CBI chief Digby Jones

Business leaders have hit out at claims by Stephen Byers that the private sector pays too little in tax.

In a speech on Wednesday, former transport secretary Stephen Byers argued that pensioners and the poor are subsidising firms' through "unfair" tax arrangements.

Speaking to the New Local Government Network, he claimed that companies are benefiting from a decision taken 10 years ago to peg business rates to inflation.

In addition, he called for local referendums on proposed council tax rises above the rate of inflation.

"Any proposal to increase the tax by a certain amount - say twice the headline rate of inflation, which at present would be 5.2 per cent - should only go ahead after an affirmative vote from local electors," he said.

"A local vote for local priorities - this must be the way forward in the 21st century.

"It really does give power to the people and puts the burden on local councils to show what they will delivery for the extra spending and convince local people that it will be money well spent."

However, Byers warned against a "knee-jerk reaction" towards total reform of the tax.

"Looking back we can see that local government finance has been bedevilled by such reactions," he said.

CBI opposition

But the Confederation of British Industry argued that the former Cabinet minister was trying to divert blame for recent above-inflation council tax increases.

"It is quite wrong to pit business and council tax payers against each other," CBI director general Digby Jones said.

"Local communities - and that includes pensioners - need businesses to provide local prosperity and sustainable employment.

"Firms recognise their responsibilities to local communities but business will see this idea as a knee jerk reaction to the council tax problem. Companies have paid huge amounts of extra tax since 1997. They would be dismayed if this damaging idea were to gather momentum.

"Firms can locate anywhere in the world and if Britain loses her tax competitiveness, they will vote with their feet.

"Business rates are as much a tax as anything the Treasury may impose. Surely Stephen Byers would rather first class British businesses were paying some business rates rather than none."

Instead, ministers should look to improving efficiency in Whitehall, Jones added.

"Stories this week about the Gershon review highlight the billions that could be saved by greater efficiency in the public sector, including local government. Realising this would surely be a more productive way of relieving the pressure on hard-pressed council taxpayers," he said.

"Businesses - and especially overseas investors - will see through policy makers who talk of business friendliness and yet propose another business tax rise through the back door."

Retail fears

His comments were backed by Nigel Smith, director of corporate social responsibility at the British Retail Consortium.

"Retailers pay over £4 billion per annum in business rates - a quarter of all collected and more than their fair share. Furthermore, this is set to rise by at least 11 per cent in 2005," he said.

“Government is squeezing more and more from retail rather than solving their own problems. There is even talk of reintroducing local business rates – a system which proved a massive failure in the past.

“This is a totally unjustified attack on the retail sector. We not only pay more than our fair share of local and national tax, but also serve the needs of local communities in a number of other ways such as job creation and participating fully in town centre management.

“Byers should stop seeking others to blame for the muddle that the government he was once part of has made of local government funding.”

Council tax reform

Ministers have hinted at a reform of town hall taxes that will take more account of income than the present property value assessment.

But Byers fell short of endorsing Liberal Democrat plans for a local income tax.