Policy? What policy?

When asked by accounting & business whether the UK Government had a coherent tax policy, Richard Lambert, the Confederation of British Industry’s (CBI) director-general, simply said ‘no’. None at all? Neither he nor his organisation, which represents UK business, could see any tax strategy, nor could they detect much rationale in the Government’s recent tax policy. Peter Williams explains why root-and-branch change is needed in the UK’s tax jungle

Businesses and their tax advisers have always moaned about politicians and tax. In some way, it is playing mind games in the same way that Premiership football managers criticise referees. Next time the call may go your way.

But, currently, it is more than that. Lambert's damning indictment is a reflection and an expression of a groundswell of opinion among businesses and professionals of a frustration with the administration of the UK's tax system. It has found vocal criticism over three particular policies: non-domiciles, capital gains and tax income shifting, though the introduction of the last item was surprisingly delayed for a year in the March Budget.

Lisa Macpherson, national director of tax at accountant PKF, criticises government tax policy for a lack of cohesive thinking. 'All governments have a right to act where there is a tax gap or where they are losing tax revenues,' she says. 'But this needs to be done in a joined up way with adequate consultation and well-drafted legislation.'

While the CBI mutters darkly about multi-nationals deserting the UK because of its loss of tax competitiveness, Macpherson is more concerned about the impact of the tax burden on smaller businesses that have no choice but to stay put. 'Small businesses face more and more of an administrative burden combined with a level of uncertainty.'

Much of that uncertainty comes from the enormous amount of tinkering with the tax system that has taken place over the past decade. Phil McCabe, a spokesman for the small business lobby group, the Forum of Private Business (FPB), identifies the changes to the tax system that have upset his members as: alterations to the small rate of corporation tax; changes to capital gains tax, which discourage entrepreneurs; and a new rule on income shifting, which looks set to create a massive paper chase for small firms. He also suggests big business is enjoying a lower rate of corporation tax (the headline rate has come down from 30% to 28%) at the expense of small business. And his conclusion? 'The cumulative result of this is that it just makes it more difficult for our members to survive and compete.'

While the FPB could be dismissed as a lobby group, the Institute for Fiscal Studies (IFS) is a well respected research organisation. In its 2008 Green Budget, setting out the option for the real Budget, it noted Labour has changed corporation tax rates in seven of its 11 years in office, and plans to change them again next year and in 2009-2010. In a bid to neutralise the tax and national insurance difference between the employed and self-employed, it introduced a starting rate of corporation tax in 2000-2001, only to then remove it, and it is now planning to increase the rate over the next two years. The IFS predicts more changes in the form of the abolition of the small company rate altogether.

The Government does have a stated tax policy. HM Treasury, which is responsible for formulating and implementing the UK Government's financial and economic policy, has one aim (to raise the rate of sustainable growth and achieve rising prosperity for all) and eight objectives. Objective IV, the one concerned with tax, is '[to] promote a fair, efficient and integrated tax and benefit system with incentives to work, save and invest.' At least it is brief. The rest of the Objective IV is concerned with the laudable aim of reducing child poverty. And in the Pre-Budget Report, Alistair Darling, the Chancellor of the Exchequer, said that his aim was to make the UK 'a modern tax regime based on three clear principles: that our system is competitive, simple and fair'.

The Government says it is meeting that objective. It points to overall economic growth and the increasing number of small businesses in the UK - up 760,000 since 1997 - and promises to do more to help business angels and others continue to thrive.

In a recent speech, the Chancellor said: 'International surveys consistently show that the UK is acknowledged as having a business friendly environment and competitive tax system. I promise that I will work with you on the tax regime so that we provide incentives for investment in wealth creation and rewards for success - and make and keep the UK as the best place for business.'

Not surprisingly his views are not shared by his political opponents. Philip Dunne, Conservative MP for Ludlow and a member of the Treasury Select Committee and the Public Accounts Committee, has a special interest in small business. He says: 'The Chancellor has undermined whatever reputation for economic competence this Government once had, by his muddled introduction of proposed major changes to tax policy for business.

'The Government seems to have abandoned its long-held policy to encourage long-term investment by entrepreneurs, many of whom are now heading to exit their business in this country. These measures are ill-thought through and will damage business formation and investment in Britain.'

A report from Ernst & Young, Finding Its Way: A Return to the Competitive Path for Britain?, reached a similar conclusion as the MP. It said: 'As a first step towards competitiveness, simplicity and fairness the Chancellor's initial actions have been less than successful. He has used the right words, but the related actions have not measured up.'

Several reasons can explain why business has fallen out so badly with the tax authorities. Some blame the merger of the Inland Revenue and HM Customs in April 2005, which saw tax strategy and planning transferred into HM Treasury. The move, say tax practitioners, has caused disconnect between taxpayer and tax collector. Complexity is a major factor: the CBI says in 2007 Tolley's Yellow Tax Handbook totalled 9,866 pages, 4,000 more than in 2001, giving the UK the longest tax code in the world. Others see the simple need to prop up poor public finances with every penny that can be extracted from anywhere. Others point to a lack of understanding among politicians of how businesses, especially small firms, really work with the adjacent point that few senior politicians have worked in commerce. It has to be said that suspicion and hostility is mutual with the Government, tax authorities and others, such as trade unions, seeing businesses prepared to go to great and unreasonable lengths to avoid paying tax.

Another primary cause of discontent for businesses and their tax advisers is the way the Government appears to have moved away from its own idea of how it should conduct tax policy. The Pre-Budget Report was an idea introduced in 1997 on the election of New Labour to encourage debate on proposals under consideration for the Budget, including fiscal policy. But that system has never got off the ground. Privately, tax practitioners condemn present day consultations as a sham, or say that the Government has already made up its mind and is only asking about how the details should be worked out in practice. Chas Roy-Chowdhury, ACCA's head of tax, says that there is a lack of mechanism in the consultation process: 'They appear to consult with those who shout loudest. The real issue is how do you get to give the proposal a reality check? There should be consultation on both policy and administration.'

Voices are demanding reforms to the UK tax system: for instance, the CBI has called for a radical overhaul of the UK business taxes and ACCA has suggested a Tax Policy Committee in a bid to provide business with certainty, simplicity and a reduced tax code. Business and tax professionals see moves are desperately needed to break the current impasse over tax policy, but there is little to suggest the Government is willing to embrace such a root-and-branch change.

Peter Williams is a journalist and a chartered accountant. He writes on accounting, financial reporting and auditing issues.