With the UK corporation tax rate now set firmly at 20 per cent, the scope for a further rate for reduction is so small as to be non-existent. Equally, a low corporate tax rate reduces the effectiveness of new tax reliefs to achieve particular economic effects.
While the government may fret about productivity and encourage entrepreneurship, neither seem obvious candidates for assistance through the tax system, at least not in any meaningful way.
We also hear concerns that tax reliefs don’t always benefit the intended businesses. For example, property incentives may translate into tax-funded increases in value, while tax reliefs of themselves won’t turn a struggling venture into a successful business. There are also separate concerns that returning to the path of debt-funded growth may not be sensible for the economy as a whole.
We do however expect to see two aspects of business taxes mentioned on Budget day.
The first is Patent Box which has once again run into problems in Europe. The recent EC action plan to fundamentally reform corporate taxation in the EU sets out a path for effective taxation in the EU based on the notion that companies should pay a fair share of tax in the country where they make profits. Stricter rules will be applied to preferential tax regimes and tax competition will be under the microscope again. As part of that, the UK’s Patent Box regime is almost certain to come under scrutiny. The UK Treasury is known not to be supportive of various aspects of the latest EU proposals: we expect to hear more about this in the Chancellor’s Budget Statement.
Second, the annual investment allowance. The AIA is a generous form of capital allowance which enables businesses to deduct the full value of a qualifying item from profits before tax. The AIA, currently £500,000, has changed four times since 2008. Without specific action by the Chancellor, it will revert to £25,000 on 1 January 2016.