The industrial strategy sets out a blueprint for how the UK can address key challenges for the growth of our national economy. It looks at boosting infrastructure, productivity and digitalisation. Barry Murphy, Partner at PwC discusses what role tax can play to deliver these ambitions with Stella Amiss, PwC's Head of Tax Policy and Helen Miller, Deputy Director at the Institute of Fiscal Studies and Head of the Tax Sector.
Our latest report in collaboration with the Institute for Fiscal Studies on The role of Tax in the Industrial Strategy captures the key themes discussed by a range of senior specialists and stakeholders at a recent IFS conference sponsored by PwC, and can be accessed here.
Hello, I am Barry Murphy, tax partner at PwC, and welcome to the latest episode of Talking Tax Podcast, where we delve into some of the most topical tax issues of the day.
As a country, the UK faces imminent challenges of a scale not seen for decades. Brexit, weak productivity growth, and increasing pace of technological change, an ageing society, and shifts in global economic power, all raise questions as to where should the UK go for the future.
That’s where the industrial strategy comes in that the government set out in November 2017. It’s effectively a blue print or a strategy looking at how the UK can address some of these fundamental challenges. It highlighted ways to create conditions for growth, including the focus on skills, education, infrastructure, investment, innovation, and a fair distribution of outcomes across the regions. What it didn’t do is focus much on tax, of what role tax plays in that strategy. If we are going to have an industrial strategy in the UK and implemented in an effective way, then it seems essential that figuring out the role of tax system plays in that must be important.
Today, I am joined by two people, who can help us talk just about that. Helen Miller, deputy director at the Institute of Fiscal Studies and head of the tax sector; and Stella Amiss, PwC’s head of tax policy.
I know Stella and Helen you’ve just held a conference on this, and you’ve got a report coming out with more details soon, but let’s explore some of the issues here today.
Helen, if we, maybe, start with you, what role can tax play in industrial strategy and how could we do it well?
Well, as you already mentioned, if you actually open the industrial strategy, what’s most remarkable is that tax hardly features. It only really mentions R&D tax credits, and the role of a competitive corporation tax rate. But if you step back and think about the rest of the tax system, it is literally riddled with ways, with policies that affect the industrial strategy. Just to name quite a few, we have capital allowances that promote investments in certain assets, we have a bias towards debt, we have a whole bunch of policies that affect small businesses, albeit where small is defined very differently in different bits of the tax system, we have R&D tax credit, we have venture capital schemes, and so on.
Really the lesson is that before we even worry about what’s in the industrial strategy, we should look at all the ways in which tax effects our industrial strategy, and ask why are they doing that. Actually, for my money, stop doing a lot of those things, and take away some of distortions we have already. Then, if you want to think about what should tax be doing to actually manipulate the structure, we need to be much more careful, and start clear headed, why do we want to change market outcomes, if we do; is tax the right tool, or should we be thinking about regulation, competition, education, or other policies.
Even if in principle we should be using tax, can we design a good policy? There are so many examples where there might be a sensible policy aim, but the policy is actually been designed, just isn’t working. We need to not necessarily expect to see all these policies shoved into the industrial strategy document, but when we are designing bits of tax, think much more about how those designs feed through into our industrial structure.
Okay, so thank you about thinking how they feed through, and use of the words like riddled, would suggest to me that you think doing away with a lot of what we have and being more considered for the future is critical.
Absolutely, the hard thing about that is not just about scrapping some reliefs, so that I would scrap some reliefs, it’s really about thinking carefully about how we distort choices over different assets, for example, or over different types of investments. When we are trying to have policies that promotes entrepreneurship, are we actually promoting entrepreneurship or are we just giving large tax breaks to rich business owners.
Being much more systematic across different policies and thinking about why is that policy in place, should it be there, and almost always the answer is no, so let’s crack on and fix it.
Almost always the answer is no, that’s a good challenging point. Stella if I move to you on the practicalities of how would you take that overlay, and where are the priorities for the industrial strategy, and how is tax going to play a role?
