George Osborne has been single-minded in his drive to cut corporation tax. His latest reduction of 1 percentage point in April 2015 will take the rate to 20 per cent, allowing him to hail it as “the lowest business tax of any major economy in the world”.
The Budget was the fifth time Mr Osborne had lowered corporation tax, which was 28 per cent in 2010 and which currently stands at 24 per cent. It was already scheduled to go down to 21 per cent next year.
As with previous cuts, banks will be excluded from the benefit. The bank levy, introduced in 2011, will rise next January to 0.142 per cent of banks’ balance sheets to offset the reduction on corporation tax. That will raise an extra £250m a year from the levy, which is expected to yield an annual £2.9bn by 2014-15.
The UK already has the lowest headline rate of corporation tax in the G7 group of developed nations. The latest cut means it will have the joint lowest rate in the G20, alongside Russia, Turkey and Saudi Arabia.
“We will have achieved in one parliament in these difficult times the largest reduction in the burden of corporation tax in our nation’s history,” Mr Osborne said.
He will also simplify the system by merging the small company and main rates at 20p. That will abolish the complex marginal relief calculations between them and give Britain a single rate of corporation tax for the first time since 1973.
Mr Osborne must hope that his tax cuts reverse the recent signs that Britain’s once stellar performance in inward investment has been faltering.
The UN said in July that while the UK had the world’s second-largest accumulated stock of foreign direct investment by value, it had slipped from second to seventh for inflows.
The Oxford university Centre for Business Taxation said that, when capital investment allowances were taken into account – a crucial element for investment decisions – the UK would rank fifth or ninth for its effective corporation tax rate, depending on the method of calculation.
Mr Osborne will also hope that his cut offsets any damage to Britain’s attractiveness as a business location done by the controversy over whether foreign-owned multinationals such as Google, Starbucks and Amazon are paying their fair share of tax.
Chris Sanger, Ernst & Young’s global head of tax policy, said the tax regime was already attracting more jobs and investment, and this latest step reinforced the message that Britain was open for business.
But, he added: “Clients have been telling us that the UK’s tax regime is an asset, but 67 per cent of the tax professionals we surveyed before the Budget said that uncertainty created by the fair tax debate is a deterrent to increasing the level of their activities here. The chancellor’s Budget speech today [ Wednesday] will hopefully have helped to address some of these concerns.”
Matthew Barling, PwC banking tax partner, said the banking levy rate had risen by more than 80 per cent since it was introduced in 2011.
“This is a major cost for banks operating in the UK and is not a good advert for the City of London’s competitiveness as a global financial centre, particularly at a time when this is already under threat from other quarters.”
Richard Baron, head of taxation at the Institute of Directors, said the 20 per cent corporation tax rate “will put us out ahead of most of the OECD. But he will need to go further in future budgets. A medium-term target of 15 per cent would be ideal.”
John Longworth, director-general of the British Chambers of Commerce, said all companies would cheer the cut, which would be a fillip to business confidence, but added: “The chancellor may, in future, need to consider even further tax cuts of this nature if there is no sign of resurgent growth over the coming months.”