TAX NEWS - June 2010

Industry Tax UK: Industry welcomes 24% tax target

Proposals to cut the rate of corporation tax to 24 per cent over the next four years will give Britain the fifth lowest rate in the Group of 20 leading economies and signal that it is "open for business", George Osborne said on Tuesday.

The measure was greeted enthusiastically by many businesses, which face an overall reduction in corporation tax of £1bn a year after taking account of cuts in allowances that were less severe than feared. But the chancellor was able to avoid accusations of a corporate giveaway at a time of austerity by raising extra revenue from the levy on banks' balance sheets.

The CBI employers' group said it strongly welcomed the planned reforms. Will Morris, chair of the CBI taxation committee, said: "The coalition's plan for corporate tax sets a very positive course for the future direction of tax policy."

But some companies will be hit by the reforms, depending on their level of investment and overall tax profile. The main rate of capital allowances will be cut from 20 per cent to 18 per cent and the special rate from 10 per cent to 8 per cent from April 2012, while the annual investment allowance will be reduced from £100,000 to £25,000. The basket of measures included a reduction in the small companies' rate to 20 per cent with effect from April 2011.

Michael Devereux of Oxford University's Centre for Business Taxation said: "The combinations of rate cuts and allowance cuts will leave some businesses better off and some worse off. The hotels and catering sector is likely to be among the worst hit, since it has higher capital expenditure, but low profitability."

Andrew Hubbard, tax policy director at RSM Tenon, the professional services firm, said that while larger businesses would be relieved that capital allowance rates on plant and machinery had only been slightly reduced, smaller companies would view the cut in the annual investment allowance from £100,000 to £25,000 as overly harsh.

The EEF, representing manufacturers, said: "Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies."

Mr Osborne said he had accepted that "changing these crucial allowances during the early stages of the economic recovery could be disruptive", so he delayed the reductions in capital and investment allowances to April 2012, while giving businesses the extra early advantage of the tax cuts, which start to come in from next year. The Treasury said on Tuesday that the manufacturing sector as a whole would pay less corporation tax as a result of the reform.

Anneli Collins, head of tax policy at KPMG, the professional services group, said the Budget was "a fine example of expectation management" because harsher measures had been widely predicted.

She said the plan to reduce the corporate tax rate to 24 per cent, rather than 25 per cent as had been previously mooted, would be welcomed. But she warned that business should not be complacent because there were "huge" issues up for future consultation.

The Treasury said it would follow through on its promise to reform the controlled foreign companies rules, the unpopular anti-avoidance rules that curb international tax planning by multinationals. Interim improvements in the CFC rules will be introduced next spring after consultation this summer. A more detailed consultation will lead to legislation in spring 2012.

Revenue & Customs will engage informally in discussions over the summer to explore whether a general anti-avoidance rule should be one element of strengthened defences. The Chartered Institute of Taxation said the prospect raised "many concerns".

The Treasury also promised a consultation on the taxation of intellectual property, which is likely to examine the proposal for a "patent box" offering a lower tax rate on certain types of intellectual property that was put forward by the last government. It also published proposals to improve the way tax policy is made.