Labour government would close Eurobonds "loophole" and equalise tax treatment of debt and equity finance

Out-Law News | 01 Jul 2014 | 4:12 pm | 3 min. read

Reversing the planned reduction in the corporate tax rate and instead cutting, and then freezing, business rates are among the changes a future Labour government would introduce to the UK business tax regime, the party's shadow chancellor, Ed Balls, has announced.

Giving a speech in London, Balls also proposed the introduction of a new allowance for corporate equity, which he said would "redress the systemic bias in favour of debt finance". A future Labour government would also close the quoted Eurobonds exemption "loophole", which Balls included in a list of measures designed to tackle tax avoidance.

"Our business tax system must be competitive, promote long-term investment and innovation, and be simpler, predictable and fair," he said.

"The last Labour government left Britain with the most competitive rate of corporation tax in the G7 and we are committed to maintaining that position. But unlike George Osborne we also recognise that companies are just as concerned about other elements of the business tax regime, such as capital allowances and business rates. That is why, having started and supported successive cuts in corporation tax over the last 15 years, we do not think the right priority is a further cut next year," he said.

The main rate of corporation tax has steadily fallen from 28% in 2010 to the current rate of 21%. It is due to fall to 20% in April 2015. The rate is the lowest in the G7 group of largest global economies by some margin, with the second lowest being the 26.5% rate that currently applies in Canada.

Retailers and lobbyists have repeatedly called on the current government to re-examine the effect of business rates on their businesses, with some saying that the regime disadvantages traditional shop owners compared to their online retail counterparts. Business rates are charged on most non-domestic premises including shops, offices, warehouses and factories and currently form the third biggest outgoing for small businesses after rent and staff costs.

In his speech, Balls said that the tax system should "tackle the short-termism that has become an entrenched feature of the UK business environment". One way of doing this would be through the potential introduction of an Allowance for Corporate Equity (ACE) following consultation with businesses. This new allowance would offer a "strong incentive for long-term investment" by equalising the treatment of equity and debt finance, according to Balls. Under UK tax laws, companies can deduct the interest that they pay to their lenders from their taxable profits in certain circumstances.

A Labour government would also consider the introduction of "structural changes" to the tax system to incentivise long-term investment, such as the possibility of a lower rate of capital gains tax for long-term investors. Balls said that this measure could "complement" a new ACE by "making long-term investment attractive to the investor as well as to the recipient of funding".

"The purpose of a competitive tax system must be that companies view Britain as a great place to do business, not simply a cheap place to shift their profits," he said. "So Labour's approach will be to develop a business tax system that promotes long-term investment, supports enterprise and innovation, provides a stable and predictable policy framework for business and which is founded on fairness."

As part of a future Labour government's plans to tackle tax avoidance, Balls said that it would end the quoted Eurobonds exemption. This allows overseas investors to receive the interest on loans made to companies without the deduction of a 20% 'withholding tax' payable to HMRC, provided that the security is listed on a recognised stock exchange as designated by HMRC.

The quoted Eurobond exemption was introduced in 1984 as a way of encouraging international investment into the UK. In March 2012, HMRC consulted on limiting its use so that it would not apply where the Eurobond was issued to a company in the same corporate group, and was listed on a stock exchange on which there was no substantial or regular trading in the Eurobond. However, it decided against making these changes after respondents indicated that this restriction could undermine the well-established market in Eurobonds in the UK and reduce inward investment.

According to the Independent newspaper, the Conservative party is considering a plan to merge national insurance contributions (NICs) and income tax as part of its own manifesto ahead of the next general election in 2015. According to the report, the government considered the move as part of this year's Budget but did not go ahead with it because of problems merging computer systems. The new tax could be called an 'earnings tax', payable by employees; but employers' NIC contributions would likely remain unchanged, the newspaper said.