There is a lot in that question Barry. We will need to break it down into different parts. There is an awful lot in the framework that is the industrial strategy, and it’s pretty vital to have that framework, to focus on, trying to deliver on some of the challenges that we are going to face in this country over the coming years and generations. I think you need to then stand back and say, which bits do you think are the top priorities, and there is an awful lot in there. It’s a big old document, and as Helen said, there is not very on tax at the moment, but tax could have a really vital role in quite a lot of those areas. As Helen said, actually tax permeates virtually all of it.
If you breakdown and just pull out three key areas, people issues is incredibly important. Are our people skilled to do the jobs that are going to be needed to be done in the future, do they have the right kind of training behind them, can they be retrained as the jobs change? All of that is something that is set out in high level in this framework for industrial strategy. There is a role that tax can play in trying to deliver some of that. We have already got the apprenticeship levy, could we redesign or reimagine the apprenticeship levy to try and address some of the challenges that come up on people issues for the industrial strategy, so that’s one area.
Another area is looking at infrastructure, incredibly vital. There really one of the key things that you need to do, is boost investment. There is all sorts of different attributes that you need to think about, but fundamentally you need to get the right level of investment and the real focus on what infrastructure needs to deliver. So, is there a role for tax to pay there, well probably, yes. But then you get into what Helen talks about, the obvious way that tax can help there is to incentivise investment, but if you do that, are you getting the right return, is it the right kind of influence you want to impact on the market to do it. The answer might be yes, because you want to incentivise something with a real immediate focus and a real immediate output, but then there will be consequences.
So tax, I think, has a vital role to play, it shouldn’t be underestimated, and I think the other piece I would definitely stress is that tax can’t do things on its own, which picks up what Helen was saying. Tax can have a role, but tax shouldn’t be the driver, and it shouldn’t be done in isolation. If I go back to the people challenge, having a new tax policy isn’t going to fix people challenge. Having a new tax policy alongside an education policy, and a skills policy could actually make a real difference.
So, big challenges there, you mentioned retraining and reskilling, infrastructure, that sounds to me like more money. Are you saying, as part of the industrial strategy, we need to pay more tax or design policies that mean we are going to get winners and losers as we get this right?
I think that’s inevitable. You are always going to have winners and losers. It comes back to some of the principles that Helen was outlining. You’ve got to decide what you want to achieve, and then once you have decided that, how best to get it. There may be some spent that is required to make an incentive work, or if that’s the way you want to go, but you need to look at it, the return on that overall. You can actually get tax back. If the incentive works, and the infrastructure is built, and people are using things, and we’ve got more productivity, more growth in the economy, there is more tax to be paid. You need to look at the whole equation rather than just the immediate cost of incentivising the activity you want to incentivise.
Okay, and you outlined some pretty big challenges in there as we look forward, because obviously it is what the industrial strategy has to deal with, is the longer term looking forward. People, technology, we don’t quite know how it’s all going to turn out.
Helen where would you pick out the priorities, and how are they going to shift how we get tax today, and we get them tomorrow?
As you said, there is lots of challenges. The big difficulty is that no one knows exactly how our economy is going to look. The economy will change, technology will change, society and society attitude will change, and we can’t plan for all of that now.
We have to look back at history and say, ‘society has changed a lot, and tax has changed with it, we have to trust that we will keep up.’ What we really should do is think about all the things we are doing now that are steering our economy down because of the wrong path, or are holding us up and, storing up problems for the future, and start tackling those. Now you can think about that across lots of areas, but to give one concrete example, you mentioned technology, one thing that people increasingly worry about is, are we going to have the rise of robots and technology taking over jobs, that’s a thing worry about. But actually, we are also thinking about, should we stop robots or encourage robots, what we should really realise is that that future pretty means that we will have more of our societies wealth accruing to the owners of capital rather than to people who sell their labour. Currently we have a system that favours those capital owners. We have lower taxes on the return to capital than on the return to labour. Again, before we even worry about whether to incentivise or disincentive robots, let’s get that right and take away that tax advantage to capital owners and level the playing field.
