The Destination of the Defence Pound

In defence acquisition, the tax revenue implications of a given choice are frequently overlooked. Given that the government, including the Ministry of Defence, is committed to reducing the budget deficit – a function of spending and revenue – this issue is highly pertinent.

Using an actual contract and an explicit accounting method, this paper finds that the tax revenues are significant; they can yield to the Exchequer over a third of the value of the contract. This figure is of obvious procurement policy significance at a time when there is such concern with the government’s budget deficit.

Using a CIMA approach, a clear methodology and explicit assumption, the study tracks the tax revenues associated with an actual £1 million contract, and concludes that the government could get back over 28 per cent in income tax and national insurance payments alone.

The paper also suggests if the UK spends a third of its defence budget on off-the-shelf foreign systems, as outlined in the Green Paper on Equipment, Support and Technology, the Treasury would lose about £1 billion in revenue, which could have a negative effect on government revenues and thus the public sector deficit.