Taxation as a tool

Taxation as a tool
David Braben

By David Braben

December 28th 2011 at 12:30PM

The frontier boss looks at the impact UK tax systems have on the high tech industries

Taxation has been used as a tool by governments through the ages to encourage particular types of behaviour, and to discourage others. Trouble is, when it comes to government, it seems to be deeply broken. I’ve taken just three examples where taxation works against the high tech industries, but there are many more.

RELOCATION TAX
Our industry is quite a mobile one. Indeed, as I write this, I’m sure there are many developers looking to relocate from Australia to find work elsewhere given the recent closures of studios over there. Even within the UK, it is not unusual to have to move to follow a job – though since about 2003 this has been taxed hugely – a one-off tax of £12,000 on a typical three bedroom house outside Cambridge, for each such relocation.

Given the already large cost of moving, this is a block to many people relocating, especially if they have families, whether they are coming from Australia or elsewhere in the United Kingdom.

Some unlucky individuals have had to do this for several years in a row – and as such this is an unmanageable burden.

Of course, this tax is not called a relocation tax, but that is what stamp duty on primary homes amounts to - it would be easy to fix by simply taxing the uplift in value (if any), or restricting it based on distance – or even not charging stamp duty on people’s primary homes. Another way of looking at it is there is a tax break for not relocating.

TAX ON UK MANUFACTURERS
Manufacturing in the UK has reduced hugely over recent decades, and this would be a great trend to reverse. Differential taxation is a way this could be encouraged, but at the moment it works in the opposite direction – it pays to manufacture abroad.

I’m not talking about wages or working practises, but tax. As an example – relevant for Raspberry Pi – if computer hardware is manufactured in the UK, the manufacturer pays a lot more tax. That is because, assuming the basic components are still imported, they attract import duty, but the completed device does not. Frankly this seems bonkers to me. So companies effectively get a tax break if they manufacture abroad.

TAX ON UK EMPLOYMENT
We are just about to release Disneyland Adventures with Microsoft and Disney on Kinect, and as part of this process we ‘outsourced’ an amount of the work overseas. Australia too has now – perhaps belatedly – announced tax breaks for our industry, meaning the UK is one of the few remaining places in the world that does not have some sort of favourable government tax treatment similar to film.

Again, it currently amounts to a tax break for doing what is bad for the UK – sending work to the rest of the world. Taken together with, for example, the 37 per cent direct salary subsidy in Montreal, this is a very uneven playing field.

THE POINT?

The cynic would ask; what the point is of writing a piece like this?

Well, perhaps it is surprising, but more often than not people in government do not appreciate the effect some of their decisions have. Legislation is so decoupled from cause and effect – and more often than not it is the result of lobbying rather than rational consideration. Typically the result of a piece of legislation does not manifest itself until a future government is in place.

There are occasions where the taxation system works more helpfully – like the R&D tax credits – but overall it is way too complex and too payroll oriented. The term ‘tax breaks’ has been made to feel like a hand-out, when what it should really be is an instrument of differential taxation to encourage beneficial behaviour.

My hope is that someone in government reads this, and appreciates that changes can be revenue-neutral, or even raise revenue in the surprisingly short term. We have a taxation scheme that encourages many of the wrong things, much like the ‘window tax’ a few centuries ago backfired with bricked up windows across the UK.

It can be improved very easily; we should give it a try.