Cicero Policy Briefer

Issue 21, February 2008

An Open Letter to the Chancellor: My Budget Wish

By Jacob Coy

Dear Chancellor,

We are now just about four weeks out from your first Budget. You must be filled with anticipation. This would seem a rather important moment for the Government. It hasn’t been a lucky start. Economic volatility and unforeseen crises like Northern Rock have consumed a considerable amount of the attention of the Government, media and wider observers.

One of the occupation hazards of this day job is having a number of before-the-Budget wish lists cross my desk for review before they land on yours. Everybody wants something. Simplification. Tinkering here. Adjustment of rules to ensure equal treatments and level playing fields. Further consideration of this. One of the hardest tasks as Chancellor must be to carefully weigh all of the different ideas, then decide how to move forward in the final package.

On behalf of the financial services industry and UK plc at large, I too want something from this Budget: I want a Clear Tax Window. The idea would be for the Government to pledge to industry that it will adhere a set period of interregnum before changes to the tax regime are implemented.

I’m not calling for lower taxes or lenient treatment—far from it. Your Government and future Governments should make whatever (political) decisions you wish about the rate of tax they collect from business. It is your prerogative and you well know that there are always consequences (in both directions) for business emanating from those decisions. That has always been the case and always should be.

But, Chancellor, I entreat you to establish the principle of a Clear Tax Window of two years. This would lead to enshrine a two-year transitional period between announcements and implementation.

This would ensure that changes to tax policy don’t destroy value in our world class industries and businesses. You ask industry to build long-term business models; you ask them to invest to become world-class. They do so. But as of now, they do so without any assurance that the tax they are paying today or the taxation arrangements that their products are predicated upon will be the same after the passage of the next Finance Bill, only a few months after the Budget or Pre-Budget Report.

It’s unrealistic to expect businesses with tens of thousands, hundreds of thousands, if not millions of customers to be so nimble. They make plans over years, not months. They have operations and arrangements; companies and structures. They shouldn’t be penalised for knowing the rules and planning their businesses around them.

In financial services alone we have seen a series of moves that have fundamentally undermined businesses’ medium and long-term plans. Most recently, you announced changes to the capital gains tax regime. In the not-so-distant past we can remember changes to the permissibility of assets in Self-Invested Personal Pensions and abolition of Pensions Term Assurance which took the industry by surprise. For some companies, these moves were advantageous, while for other there was considerable detriment. However, what wasn’t beneficial to any of them was the suddenness with which the policy change was made. Businesses had to scrap millions in investments to sell these products or they had to re-evaluate their propositions to encapsulate what was made permissible. And that’s only one industry.

The gist is that businesses need a longer-term window in which to plan. They need a Clear Tax Window where certainty prevails. This applies equally for all changes. For instance, this would mean that when lower corporation tax rates are announced, they would be postponed to conform to the Clear Tax Window. It takes away the element whereby business feels as though it’s having the carpet pulled out from under it.

Simply look at the success of a long time-frame in the changes to ISAs. By adopting a longer time period for implementation, companies, advisers and consumers have had a chance to plan for the changes when they come. With likely changes forthcoming to the taxation of companies’ foreign profits and off-shore funds just to name a couple, surely you can see how sudden change could really disrupt business.

In contrast, establishing the Clear Tax Window would be a great boon for business which would do much to promote the kind of long-term planning and investment the Government desires from business. It would also immensely improve the competitiveness of the business environment in the UK. That’s good for all of us.

Yours sincerely,

Jacob Coy

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.