TAX NEWS - June 2010

UK Tax: A chance to rethink tax policy

What has the government announced?

A commitment to "lower and simpler" corporate tax rates will be unveiled in the final coalition agreement to be published today. Reliefs and allowances will be simplified and avoidance tackled in order to reduce headline rates.

The aim is to create "the most competitive corporate tax regime in the G20, while protecting manufacturing industries".

A five-year road map for "a big reform of corporation tax" will be set out at the time of the Budget. As well as lower rates and a simpler system, the government aims to reform the complex "controlled foreign companies" rules that have driven businesses overseas.


What will the critics say?

Many businesses will be dismayed that George Osborne did not make a clear commitment to the Conservatives' manifesto plan for an initial 3p cut in the headline corporation tax rate to 25p.

That was billed as a strong signal that the UK was serious about becoming more tax competitive. But manufacturers will be relieved that their concerns about restricting capital allowances have been taken on board and the promise of a road map to a more competitive tax regime will be applauded.

The goal of creating the most competitive tax regime in the G20 is ambitious and may stoke fears among some businesses that their cherished ability to deduct interest payments from tax will come under attack.

The suggestion that a tax avoidance crackdown will help raise sufficient revenues for a meaningful cut in the corporate tax rate will be widely seen as unrealistic.


FT Verdict

Signs that the new coalition is arguing over the detail of corporate tax policy will alarm many businesses, as Mr Osborne's plans for an immediate rate cut were popular with the majority. But an opportunity to rethink the policy may prove worthwhile, if it silences complaints among business about the destabilisation of the tax system and the resulting damage to investment, and allows the Tories to drive ahead with their plans to improve the competitiveness of the tax system.

Ideally, the proposals under discussion should now be the subject of much wider consultation, before binding decisions are made.