Matthew Dear: Business tax credits

Matthew Dear has worked in the voluntary sector since 2002, and is married with two young children. He has a degree in Theology from Oxford University, is a committed Christian, and is an admirer of the campaigning tactics (if not the politics) of Bill Clinton.

> Policy Summary

To enable medium-sized and large businesses to earn a rebate on part of their overall tax bill through showing evidence of effective corporate social responsibility programmes.

> Policy Explanation

It has long been recognised in Conservative circles (and beyond) that the voluntary sector has an outstanding track record of providing help and services to the vulnerable (in areas as diverse as palliative care, social housing and international development), and that there is a need to move away from the expensive “keyhole surgery with a hacksaw” approach of publicly-funded, publicly-managed services working in this sector.

New Labour’s PFI initiatives have proved to be the worst of all possible worlds – having been bureaucratic and overly expensive, and having exposed these vital services to vested int

erests and potentially unhealthy influences from large corporations, with few, if any safeguards.
The challenge is how to strengthen voluntary sector provision without recourse to public funds and all the waste and hazards that this would bring, at the same time as ensuring the voluntary sector’s independence to get on and do what it does so well.

Under this proposal, companies would be able to deduct from their overall tax bill the total cost (as appearing in their audited accounts) of such things as setting up charitable trusts and foundations (this programme subsuming and bettering the current tax-deductibility of donations thereto); gifting employees’ time and expertise to voluntary initiatives; innovating such activities from scratch; and creating jobs in the UK (say, a rebate on the costs associated with the recruitment process for new – but not replacement – positions, thereby encouraging growth.) It would be counter-balanced by a tightening of more traditional “no benefit” tax-avoidance loopholes and strengthened enforcement of tax evasion.

> Policy Risks and Opportunities

As a policy it would have a broad appeal – it would appeal to “the Right” as it is eases the tax burden on wealth-creators; and to “progressives” as it incentivises business and corporations to engage with civil society – strengthening the latter and contributing to social change.

It diversifies provision of such services – outsourcing, but without being seen as ‘privatising’, which is an unpopular term with the public. There would need to be a legal curb on the influence that companies providing funding can have on the services provided, especially having regard to possible vested interests.

The policy may need to be branded to as to disassociate it from the existing Tax Credit system, which a new Tory government will likely overhaul, replace or abolish on account of it’s gross complexity. In that vein, it would be important that this policy’s operation should be as simple as possible and not be seen as extra bureaucracy for businesses who already struggle to cope with paperwork – something that a new Tory government should also address.

> Questions for ConservativeHome Readers

• Can you suggest a less “Brownite” name for the policy?
• Offering a tax-deduction on all spending is bold but could be too expensive – how do readers feel?
• Does the potential size of this scheme leave it open to abuse?
• What legal restrictions should be placed on the role funders play in shaping the direction of the services they are providing?

> Costs

It may be possible for this policy to be funded by a reduction in demand on some public services and particularly in “waste” spending on activities anciliary to PFI (legal, consultancies, over-tendered contracts etc.) The closing of other tax loopholes should also help with funding.

 

Comments

[Angelo Basu]

If we are going to simplify and reduce the overall tax burden on companies anyway, I don't see the value in social engineering tinkering of this sort.

Those organisations that care about corporate social responsibility will do it in any event. Reducing the rates of corporation tax would enable more to do so if the only reason for not doing so at the moment was that they didn't have enough profit left after tax to make it viable.

CSR is not a freebie done by businesses for no return and many businesses (including my firm) do it for a range of reasons- it is a right and good thing to do, it is something that employees of businesses want to do so supporting it is part of providing a good working environment and very importantly, it is increasingly being seen as good business. We have a number of major clients who are impressed by the fact that our commitment to CSR mirrors theirs and by implication that our corporate values fit theirs and make it easier to choose us over firms who don't align in the same way. There is also a substantial body of research (from Harvard Business School) showing that businesses with strong ethical principles running through their practices generally outperform their peers without such cultures.

These benefits of CSR would and should substantially outweigh any proposed tax advantages. Keep the tax system as simple as possible and reduce the compliance cost for businesses in respect of having to work out the most efficient tax structures.

[RichardS]

Matthew,

Could you expand on what you mean by:

"It would be counter-balanced by a tightening of more traditional “no benefit” tax-avoidance loopholes and strengthened enforcement of tax evasion."?

