Corporation tax - Britain blazing a trail

15 April 2016

In the March 2016 Budget, the chancellor announced a further reduction in the UK rate of corporation tax to 17 per cent in April 2020.

If rates remain the same elsewhere, this change would mean that the UK’s corporation tax rate will be at least 3 per cent lower than every other country in the G20, making the UK an outlier in its international peer group.

The G20 countries account for around 85 per cent of global economic activity, so the current direction of the UK’s corporation tax policy marks it out as a unique jurisdiction; a real economic power with a really low corporation tax rate.

What does this tell us about the UK’s corporation tax policy?

In his Budget speech, the chancellor indicated that the Government’s corporation tax policy is to continue to attract inward investment by establishing ‘a low tax regime that will attract the multinational businesses we want to see in Britain, but ensure that they pay taxes here too.’

A graph presented in the Red Book published on Budget day starkly compares the UK’s 17 per cent with a US rate of 40 per cent.

So the announcement, less than a week later, that IHS (a US company) is set to acquire Markit (a UK company) in a deal that will enable the combined group to take advantage of the UK’s corporation tax regime, will undoubtedly have been noted on the other side of the pond.

It will be interesting to see if other countries in the G20 respond to these continuing policy moves by the UK.

Is this the whole story?

No. As pointed out in a previous tax voice article, the impact of generous announcements in the Budget is often unwound by the detailed provisions that follow.

True to form, whilst the headlines were grabbed by the reduced corporation tax rate, the real story is an increase in the UK’s corporation tax burden approaching £7bn across the lifetime of this parliament.

The key reason is that the rate reduction will apply only from April 2020 which is towards the end of the current forecasting term. As a result, the rate reduction will cost the Government ‘only’ £1bn in foregone corporation tax receipts during this parliament.

Meanwhile, a number of corporation tax raising measures targeted mainly at large corporates generally, and banks in particular, will kick in earlier and will thereby raise £8bn corporation tax, a lot more than will be lost through the rate reduction.

These changes include:

  • interest relief restrictions (£4bn) - set to apply in certain circumstances where annual interest costs exceed £2m from April 2017;
  • corporate loss relief (£1.4bn) - set to apply to restrict the use of brought forward losses where a company makes profits in excess of £5m from April 2017; and
  • bank loss relief (£2bn) – set to further restrict the use of losses by banks from April 2016.

One bit of good news for the cash flow of the largest corporates (those earning annual profits in excess of £20m) is that the anticipated acceleration of quarterly instalments payments will be postponed by two years from 2017 to 2019.

The impact on the Government’s forecasted corporation tax receipts for this parliament is limited, as the change is largely a timing difference that will unwind during the parliamentary term. Presumably this influenced the chancellor’s thinking in introducing this provision as it will not significantly impact upon his deficit reduction plans. 

Large corporates will have become used to reading beyond the headlines in order to understand the fiscal landscape. Budget 2016 is no exception.

If you would like to discuss any of the details in this article, please contact Dan Robertson.

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