Predictions and comments on CT rate changes

The Conservative manifesto promised a reduction in the small company rate of corporation tax to 20%, and a reduction in the full rate to 25%. A reduction in the full rate of corporation tax is viewed as quite desirable to retain international competitiveness – it is not wise for our rate to drift too far out of line with our EU partners, as businesses attracted to the EU will clearly establish themselves where the local conditions are most favourable – and the rate of corporation tax on profits is a key element in this decision. Freedom of movement within the EU also means that large groups may move their base of operations if they see UK taxes as uncompetitive, so a reduction in rate may be an economic necessity at some point – that point may not, however, be now.

Small company rate
A reduction in the small company rate has long been in the Conservative proposals – long before the general election and the launch of the manifesto. However, the Conservatives are treading on dangerous ground here. The cost of reducing the rate is modest, but as Gordon Brown found a few years ago, tinkering with this rate can produce unexpected effects, and any reduction is likely to see increased pressure from small businesses to incorporate to save tax. Advisers will have to wait until Budget Day to find out what the government has in store on this – but changing the rate mid year is entirely possible, as although convention says that rates only change from 1 April, corporation tax works to specific dates, so apportioning a chargeable period to alternative dates would not be complex to legislate for.

If they are implemented on 22 June, these reductions would be paid for, the manifesto promised, by the abolition of “complex reliefs”. It became clear that at least part of the cost would be met by the abolition of the Annual Investment Allowance, but that other changes to capital allowances were also contemplated. It is not now clear what will happen on these proposals.

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John Stokdyk's picture

Leave capital allowances alone, says Centre for Business Taxatio

John Stokdyk | | Permalink

A Corporation Tax rate cut should NOT be financed by restricting capital allowances, according to Mike Devereux at the Centre for Business Taxation. He sent across a statement that commented: "There is very limited scope for further reducing capital allowances. Any restrictions on the deductibility of interest should be considered as part of a fundamental overhaul of the tax.
 
"The new coalition government aims to reduce the corporation tax rate over the lifetime of the new parliament. But it aims to finance this by broadening the tax base, so that overall corporation tax revenues are unaffected.  There are gains to reducing the corporation tax rate in reducing the incentive to shift profits out of the UK. 
 
"However, a revenue neutral reform would leave effective rates of tax – and hence the incentive to invest in the UK - unaffected, on average. However, it would create winners and losers.
 
"Cutting capital allowances would hit firms and industries which have a higher proportion of capital investment. This could undermine physical investment in the UK.
 
"Another way of broadening the tax base would be to restrict the deductibility of interest payments. This option is worth considering seriously. However, it would represent a major reform of the corporation tax, and should be seen in this light, rather than as a simple way to enable the tax rate to be cut."

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