The UK's tax system needs a significant overhaul to encourage investment in domestic companies and prevent the "overseas stripping" of the country's most innovative businesses. A leading economist has proposed a radical solution to redirect the billions of pounds spent on pension tax relief each year to support British growth.
The economist argued that the current system, which provides over £50 billion in pension tax relief and more than £10 billion in tax relief for Isas, could be leveraged to support British businesses. Currently, these benefits are conferred without any accompanying commitment to support British businesses or UK growth, and most implicitly support US corporations and foreign governments.
Redirecting these incentives would deliver a far larger return while keeping investment decisions in the hands of managers, rather than ministers. The proposal is designed to sidestep objections that mandating pension funds to back UK companies would cut across their duty to secure the best possible returns for savers.
The economist pointed out that Britain is an international outlier in terms of pension fund investment, with most countries having a "home bias" towards investing in domestic companies. He cited surveys suggesting that more than 70% of British investors would rather see their pensions invested in UK companies.
Westminster and the City have long grappled with how to keep promising ventures growing on home soil rather than being acquired and spirited overseas. Existing efforts, such as the British Business Bank and the National Wealth Fund, have been welcomed, but are considered to be on a modest scale.
The economist warned policymakers that the UK cannot afford to allow the continuation of overseas stripping of its greatest growth asset, innovative businesses. He called for a "level of boldness" to act at speed and scale to take full advantage of the UK's brilliant businesses.
The proposal has sparked debate about the direction of pension fund investment and the role of government in supporting British growth. With more than £60 billion of annual tax relief in play, the question of how that money is directed looks set to stay firmly on the agenda.
Separately, the economist called for a radical simplification of the tax code and a systematic cutting back of the "thicket of regulation", themes that will resonate with smaller firms who cite red tape and compliance costs as a brake on growth.
