In last week’s tax brief, we predicted that the Chancellor of the Exchequer would have little choice but to maintain or even reduce the UK’s already low corporation tax rates to preserve the attractiveness of the UK as a place for doing business following the Brexit vote. We also forecast that possible corporation tax rate reductions might be accompanied by personal tax rate increases. All of that has now moved one step closer with the statement made by George Osborne on Sunday 3rd July and we now call on Parliament to publish a roadmap for Brexit tax changes to provide greater clarity by emphasising not only putative tax cuts but also any compensating tax increases which may be necessary.
Despite assertions to the contrary by spokespersons for a number of European bodies, the Chancellor’s new commitment to reduce UK corporation tax rates to 15 per cent over an unspecified period (and only if official statistics support that approach) is part of a continuing trend. UK corporation tax rates are currently 20 per cent and are set to fall as follows:
|Year beginning 1 April||Rate (%)|
The 2020 rate of 17 per cent was announced in the March 2016 Budget; previously that had been pencilled in at 18 per cent. While any of these figures could be changed in a subsequent Budget, taking this at face value suggests that the corporation tax rate is unlikely to drop to 15 per cent until 1st April 2021 at the earliest.
When I began my career in tax, the corporation tax rate was 52 per cent. Since then UK corporation tax rates have generally declined. In recent years this has been part of a conscious plan by the UK government to create the most attractive business tax regime in the G20. While the UK has been using the business tax system to attract businesses to the UK, doubts were already being expressed as to whether this was unfair tax competition - a 'race to the bottom' so to speak. Even before the 3 July announcement, some people were already describing the UK as a tax haven. That latter criticism has an interesting flipside: with the prospect of a headline rate of corporation tax of 15 per cent, companies whose tax-planning arrangements worldwide are under threat following the OECD BEPS initiative may begin to see the UK as a very attractive location indeed, especially if the lower rate of 12.5 per cent offered by the Republic of Ireland is also under threat.
Even more significant than the commitment to reduce the UK corporation tax rate is the Chancellor’s preparedness to forego his target of a budget surplus by 2020. That’s been a fundamental feature of his approach throughout his time in office. If the Chancellor is prepared to give up on that in the interests of maintaining the health of the UK economy, then we should not be surprised if significant tax changes are also ushered in.
Clearly, in the absence of current figures from the Office for Budget Responsibility, the Chancellor can do no more than suggest a general direction of travel for UK tax rates. But by the time of the Autumn Statement new data will be available. We call on the Chancellor to end the current uncertainty by taking that opportunity to publish a roadmap for Brexit tax changes, setting out not only the hoped-for tax cuts but also areas in which taxes can be expected to rise.
That brings us back to the question of balancing the books. On the business tax side, the Chancellor is prepared to take a gamble that reducing corporation tax rates will stimulate economic activity, and with it the absolute level of corporation tax receipts. Hand in hand with a healthy economy goes the prospect of buoyant retail sales and therefore solid VAT receipts to make up the shortfall. But if tax receipts do not match expectations and borrowing is not attractive, then other compensating tax rises seem inevitable. This brings us neatly to my colleague Andrew Hubbard’s comments regarding personal and employment taxes.
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