UK tax system turns off investors, report says

Britain's tax system is damaging the country's standing as a destination for overseas investment, a leading manufacturers' group warns today.

The increasing level of tax and the complexity of the system are harming UK competitiveness, the Engineering Employers' Federation said. Its warning came as an economic think-tank slashed its estimate of GDP growth this year, accusing Gordon Brown of using high oil prices as a "crude excuse" for downgrading his forecasts.

The EEF said business would pay an additional £2.2bn annually in corporation tax and an additional £5.5bn in other business-related taxes in the current financial year after fiscal changes since 1997.

Over the same period, only a handful of OECD countries will have seen a greater increase than the UK in their tax burden. The US, most large EU countries and the newly acceded members to the union have seen their tax burdens fall.

"Our long-held competitive advantage on tax is starting to erode," Martin Temple, its director general, said. "The UK's tax burden has been rising while falling in many other countries, who are actively designing their tax systems to attract high-value manufacturing."

He said that while the Government was promoting innovation and improved skill levels, the rising cost and complexity of business tax prevented companies from "taking full advantage" of this to improve their performance.

Mr Temple said that any further increase in taxation would make it ever harder for manufacturers, who have seen profitability fall for six of the last seven years, to break out of the cycle of weak profitability and low investment.

He called on the Government to: avoid any further increases in the tax burden on business; pursue simplification of the complex UK tax system; step up efforts to achieve its 2.5 per cent annual efficiency savings in public spending; and redirect its current policy on environmental taxes away from the "stick" and towards the "carrot" approach.

The report is the latest to criticise recent business trends. Last month the World Economic Forum said the UK had slid in a global league table of competitiveness. In the same month, a London School of Economics report found British managers came fourth in a survey of 730 manufacturers in the UK, US, France and Germany.

Meanwhile, the Item Club sponsored by Ernst & Young that uses the Treasury's economic model, cut its forecast for GDP growth this year to just 1.6 per cent. The official Budget forecast is for growth of between 3 and 3.5 per cent.