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The Destination of the Defence Pound

Trevor Taylor and John Louth
Briefing Papers, 20 January 2012
Defence, Industries and Society
A new study reveals how much the Exchequer might claw back in taxation from domestic defence projects at a time when the Ministry of Defence is expected to contribute to budget deficit reduction

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.

Trevor Taylor
Professorial Research Fellow, Defence, Industries and Society

Trevor Taylor is Professorial Research Fellow in Defence Management at RUSI, where he heads up a research programme in Defence,... read more

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