Is that for the statement tax the robots is coming from in the headlines, is that really what it is getting at?
I think so, I think people are worried that robots will take jobs, and therefore if you think about a robot like a person, maybe robots should pay tax too, we should try and stop them. Of course, really if you think about it, robots are like tractors or other machine, unless we are talking about robots that have national insurance numbers, they are just like tractors or machines, and we should worry less about how you tax them directly, and more about, if I am an owner of a robot, and I get returns for that, we should think about how we tax those returns.
Obviously, along the way we could think about how that affects inequality and other things we care about. So, we can crack on today, solving some very specific problems in our tax system, in ways that will make us more future proof to the challenges that are coming down the line.
Stella, how would you see those future challenges?
Well, if I am going to build on the example that Helen has outlined, one of the other things we need to do, especially with technology, and the advent of the digital age, is precisely looking at, is the tax system fit for the future? Are some of the things that we are doing right now are just knee jerk reactions to an immediate problem, without thinking about what impact might that have on the future?
Digital tax is one area where we can look at that happening right now. Lots of territories across the world are looking at how they tax digital activity. The current response is to focus on a particular type of digital activity and tax that more, rather than standing back and thinking about, ‘is this really the problem that we are trying to deal with,’ or ‘is the problem more that technology is impacting our lives in a different way than we would ordinarily have planned for, and actually at a pace that is probably a lot quicker than we anticipated.’
That not only has an impact on the society that we live in, but also the way that taxes are collected and the types of taxes that are generated.
To get back to Helen’s point, if we ignore everything, actually we could end up losing out on tax, because we still have a tax system that favours labour. Labour could be impacted by the advent of technology. There could be an erosion of jobs or a shift of the types of jobs that people have, which changes the balance of taxes. If we don’t think about that and plan for it, the net result could be less tax.
It might not be, because we don’t know what’s going to happen, but if we don’t think about it, plan it, and model for it, then we could up in a very sticky situation, when we could do something about it now.
Okay, so that sounds to me like a big message coming out of what you are putting out there. I know there is a lot more detail in the report you’ve worked on, is far more joined up thinking.
At a time when it seems like getting anyone to agree on anything, is getting more and more difficult, give me your view on hopeful prospects. Are we going to be able to crack this tax alongside industrial strategy starting soon, what’s your view Helen?
I think we have to find a way to crack it. I mean, one good is that, there are so many problems and so many challenges, and we mentioned in technology, you could add inequality, the collapse of some tax bases like fuel duty, environmental and health concerns, devolution, there are so many challenges that we could just pick any one of them and get cracking. In some ways there is just lots of low hanging fruits, so let’s be hopeful about that.
I think you’re right to acknowledge the challenge. I think a lot of good work is being done in setting out that framework that is the industrial strategy, so there is something to build upon. I think there needs to be a real momentum of people with the right skills and the right activities to come together to address these solutions. It is not going to be done by one part alone.
But, I think, the more that we can have conversations like these and air the type of things, things like tax could do, the better it is that we might get people working together on it.
Thanks very much Stella and Helen that was a fascinating discussion. Certainly peaked my curiosity to go and explore the details more, and I hope it has peaked all of our listeners’ curiosity to go and do that.
Key takeaway for me is that designing tax policies alongside an industrial strategy, it is not easy. It is complex, but requires grown up and transparent discussion, if you are going to get this right for the society and the economy. That’s probably the most important talking point, and I hope people get involved in that debate.
General trend coming through is that, are we going to see a wholesale reform, probably not immediately, but if we can set off in the right direction, as Helen said, ‘let’s get cracking,’ I think that would be a great start, and hopefully we can do that in the coming weeks and months.
That draws our latest talking tax podcast to a close. I would like to thank you again, Stella and Helen, and do look out for that IFS and PwC report, please have a read, see how you can contribute to the future of the industrial strategy and the tax policy that goes with it. For future podcasts, don’t forget to subscribe, do leave us a review, and any comments you have on the topics you are listening to. Thank you