If, by the former, you mean introduction of more benefits-in-kind, then I think the system is currently about as far stretched as it can get. If you propose that the latter forms part of a costed funding of the scheme, then I have to doubt whether the claw-back is achievable (if the Revenue could get this back now, then they would - there appears to be no lack of zeal within the Revenue for the scrutiny of businesses to find this sort of thing!).

The idea in itself is, I think, very worthy. I have doubts about the counter-balancing bit, that's all, especially in relation to small businesses.

[Matthew Dear]

Richard S - I was thinking mainly of offshoring: difficult, but not impossible to tackle. There's a lot of work going on in the 'Third Sector' on this at the moment anyway, so there's already a small momentum for reform in this area.

Obviously, this applies primarily to large multi-nationals. The policy would itself help to offset any damage done to Britain's attractiveness for such companies by the greater scrutiny of offshore tax avoidance that's beginning to happen anyway.

There's nothing in this which criticies genuine 'tax-efficiency', which remains a vital part of the sustainable running of a small business.

Glad you like the principle anyway!

[Mark Wadsworth]

I work in tax, I am sorry, I must warn strongly against this sort of thing.

Too much tinkering, too fiddly. One man's tax break (or subsidy, to give it its proper name) is funded out of another man's tax burden. Subsidies never achieve what they are supposed to and are financed out of tax that causes FAR more damage than any possible benefit from the subsidy.

Of course the government has to distinguish between good behaviour and bad behaviour. The latter should be dealt with via criminal justice system and taxes on pollution, smoking, drinking etc. Virtue should be its own reward.

[TaxCutter]

This is too complicated and like most tax incentives would probably have an impact, but not the desired one. It would be easier to just make all charitable donations tax deductible.

[Jonathan Mackie]

I get so frustrated with people writing about PFI and externalised service provision when they clearly have little knowledge of it.

The financial aspects of PFI schemes are not the problem. Put the liabilities on the PSBR and watch the economy go down in flames. What is a real issue about PFI is that it has locked in service delivery for 25 years (plus in some cases) to today's technology and service delivery methodology.

Outsourcing on a PPP basis is a basic argument about core competencies and what exactly the convening role of the public sector should be.

That been said, I think your proposal has merit. Although I do not think we actually need to incentivise the private sector to engage in CSR activities. Most already are. Market forces have driven them towards it as consumer behaviour has matured into a more moral perspective.

I think it would also be difficult to assign a value and therefore a tax benefit to the cost of some of the CSR activities companies engage in. It may simply complicate the tax system and actually increase central overhead charges in companies as they seek means of spreading their taxation liability.

On the whole a useful perspective on CSR.

[Matthew Dear]

Thanks for all the interesting comments (and criticisms!)

What's interesting to me is that the criticisms are coming from a fiscal perspective, and from people with that kind of expertise. For me, it's not just about financial benefits for charities or for companies, but about 'added value'. This is my area of expertise and I'd be interested to hear from anyone who can comment from this perspective!

I take on board the claim that companies are progressing naturally towards more CSR and don't need incentives - I acknowledge that, but devised this to try to make it easier for them! It's wonderful when companies are 'charitable' but this would enable them to contribute their expertise with spending their own money.

Thanks again everyone.

[Matthew Dear]

Re: the above - I obviously meant WITHOUT spending their own money! I also acknowledge the criticism that this means spending taxpayers money, but, frankly, (coming from a more 'reform' position than many users of this site) I feel this is justified!

[Matt Wright]

Just a general point, I think we should be finding ways to reward "community" behaviour because it has the effect of saving Govt the cost of remedying social problems. This would fit brilliantly with the social responsibility that we stand for as a party. I don't think its tinkering with society as we are not aiming to make it happen just reward it when it does. The challenge is how we do this in the simplest and least bureaucratic ways,

Matt

[Angelo Basu]

So next stop, cash rewards for those who don't breach their asbos and bigger ones for those who don't get one in the first place? Extra grants for all those "community leaders" who seem to pop up all over the place without any visible signs of actual community support?

Or are there certain types of community and certain types of project that should be encouraged and others not? How could that be administered other than by creating a bureaucracy and one which will be open to criticism by those who feel politically selected against?

[Matthew Dear]

The rebate would only be avaliable where work was being done in areas which overlap with (a therefore reduce the need for) public provision - a pretty watertight standard.

[Josh]

The best thing to do would have a government authority rate every good and service from 1 to 10 on the basis of social resposability, aswell as things like enviromental sustainability, therefor helping the devolping market for goods and services which are responsable.

And then simply cutting the tax rate because it will free up funds for social programs and enviromental programs.