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24 January 2012 | Adam Leach
By awarding defence contracts to
UK-based supply chains the government could get back more than third of the
money it spends through tax revenues, according to research.
The Destinations of the Defence Pound, published by the Royal United Services
Institute (RUSI), argued that the implications of tax revenue are “frequently
overlooked” in relation to defence procurement. This is despite it being
increasingly important as efforts to reduce the deficit are made.
The report, authored by defence
experts Trevor Taylor and John Louth, carried out financial analysis that
suggested that by using UK-based contractors the government could recoup around
36 per cent of the money it spends through tax revenue.
The authors examined the results
of a study conducted by the Ministry of Defence (MoD) last year that looked at
spending on The Chemical, Biological, Radiological and Nuclear Physical Protection
Key Strategic Partnership. The MoD wanted to see if outsourcing would make it
more economic and efficient. The researchers took these results and calculated
the tax revenue the government would receive via Corporation Tax, VAT, National
Insurance and Income Tax through a wholly British supply chain. It found that
that 36 per cent of the £1 million spent would end up back with the exchequer (although
it conceded a two per cent margin of error, as a result of indirect costs).
Explaining the result of the
hypothetical calculation, the report said: “By using British businesses and
conducting the work on-shore, close to 36 per cent of the government spend of
£1 million was returned to the exchequer via tax and National Insurance
contributions.” The researchers suggested that the government could factor this
in when assessing bids by using the net cost – price less tax revenue – of UK
The report recommended that
bidders provide the government with detailed information on their supply chain
when bidding to enable it to assess tax implications. It also called for the UK
to grant access to its defence market on the grounds of reciprocity, so that
while UK companies may miss out on UK contracts, they would have the chance to
win business on foreign shores.