Defence experts urge MoD to spend in UK to reap tax revenue

24 January 2012

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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 bids.

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.

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