Osborne corporate tax plan ‘will fail’

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George Osborne will fail in his ambition to create the most competitive corporate tax system in the G20 on current plans, according to analysis by Oxford university.

But the Treasury dismissed the research that showed the UK was set to take fifth place by 2014 in a league table of effective tax rates as taking too narrow a view of competitiveness.

The analysis by the Centre for Business Taxation at the Saïd Business School criticised the government’s policy of cutting capital allowances as “misguided” given the government’s intention of making Britain more attractive for manufacturers.

Its results “suggest strongly that reforms that cut the tax rate but also cut allowances are not enough to maintain, let alone improve, the competitiveness of the UK corporate tax system.”

Reversing the decline in the competitiveness of the UK tax system over the last decade and making it the most competitive in the G20 was “a very ambitious objective” it said. “To get anywhere near that objective, more has to be done, but this would almost certainly have to come at the cost of lower corporate tax revenues.”

Plans to cut the corporation tax rate from 28 per cent when the current government took office to 23 per cent by 2014 would push the UK’s effective tax rate up from ninth lowest in the G20 to fifth lowest – but only if no other G20 country also reduced its effective rate.

The researchers said that the main problem for the UK was that allowances for capital expenditure were the lowest in the G20. Few countries had pursued the policy of cutting allowances to recover revenue losses caused by lowering the tax rate as aggressively as Britain, it said. So while the UK had the fifth lowest tax rate in the G20, the rate was applied to a broad definition of profit, implying that the effective tax rate was much higher.

It said: “Reforms which reduce allowances as a way of paying for rate reductions mainly redistribute the tax burden between companies, rather than making the tax system as a whole more competitive.”

David Gauke, exchequer secretary to the Treasury, will on Monday respond to the research by saying that the report’s focus on capital allowances was misleading because it was too narrow. He said: “Our corporate tax reforms in the round will result in unambiguous reductions in marginal rates“.

He said the Oxford research did not take account of regional corporate taxes which played a significant role in countries such as the UK, Canada, Germany and Spain. It also did not take account of reforms to the “controlled foreign companies” rules which govern the tax treatment of overseas profits, research and development tax credits or the small profits rate.

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