Chancellor George Osborne’s plan to cut corporation tax to less than 15 per cent in the future is the first significant move on taxation that is related to the Brexit vote. It further differentiates the UK from the average rate of 25 per cent in the world's most developed countries.
One plus point is that over half the tax saving would go to those with profits below £1.5m, allowing them to invest more. Many would see this as the right focus at this time.
A decision to lower the corporation tax rate significantly would have knock-on effects: for example, it would provide a further incentive for small businesses currently operating as sole traders or partnerships, and currently paying income tax at the basic rate of 20 per cent or the higher rate of 40 per cent, to incorporate to benefit from the lower corporation tax rate. Incorporate means to constitute a company or other organisation as a legal corporation.
The existing incentives to incorporate have already led to a recent reform of dividend taxation, and the rates of tax on dividends could need further adjustment if there is a significant change to corporation tax.
There have been some comments that reducing corporation tax to 15 per cent could make the UK look something like a ‘tax haven’. The formal OECD position is generally that countries are free to set their own tax rates, but a low tax rate should only be available on profits or income genuinely created in that jurisdiction, and that tax competition involving very low rates or highly selective regimes can be harmful. Some countries have criticised the Irish rate of 12.5 per cent, but a rate of around 15 per cent in the UK will still arguably be on the right side of the ‘harmful competition’ line.
A lower rate has obvious attractions for multinationals, but could raise some detailed issues for them. They would need to consider whether the low tax rate on a UK subsidiary of a foreign parent could potentially trigger taxation of UK profits in that foreign jurisdiction. This is a complex area, but, for example French controlled foreign corporation (CFC) rules can be triggered by a jurisdiction that has a tax rate less than 50 per cent of that in France – which currently stands at 33.3 per cent. There are exemptions, but some multinationals would have to consider issues that largely do not arise at the moment.
The wider policy questions for Government and the business community include:
Will this come at a revenue cost, or as some past rate reductions have, financed by increases in the tax base, such as restricting deductions? What will the fiscal framework and constraints be, going forward, with the ‘balanced budget’ target abandoned and as economic forecasts settle down after the initial period of maximum uncertainty? Are there competing priorities, perhaps around encouragement and financing of infrastructural projects?
How much can a tax rate cut effectively compensate for uncertainties around market access? It can certainly compensate for the additional costs of cross border trade once these can be identified: how well targeted is it?
What are the answers to these questions in the long as well as the short term? Business particularly values predictability and stability. Roadmaps like the existing business taxone are very welcome but are at their most valuable if they really point up the future direction the Government will try to move things in, as and when circumstances allow.
By John Cullinane, Tax Policy Director, The Chartered Institute of TaxationMore Articles by Chartered Institute of Taxation (CIOT) ...