Budget 1999: How UK Taxes Compare - Still a case of `vive la difference' in EU

THE BUDGET changes will do little to iron out the substantial differences in tax and duty between Britain and other European countries.

Following this Budget the ratio of debt to national income will fall below 40 per cent in the next fiscal year and is forecast to stay below 40 per cent for the rest of the Parliament. On the face of it, this puts the UK at the lower end of the European taxation scale.

Closer inspection reveals that this broad picture masks some important variations. In particular, it disguises the fact that - contrary to popular belief - many taxes in the UK are among the highest in Europe.

"Tax harmonisation is seen as forcing a low-tax hard-working UK to match Europe's uncompetitive level of state dominated inflexibility," said Alison Cottrell, chief international economist at PaineWebber. "All very entertaining and containing more than an element of truth - which still leaves it some distance from reality."

The UK's corporate tax burden, for example, is substantially higher than in Germany, Italy or France, on Organisation for Economic Co-operation and Development calculations. Recent OECD data puts the UK effective rate of company tax - which includes factors such as allowances and depreciation rules - at around 45 per cent. This is despite the fact that the UK's 30 per cent top rate of corporation tax is lower than any other major country in Europe.

"Looking at the tax rate is interesting, but it doesn't tell the whole story," said David Evans, director of international tax at accountants KPMG.

Sales tax is another field where the UK fails to shine. The OECD puts the effective rate of sales tax - which includes excise taxes - at just under 15 per cent; roughly similar to Germany, above Spain, but below Scandinavia. And as far as particular duties - such those on alcohol and tobacco - are concerned, UK consumers pay through the nose. The tax on a pack of 20 cigarettes in the UK, for example, is almost pounds 1.50 higher than the average of other EU states, according to recent calculations by the Tobacco Manufacturers' Association. "We are one of the most highly taxed for the `sin' taxes," said Bill Robinson, a director of the London Economics consultancy.

One area where the UK's reputation as a low-tax, flexible economy does hold true is labour tax. Relatively, the British economy enjoys low rates of personal income tax. UK workers also tend to be cheaper to employ than abroad. Ms Cottrell said: "Continental Europe has on the whole taxed capital far more lightly than labour. In the `Anglo' economies the reverse has been true."

Looking forward, both market forces and greater European integration will smooth out some of the tax differentials, although domestic political and cultural concerns limit how far this can go.

Although some differences will never disappear, budgets in the years to come will increasingly have to take account of the fiscal situation abroad.

Lea Paterson