City AM: Matthew Elliott: Why Chancellor must kill off his corporate tax plans for good

Alistair Darling's proposals to reform the taxation of foreign profits are being watered down, with the Treasury confirming to the CBI last night tat it has scrapped some of the plans and delayed others. This is a step forward: the reforms purported to create a more “straightforward” regime but entailed vastly more complexity and threatened Britain’s competitiveness.

Companies with high levels of intangible assets, such as intellectual property, would have suffered disproportionately.  Many were going to end up paying more.  It is no accident that one of the first major firms to relocate in the face of these measures was Shire Pharmaceuticals, which moved to Ireland.

Over the last decade the tax system has grown steadily more complex and the set of changes Darling is about to abandon would have made things significantly worse.  Companies would have had to establish their ‘motives’ for investing abroad every single year, instead of just once.  Subsidiaries would no longer be offered a simple all or nothing test of whether they were liable to be exempted from tax on foreign profits but would, instead, have some fraction of their income separated out as passive.  This would have increased the costs of complying with the corporate tax system, making it more expensive to do business in Britain.  Many firms were also loathe to give the taxman, an increasingly aggressive and incompetent HMRC, even greater access to their affairs.

Britain has already slipped from having the 4th lowest corporate tax rate in the OECD in 1996 to having the 11th highest rate of the 30 OECD countries in 2007.  Even with the cut to 28 per cent the UK is still above the OECD average rate in 2007.  That means there is already a pretty powerful incentive for firms to move to other, low tax, domiciles that will only be strengthened by increasing compliance costs.

Politicians should stop looking for new, intrusive ways of trying to prevent Britain’s tax base being eroded by firms relocating operations abroad.  Instead, they should try and make Britain and the City of London more competitive so that firms are no longer looking for an exit.

Everybody bar our competitors suffers under an onerous corporate tax regime. Time and money wasted by companies forced to jump through administrative hoops can’t be spent on more productive activities that make us all better off.  When firms move abroad Britain loses out on jobs and tax revenues.  Darling must now go one step further and dump his remaining destructive proposals.

Matthew Elliott is CEO of action group the TaxPayers' Alliance.