By Daniel Hunter
For the first time in seven years the UK has moved up the global ranking of effective tax regimes, having previously been slipping down the league table.
The latest PwC, World Bank and IFC Paying Taxes study puts the UK in 16th position, up two places from last year but still five short of its number 11 spot in the 2006 report.
Paying Taxes compares tax systems across 185 economies by measuring total tax cost, number of payments and time to comply for a case-study flowerpot making firm. Across the world it has become easier for a medium sized business like this to pay its taxes. The UK’s improved position is largely down to the reduced rate of corporation tax and increased National Insurance thresholds.
This year the report includes analysis by PwC’s senior economic advisor, Andrew Sentance, on the link between tax systems and economic growth. The findings support the view that regions with less complex tax regimes and lower tax costs experience stronger growth. Based on the global data collected over the last eight years, the analysis shows:
· Falling complexity across tax systems over the eight year course of the study is linked with an increase in GDP growth of around a quarter of a percentage point a year.
· A 10% cut in the Total Tax Rate for medium sized businesses can be linked to increased inward investment of 0.7% per year and a rise in the annual economic growth rate of just under 0.1%.
“The Government’s ‘open for business’ agenda has fed through to the league table of tax systems," Mary Monfries, head of tax policy at PwC, said.
"Ease of doing business is one of the UK’s strong points so it’s good we’ve made up some of the ground lost in recent years. Effective tax systems are good for growth. To keep on the map though, stability of policy and consistent messaging that encourages business investment will be crucial.”
The report highlights the relative simplicity of the UK tax system compared with other economies. A medium sized UK business has to make eight tax payments a year (27.2 is the global average) and spend 110 hours on tax compliance (267 hours globally). Their Total Tax Rate is 35.5% compared with the global average of 44.7%.
“Many UK businesses would probably be surprised if they heard their tax compliance burden was relatively light," Monfries added. "There’s scope to reduce red tape further, particularly when it comes to employment taxes which make up a big chunk of compliance time. Our study suggests that for medium sized firms the time spent having to deal with the tax system can have a bigger potential impact on economic growth than the rate of tax.”
Andrew Sentance, senior economic adviser to PwC, added: “Our analysis suggests that reducing the complexity of business taxation and its overall burden can boost economic growth. That means tax reform aimed at providing a simpler and more efficient tax regime for business should be high up the agenda in the UK and other economies.”
Key global findings
· On average a medium sized company pays a Total Tax Rate of 44.7 percent of profits, makes 27.2 payments, and spends 267 hours to comply with its tax requirements.
· In the eight years since the study began, the time to comply has fallen by 54 hours, almost seven working days, and the number of payments has declined by more than six.
· The average Total Tax Rate is almost flat on last year’s study, just 0.3% less. This compares with a fall of 3.3% the previous year.
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