The proposal to reduce the 20 per cent corporation tax rate to 19 per cent in 2017 and to 18 per cent in 2018 came as a complete surprise. Neither business groups nor professional advisers had been asking for this. So what’s really going on?
Justifying the tax cut on the basis that it will act as a major stimulus to business, George Osborne went on to point out that it would also reduce the costs of companies as they pay the new mandatory living wage. The corporation tax cut will be worth £6.5bn over 5 years, although the Treasury will be boosting its own cashflow by bringing forward corporation tax payments for large groups to the tune of almost £8bn over the same period.
The tax rate reduction represents a gamble by the Chancellor that the headline cost of this will in due course boost business and so increase the tax yield, or at least support the payment of the mandatory living wage. Many people think that a mandatory living wage is more logical than the Chancellor’s pre-Budget mantra that the best way to improve the situation of those on low incomes is to cut taxes.
Beyond this sleight of hand, what’s going on here? In the short term, the drift towards ever-lower rates of corporation tax in the UK upsets governments in the EU and the USA who see the UK becoming a tax haven in relative terms.
In the longer term, a more profound question arises. As taxes are ultimately borne by individuals not companies, what is the role of corporation tax? Should it be abolished? We can be pretty sure that won’t happen during the life of this parliament but in the longer term anything is possible.