in the race to attract greater and more diverse streams of international capital.
i. Long-Term Asset Funds (LTAFs) have great potential to allow investors direct access to infrastructure assets, channelling much-needed funds into these key growth projects. The FCA is currently working to deal with the retail distribution rules. Once delivered, the remaining policy barrier will be the current illegibility of the LTAF for investment through an ISA. Allowing retail investors to invest in the LTAF through an ISA would provide the biggest possible boost to infrastructure assets.
d) Review and expand the scope of the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) relief to scale up capital for growth businesses, such as less mature low carbon energy generating technologies and infrastructure. This could help the pipeline for listings by financing SME growth. More businesses that are managed by Private Equity (PE) or Venture Capital (VC) funds should also benefit from a wider research and development (R&D) definition. This would drive positive externalities such as decarbonisation, which should be recognised by the tax system.
e) Reform the Apprenticeship Levy so that it can be used to re-skill and upskill existing employees. This would allow businesses to adapt to rapid changes in the economy and, based on research by the Financial Services Skills Commission, could increase output by £38bn by 2038.