Proposals by Ed Miliband to increase corporation tax and cut business rates for small business if the Labour party wins the next election have received a mixed reaction from tax advisers and business groups.
During his speech at Labour’s party conference in Brighton this week Miliband promised to reverse a planned cut in corporation tax from 21% to 20%, due to take effect in April 2015, and offer an £800m business rates tax break to smaller companies.
Corporation tax receipts fell to £28.1bn in 2003-04 before rising sharply in the following years to reach a maximum of £46.4bn in 2007-08.
The global financial crisis in 2008 and resulting economic downturn led to another fall in receipts (to £35.8 billion in 2009-10), but receipts increased again in 2010-11.
In 2008 the main corporation-tax rate was reduced from 30% to 28%. The small companies’ rate was raised from 20 % to 21%.
In 2011 the rate was reduced to 26%. The small profits rate (formerly known as small companies’ rate) was reduced to 20%.
In 2012, the rate was reduced to 24 per cent and again to 23% in 2013.
From April 2014, the main rate will reduce to 21% and to 20% in April 2015.
Chris Sanger, head of tax policy at Ernst & Young, said the announcement on corporation tax was a departure from the recent “orthodoxy” of tax policy.
“In choosing to depart from reductions in corporation tax rate, in favour of cuts in business rates, the Labour Party is seeking to address the increasing importance, particularly for smaller businesses, of business rates which has risen to more than 4% of total taxes.”
Increasing receipts from business rates have come close to making up for declining money from corporation tax, Sanger said.
By 2017 corporation tax is due to account for 5.75% of all taxes.
The coalition government and previous Labour government have said cuts in corporation tax are a sign that Britain is a good place to do business.
“Investors seeing this change now may well be concerned as to whether this represents a fundamental change in policy or a slight shift in priorities,” Sanger said.
John Cridland, director-general of the CBI, which represents more than 240,000 companies of all sizes, said: "Businesses will view the proposals on tax ... as a setback for Labour's pro-enterprise credentials ... "The proposal to reduce business rates has merit, but to do it for some firms, through an increase in corporation tax for others, is divisive.
Small businesses rely on large businesses which employ ten million people, Cridland said who urged Labour to “speak for all businesses.”
Simon Walker, director general of the Institute of Directors said Labour’s tax policies were “better politics” than economics, and created a “false distinction” between small and larger businesses.
Patrick Stevens, a former president of the Chartered Institute of Taxation, said that corporation tax was unlikely to go down any further than 20%.
Increasing it slightly would not make much difference to HMRC’s tax receipts or companies’ tax bill, but it may mean a Labour is perceived as less “friendly” to big business, he said.
Small Business Support
Perhaps unsurprisingly, small business groups were pleased with the cut in business rates but said Labour should also try to make the tax system simpler.
The Federation of Small Businesses said that seven per cent of small businesses pay more in rates than rents.
Business rates have been partly blamed for empty shops on UK high streets.
In the UK's top 500 towns 18 stores a day closed in the first half of 2013, just two fewer a day than in the same period last year, according to figures released by accountancy firm PwC and the Local Data Company.
A rate cut may help some struggling businesses keep trading but underlying problems with the way rates are calculated (based on the RPI measure of inflation rather than CPI, which is generally lower) can still cause hassle for business, according to, James Moore, the deputy business editor of the Independent.
AccountingWEB members were also sceptical in their initial reactions to Labour's proposal. Shoshana viewed the announcement as “political tosh as usual” and wondered when tax policy would cease being a political tool and be used as an economic tool instead.
Jon Griffey and others also questioned whether the focus on business rates really addressed the pressures facing many businesses, particularly small retailers. "A cut/freeze in business rates would no doubt be welcomed by the recipients but it is not suddenly going to revive the High Street. We increasingly buy everything online these days so the resulting squeeze on margins and volumes makes many shops unviable. Short of uninventing the Internet it is difficult to know what to do."