David Prosser: Everyone is in favour of tax reform – just as long as someone else pays

Outlook: The problem is, what businesses really mean when they ask for clarity and simplicity is that they think their tax bills should be lower
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The Independent Online

The Chancellor is a brave man. When his predecessors in government unveiled reforms to the controlled foreign company rules – which essentially govern the way UK-based multinational companies are taxed here on their overseas earnings – they prompted a revolt among business leaders. Alistair Darling, the former Chancellor, eventually backed down on the revamp, but not before companies such as pharmaceuticals giant Shire had fled to more accommodating tax authorities.

Mr Osborne hopes his attempt to tackle the CFC regime – which he correctly identifies as being hopelessly out of date – will have precisely the opposite effect. The Treasury's consultation documents, which Mr Osborne unveiled yesterday, talk about "improving the UK's tax competitiveness" rather than adopting the language of an authority hoping to put a stop to multinationals playing the system.

But while the consultation is tonally on-message, there isn't yet much detail of what the Chancellor plans. There are some interim reforms that it should be possible to introduce next year, but we will have to wait until 2012 for the full-scale overhaul of CFCs.

It is, of course, quite right to take the time to get this right, by talking to as many of the companies likely to be affected as possible. But all the consultation in the world is not going to get Mr Osborne out of addressing a painful dilemma.

Here's the difficulty: unless the Chancellor is prepared to see the corporation tax take fall – which he isn't – he has to find a way to reform the CFC rules in a way that is broadly revenue neutral. (Well, he could impose reforms that would increase the Treasury's earnings from corporation tax, but that would rather seem to run counter to the aim of the exercise.)

In practice, what that means is that the reform of the CFC rules is likely to create winners and losers. We may well end up with a regime that is both fit for modern purpose and fairer, but it does not follow that this will put a stop to the exodus of companies seeking a better deal in another jurisdiction.

The easiest option would be simply to get rid of the CFC rules lock, stock and barrel. That could be done for the quid pro quo of tougher tax treatment of interest costs in respect of foreign profits. Such an approach is not pain-free, however, since it would be a serious deterrent to inward investment in the UK.

Mr Osborne's problem will be familiar to all Chancellors who have tried to simplify the tax system. What businesses really mean when they ask for clarity and simplicity is that they think their tax bills should be lower. They may be right, but in a fiscally challenging environment someone else has to pay if their wishes are to be granted.

The Chancellor has already trodden this path, announcing in June's emergency Budget that he would lower corporation tax for all businesses over the years ahead, but that the cost of doing so would be met by lower capital allowances. The effect of that reform will indeed be a more equitable tax regime for businesses, but it will also see the manufacturing sector, to which capital allowances are of most use, forced to subsidise a tax cut for everyone else – including the banks. More simplicity achieved, for sure, but with a rather perverse side effect.

BA's cabin crew rain on its Iberian parade

The merger between British Airways and Iberia, signed off by shareholders yesterday, only went ahead after the Spanish airline approved a sensible deal agreed between its new partner and its pension scheme members over how best to address the deficit in their fund. BA's executives should think themselves lucky that Iberia did not also insist on a similar agreement with their cabin crew staff. Within hours of that shareholder vote yesterday, we learned that the on/off dispute between BA and the Unite union – or, more accurately, Bassa, the Unite division that represents the cabin crew staff – is back on again.

In an economy that continues to see a remarkably low number of days lost to strike given the tensions that austerity brings, the BA dispute is a wonderful throw-back for those who enjoy such things. It's also a phenomenal waste of time and energy.

One might have more sympathy for Bassa were it holding out for the principles over which this dispute began more than a year ago. It is not: the row over new working practices and pay has long been settled. No, the bone of contention today is the treatment of cabin crew staff who took strike action. Though Willie Walsh, BA's boss, eventually swallowed his pride and gave the strikers their travel perks back, they apparently aren't getting them restored quickly enough. There is also an argument over the disciplinary action taken against union members that the airline accuses of bullying colleagues during the dispute.

The remarkable thing about the BA saga is that for all the talk about Mr Walsh's hardball approach to outdated labour practices, the union has actually achieved almost all of its aims during this dispute. Now is the time for them to end the argument – or, at the very least, give cabin crew staff the opportunity to vote on BA's most recent proposals before marching them back up the hill towards strike action.

As for Iberia, having spent so long negotiating the complicated regulatory implications of a merger with BA in jurisdictions around the world, it will no doubt be relieved that the deal sees the two airline operations keep their own branding and separate responsibilities for operations. But Spanish executives would be wrong to ignore the British labour dispute altogether: Unite plans to object to efficiencies the merged entity might be planning. As Mr Walsh plans on plenty of them, the cabin crew dispute of 2010 may prove to be just a warm-up.