Outside View: No direction home: Labour's 'clear' tax signals leave businesses lost

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The Independent Online

In Gordon Brown's first Budget over a decade ago, he set out his view on the role of tax. As well as raising revenue, the then Chancellor indicated he saw it as a tool of social and economic policy that sent "clear signals about the behaviour the Government wishes to encourage".

This approach has led to a far more interventionist tax system with a raft of new taxes designed to deter behaviour (the climate change levy); reforms of taxes that previously distorted behaviour against government policy (the introduction of a modern regime for intellectual property); and targeted reliefs to encourage particular behaviour (research and development credits).

Not all of these developments were popular, particularly among those bearing a greater share of the tax burden as a result. But it was possible to determine an underlying sense of direction.

However, as we approach the first Budget of the new Chancellor, business is struggling to find any "clear signal". Alistair Darling's 2007 pre-Budget report (PBR) included major changes to the tax system that seemed at first glance to have been developed without regard to the way in which businesses operate in the real world.

The inclusion in the PBR of a reform to capital gains tax (CGT), and the perceived threat to wealth creation, shocked the business community. Particularly controversial was that the new regime would change the treatment of gains built up in the past. This rewriting of tax history, apparently, was considered a suitable sacrifice for a simple tax system in the future – a judgement shared by few in business.

Since then, the Chancellor has made the welcome announcement of entrepreneurs' relief, which will address the concerns of many small businesses, but will still leave others facing a sudden change in April.

The attention has now moved on to the taxation of non-domiciliaries – those individuals who have come to the UK and pay UK tax on all of their UK income, but do not suffer tax on wealth not connected to this country. Much has been said about fairness, completely ignoring the large taxes that many non-doms pay already. We are again in a race to April when the rules are due to change fundamentally.

So Mr Brown's "signals" are now anything but clear. One could be forgiven for thinking that the CGT policy in the PBR indicated that the Government felt it was acceptable to change the tax system retrospectively.

Looking at the non-doms, one would be tempted to conclude that the UK cares little for the benefits that these people bring and will continue to see them as fair game in the future.

Policy changes announced last week by HM Revenue & Customs include a relief for works of art on public display. This may well be a worthy change but, given the economic benefits brought by non-doms, there is a real concern over the Treasury's priorities.

It may well be all these concerns are addressed in the Budget on 12 March. But the danger is that, for many, it will be too late. The Government must act now to restore faith in the direction of tax policy. A deferral of the non-dom regime would be a start. Failing that, the behaviour the Government wants to encourage is unlikely to encourage business competitiveness.

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