The UK’s rank on the International Tax Competitiveness Index

What is the International Tax Competitiveness Index (ITCI), I hear you cry. Well, put simply, it’s an index compiled by The Tax Foundation. This is an international not-for-profit research think tank based in Washington, D.C. that collects data and publishes research studies on tax policies, both in the USA and worldwide. Its stated mission is to ‘improve lives through tax policy research and education that leads to greater economic growth and opportunity’.

The Tax Foundation states that its research is guided by what it calls the principles of sound tax policy: simplicity, transparency, neutrality, and stability. It describes itself as an “independent tax policy research organisation” and is cited in the media as a nonpartisan organisation with no governmental control or funding.

Background

The structure of a country’s tax code, which essentially determines a country’s ranking on the index, reflects its economic performance over the previous twelve months. A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities.

In contrast, poorly structured tax systems can be costly, distort economic decision-making, lead to unfairness and harm the economy. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly across the OECD. This has led to many other countries recognising the benefits of changing their systems, especially by reforming their tax codes.

How is the UK doing?

The ITCI is essentially a relative comparison of all OECD countries’ tax systems with respect to tax neutrality and competitiveness. The UK came 30th in the ranking’s for 2024 with an overall score of 58.1 which is very disappointing when compared with Estonia in first place with a ranking of 100.0.

In fact, the only area that the UK did well in was in international trade, where we came 2nd overall, largely because we are in essence a Free Trade country, but the effects of the turmoil created by Trump on the UK’s ranking, will not be known for many months.

Which countries top the rankings and why?

The top five in the index; Estonia, Latvia, New Zealand, Switzerland and Lithuania all have low tax rates for individuals, corporate tax rates of between 15 and 20% and with the percentage of costs of collection to the tax take, relatively low. They also all share the common factor of having low rates of tax evasion and deliberate tax avoidance.

The only large economies in the top twenty of the index, Germany, Canada and the United States come in at 16th, 17th and 18th on the index.

Recovery of costs can boost tax take

Business profits are generally defined as revenue (what a business makes in sales) minus costs (the cost of doing business). The corporate tax rate is intended to be a tax on these profits. Thus, it is important that a tax code properly defines what constitutes taxable income.

If a tax code does not allow businesses to account for all the costs of doing business, especially investment in plant, machinery and research & development, it will not be able to write off these costs in full or do so in a relatively short time frame. This has the effect of inflating a business’s taxable income and thus its tax bill. The knock-on effect is to increase the cost of capital, which leads to lower levels of investment.

The combination of companies not being allowed to write off all costs in a relatively short time frame, plus high corporate tax rates and low productivity, has directly led to significantly lower economic growth in the UK.

The British disease

Low productivity in the UK is often mockingly referred to as the ‘British disease’; and whilst this is a little unfair, the statistics do tend to bear this out when comparing our economy with our leading competitors. Growth in GDP per hour slumped to just 0.6% a year during the 2010s, the worst of any G7 economy and has fallen even further during the 2020s, to just 0.4% by the official Office of National Statistics measure.

The Governor of the Bank of England recently said that Britain’s productivity record has been going in the wrong direction for a while now and when asked why, he explained that the persistent productivity gap between the UK and the two biggest continental European economies can mainly be ‘explained’ by the fact that they have more capital invested per worker, plus the fact that their workers are more skilled. Even countries such as Ireland have a workforce whose GDP (Gross Domestic Product) per hour is nearly 2½ times that of the UK.

What has the UK’s watchdog said

Sir Geoffrey Clifton-Brown, Chair of the House of Common’s Public Accounts Committee, recently alluded to the fact that the UK’s tax policies and rates of tax collection are poor by international standards and strongly urged HMRC to learn from those countries that operate much more efficiently, such as Estonia.

He went on to say that the UK’s tax authority HMRC, is clearly inefficient in collecting tax, which combined with their high-cost base, had directly impacted on our country’s productivity rates and more worryingly on the country’s GDP.

Accountant’s view

Rachel Reeves is constantly berating us with her mantra of the UK’s level of growth needs to improve and that she is determined to achieve this. When she mentions growth, she is in fact referring to the country’s Gross Domestic Product or GDP.

So perhaps she could make a start by putting a rocket up HMRC’s ‘proverbial’ as well as significantly improving companies’ ability to write off investment costs more flexibly and rapidly. In my, and most accountants’ opinion, these two measures alone would boost GDP and hence the amount of tax rolling into the government’s coffers. A win-win scenario methinks.