Tax: Paying for lower corporation tax rates
By Donald Drysdale for ICAS
29 May 2019
With the UK corporation tax rate due to be reduced from 19% to 17% next April, Donald Drysdale explores the devious ways in which this tax cut is being funded.
International comparisons
In July 2015 it was announced that the UK rate of corporation tax (CT) would be reduced from 20% to 19% on 1 April 2017, and subsequently to 18% on 1 April 2020. Then in March 2016 it was announced that the rate would be slashed to 17% on 1 April 2020.
By April the projected UK rate is likely to be as low as that of Singapore – currently the lowest CT rate of any G20 nation. It is also likely to be less than half the rates that apply in some G20 nations – for example, India and Argentina each charge CT at 35%.
Britain’s ‘race to the bottom’ on CT rates aims to ensure that the UK is the best place in the world to start and grow a business. If this succeeds in attracting businesses that might otherwise invest elsewhere, it should boost the British economy. But will this happen?
Budgetary impact
The published figures take some deciphering. Looking at 2020/21 alone, the combined effects of the rate falling from 20% to 17% emerge as a reduction of £7,530m in CT revenues for that year. On a broad-brush basis, it seems reasonable to extrapolate some £5bn of this to the cut from 19% to 17% on 1 April 2020.
A comparable result can be achieved in another way. CT revenues in 2019/20 are expected to be £58.2bn – around 7.7% of the UK’s total tax revenues of £756.7bn. Arithmetically, if all else were to remain the same, a 2% rate reduction might be expected to cut CT revenues in 2020/21 by £6.3bn to £53.7bn.
If something looks too good to be true, it usually is. In reality, CT revenues in 2020/21 are expected to edge upwards to £58.7bn – or 7.5% of total revenues of £787.1bn. This leads me to wonder where the expected tax saving – which I estimated variously at £6.3bn or £5bn – has gone.
Paying for the CT cut
Could it be that the savings which companies might expect from the loudly trumpeted cut in the CT rate have been clawed back in other ways?
Some possible answers to this question can be gleaned from the Autumn Budget of 29 October 2018. Others are revealed by the Office for Budget Responsibility (OBR) in its Economic and fiscal outlook of 13 March 2019, published alongside the Chancellor’s Spring Statement.
As alluded to above, the UK’s total tax receipts in 2020/21 are expected to be some 4% higher than those in 2019/20. The latest published indices for RPI and CPI are both showing rises of 2% over the past year, and it comes as no surprise that taxes are rising even faster.
A number of tax policy changes relating specifically to companies have already eaten into benefits which might otherwise have flowed from cuts to the CT rate. Other tax changes are also contributing to the projected increase in total tax revenues. The more significant of these factors are described below.
Corporate tax changes
CT revenues have been increased by a substantial reform of corporate tax loss reliefs from April 2017, giving rise to extra revenues of £255m in 2020/21. Restrictions on the use of pre-2015 losses of banks will account for additional CT revenues of £315m in that year.
More recent proposals to restrict the use of carried forward corporate capital losses from April 2020 will increase CT revenues by a further £110m in 2020/21.
From April 2017, new rules have limited the tax relief that large multinational enterprises can claim in respect of interest expense. Extra CT revenues from these will amount to £885m in 2020/21.
From January 2017, new hybrid mismatch rules have prevented multinational enterprises from avoiding tax through the use of certain cross-border business structures or finance transactions, increasing CT revenues by £200m in 2020/21.
Changes to the withholding tax rules on royalties, bringing the UK more into line with international practice, will increase CT revenues by £125m in 2020/21.
The new digital services tax (DST) to be levied from April 2020 at 2% on the turnover of certain digital businesses will generate CT revenues of £275m in 2020/21.
The latest capital allowance policy changes are largely self-financing. They include a temporary increase in annual investment allowance (AIA) from £200,000 to £1m for two years; a new permanent capital allowance for new structures and buildings; and a cut from 8% to 6% in the special writing down allowance on long-life assets, thermal insulation, integral features and certain cars.
Comparison between 2019/20 and 2020/21 is further obfuscated by the deferral, from April 2017 to April 2019, of the government’s decision that large groups should pay their CT quarterly instalment four months earlier than before.
Other tax changes
Extra income tax and NICs estimated at around £1,165m for 2020/21 will be paid by some people under IR35 as a result of changes from April 2020 to the treatment of off-payroll working in the private sector.
Income tax allowances and thresholds for 2020/21 are to remain unchanged from those in 2019/20, increasing tax revenues by around £850m.
Capital tax revenues will be boosted by £1,260m in 2020/21 by an acceleration of capital gains tax receipts from gains on non-exempt residential properties.
Restricting the NIC employment allowance from April 2020 to businesses with an employer NIC bill below £100,000 will increase tax revenues from businesses, including many companies, by £225m in 2020/21.
The government has postponed the abolition of Class 2 NICs. However, from April 2020 Class 1A NICs will be levied on termination payments above £30,000 and on sporting testimonials of more than a £100,000 lifetime exemption. The net impact in 2020/21 will be extra NIC revenues of £395m.
Undue complexity
The UK tax system is often criticised for its complexity, and for the onerous compliance burdens imposed by its exceptionally tortuous tax legislation.
A low headline rate of CT which has to be paid for in other, surreptitious ways seems of dubious value. One has to question how effective it will be in attracting investment from overseas, compared with a slightly higher rate applied across a broader tax base.
Article supplied by Taxing Words Ltd