A funny thing happened on 8 July; the Chancellor announced that the UK’s corporation tax rate will fall to 18 per cent by 2020. What is going on?
In itself, this was not unusual. Lately we’ve become used to corporation tax reductions and the rate had already fallen by a third, from 30 per cent in 2008 to 20 per cent in 2015. But, like most commentators, we thought it would stop there.
It turns out that there will be only a temporary pause for the next two years. In 2017 the UK corporation tax rate will continue its descent and by 2020 will reach a similar level to places that the UK previously regarded as low tax jurisdictions, such as Hong Kong and Singapore.
Is this a race to the bottom and will corporation tax join the window tax in the fiscal history bin?
No. Although the amount of corporation tax payable in the UK has fallen in recent years, it still accounts for around 8 per cent of the total UK tax take; a very significant sum.
In addition, the rate of corporation tax rate of a country is a key criteria used by international business when deciding where to invest. The current UK corporation tax rate is already competitive and is matched by only three other G20 countries.
But, the drive down to 18 per cent should distinguish the UK from the rest of the G20 and moves us closer to the rate available across the Irish Sea where a 12.5 per cent rate on trading profits has long attracted international business to the Emerald Isle.
On this basis, the rate reduction does not point to a decline in the importance of corporation tax to the UK tax system, but is an extension of a long term advertisement of the UK as a great place to locate and do business.
Is this the whole story?
Not quite. The reduction in the corporation tax rate disguises a couple of important points. Firstly, the ‘tax rate’ is just one component of the corporate tax competitiveness of a jurisdiction, albeit the most visible and frequently quoted. To get a fuller picture it’s also important to assess the ‘tax base’ (the level of profit that is subject to tax) and, by this measure, the UK is not the low corporation tax jurisdiction that it appears.
Instead, the UK is currently only an average performer in the G20 when ‘marginal’ rates of corporation tax are compared. This is largely due to our relatively uncompetitive system for capital expenditure relief. Whilst corporation tax rates have been falling, so have plant and machinery capital allowances and the industrial building allowance regime was scrapped entirely a few years ago.
Secondly, the Chancellor’s rate reduction benevolence must be weighed against a variety of corporation tax raising measures that will more than offset the tax saving for many UK corporates.
The reduced corporation tax rate is predicted to cost the Exchequer £7bn over the life of this Parliament but the acceleration of corporation tax payments for the most profitable companies will raise £8bn. In addition, the removal of corporation tax relief for goodwill and customer intangibles, and restrictions on using losses against controlled foreign company (CFC) charges, will raise a further £2 bn.
Finally, a corporation tax surcharge of 8 per cent will single out the banking industry for an additional corporation tax contribution of some £1.5bn and will subject banks, alongside oil and gas companies, to a more penal corporation tax regime than other corporate sectors.
What does the future hold?
Anybody’s guess. The UK’s corporation tax regime continues to be a curiosity, with tax costs appearing to fall whilst actually increasing for many.
However, in the near term it will continue to perform the important function of advertising the UK as an attractive place to base and locate operations.
Whatever the future of UK corporation tax, it will be important to be aware of developments or, better still, ensure you have tax plans in place to manage any further changes.