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Corporation tax: A fiscal storm brewing

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24th Mar 2017
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Bristol’s historic ship the SS Great Britain welcomed the Chartered Institute for Securities and Investments for their annual Budget review, with former BBC economics editor Stephanie Flanders, now chief market strategist at JP Morgan, painting a ‘steady as she goes’ picture of the overall economic landscape.

Providing the technical know-how was AC Mole partner, ICAEW vice president and AccountingWEB podcaster Paul Aplin. While both presenters agreed that barring the odd storm around National Insurance it was generally a calmer fiscal event than usual, it is likely that Autumn Budget measures will set businesses and individuals running off to batten down the hatches.

Corporation tax cuts

The lack of concrete measures in the Budget left time for more detailed analysis, and one point flagged up by both Flanders and Aplin was the continued lack of coverage around the amounts that will be lost by the Treasury from the cut in corporation tax, as stated in the Budget red book.

From April, corporation tax will drop to 19%, with the rate dropping to 17% by 2020 according to the government’s roadmap set out in 2015.

Starting in 2019-20 the new 17% rate is expected to give away £510m, then £2.6bn the next year, and £2.6bn the year after.

budget red book

Source: Budget red book (figures in £m)

By comparison the Summer 2015 Budget cut corporation tax to 19% from 2017-18, and to 18% in 2020-21; and these changes involved even larger sums: £2.3bn in 2017-18, £2.2bn in 2018-19, then £3.1bn, £4.9bn and £5.3bn.

Budget red book

With the tax base under threat from increasing rates of self employment and tax-related incorporation, Aplin queried the fuss that had been made over the half billion lost by dropping the Class 4 NIC increases, when the corporation tax rate cut will cost many times that amount.

Speaking to AccountingWEB prior to the event Stephanie Flanders said that the corporation tax reduction giveaway was striking.

“If you look at the cost in three or four years’ time,” said Flanders, “the cumulative effect is almost £10bn taken off corporation tax receipts, which the government has decided is a key priority but given the strains elsewhere in the system I think it’s quite striking that they’ve continued to shift in that direction”.

For the full conversation click play on the Soundcloud link above.

For Flanders one of the interesting things about corporation tax is that governments around the world are still raising substantial amounts from it, even 20 or 30 years after economists predicted that footloose global capital would mean that companies could escape paying it, and no government would be able to raise any money from the tax.

“In fact”, said Flanders, “the percentage of GDP that’s raised from companies has not gone down very much in the last 30 or 40 years, which is surprising, but I think the distributions of that has changed and you can see why a lot of retailers and bricks and mortar-based companies feel that they’ve been hard done by relative to some of the bigger companies that find it easier to move things around”.

Aplin joked that ‘Spreadsheet Phil’ had found the undo function for his National Insurance changes, but if the economic picture takes a turn for the worst the Chancellor may have to take a closer look at the corporate tax plans set out by his predecessor George Osborne, or risk inflicting further austerity on the country.

 

Should more be made of the reduction in corporation tax and the amount it will cost the economy, or in light of Brexit and economic uncertainty is this a sensible way of bringing investment to the UK?

Replies (3)

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By ireallyshouldknowthisbut
24th Mar 2017 11:37

I raised this in my budget circular to clients, if you look at the % of GDP CT receipts are, its falling, and seems entirely due to this policy.

The claims that somehow this attracts head offices to the UK and so we make more in tax overall seems completely wrong. CT rates should be 30%, not 17%, and corporate would barely notice. The big ones would still stuff all their profits off shore unless HMRC properly challenges them using existing rules and the smaller ones would have no choice but to pay more.

The lack of CT receipts is the easiest place to raise revenues, unfortunate with senior ministers (like Gideon) on the back pocket of large corporates, and the media controlled by large corporates, and the BBC muzzled by politicians, and the lack of an effective opposition party at Westminster it is hardly surprising to see this missing from any public debate.

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Replying to ireallyshouldknowthisbut:
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By DJKL
24th Mar 2017 13:01

So, discard the Laffer Curve?

Reality of 30% and dividend tax is the really small ones would all disincorporate their business and fold their companies, the tax losses to the Treasury from them not paying final corporation tax , snaffling it all as capital distributions/dividends with no real enforcement to chase the directors post event would punch a nasty hole in the forecasts.

What in my opinion is needed is a distinct small business entity with its own particular tax rules/compliance rules, so that legislation can in future be better targeted to the SME sector rather than one size fits all tax legislation/accounting requirements etc; dumping (integrating) NI would be a real start.
Relevant legislation re this new beast would be brief and much simpler; maybe only taxed on vat and what withdrawn rather than profits/gains, who knows.

This is what should be on the mind of the Government rather than MTD- catch is the project would need real graft and thought ( in short supply) and would not be exciting!!!

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By raybackler
24th Mar 2017 17:06

I am in favour of having such an entity - it could get rid of IR35 as well and the Employment Allowance for NI! Say for businesses up to £150K turnover?

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