Reform the tax system to 'rebalance' the economy

The UK's tax regime requires a major overhaul if the economy is to be balanced and competitive.

The call has come from the EEF, the manufacturing bosses' organisation.

Its report, 'Tax reform for a balanced economy', highlights several areas where reform is needed.

The EEF's proposals centre on two priorities: changes to boost high-tech investment and innovation, and reforms to create a more competitive tax system.

In the short term, the EEF wants to see a modernisation of the capital allowances system. The business group said that a simple way of recognising the true cost of modern machines would be to extend the time restriction on short-life asset election from four to eight years. This would allow a wider range of assets to be written off at the end of their useful economic lives.

The research and development tax credit programme should also be examined with a view to making the credits easier and less expensive to reclaim.

And capital gains tax must be more sustainable, offering real incentives to invest in businesses and enterprises.

In the longer-term, the EEF said, the overall business tax system must be streamlined and made more efficient.

Specific recommendations included in the EEF's tax manifesto would see a cut in headline rate of corporation tax to 25p over the next five years, provided it does not come at the expense of a reduction in allowances for legitimate business costs.

Raising the VAT rate to 20 per cent would encourage further savings, while weaning the economy off debt-fuelled consumption, the EEF added.

And a return of the top income tax rate to 40p would send a signal that the UK was serious about attracting investment and encouraging entrepreneurship and innovation.

Steve Radley, the EEF's director of policy, commented: "There have been some helpful changes to the tax regime in recent years, yet we still lack a coherent tax system that encourages manufacturers to invest and sends the signal that they should be doing it here.

"In the short term it means developing a modern, efficient tax system that helps to grow a diverse and dynamic manufacturing base. In the medium term, it means creating a more competitive tax environment to help reduce the number of hard choices we have to make when repairing the public finances.

"A modern, competitive tax system would not only re-balance our economy but attract mobile multinational investment to the UK and send the right signal to would-be investors."