Chancellor George Osborne has pledged to cut corporation tax in the hope that businesses which have been deterred from investing in the UK following Brexit will be encouraged back.
Osborne is planning to slash corporation tax to less than 15%, according to a recent interview with the Financial Times. This is 5% points lower than the current rate of 20%, and would give the UK the lowest rate of corporation tax of any major economy.
At Summer Budget 2015, the government announced legislation setting the Corporation Tax main rate (for all profits except ring fence profits) at 19% for the years starting the 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020.
At Budget 2016, the government announced a further reduction to the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2020, setting the rate at 17%.
Speaking to the Financial Times, the chancellor said:
“We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt”.
He added that Britain should “get on with it” to prove to investors that the country was still “open for business”.
Osborne’s plans have been met with some concern. Former World Trade Organisation chief, Pascal Lamy has said in an interview with the BBC, that the chancellor’s plans may well be viewed by the EU as the start of Brexit negotiations.
"The UK is already activating one of the weapons in this negotiation, which is tax dumping, tax competition. I can understand why he (Mr Osborne) does that, because obviously investors are flowing out from the UK, and he wants to provide them with some sort of premium that would make them think twice before they leave the United Kingdom.
"He has to think about the impact of this on the continent. This will be seen on the continent as the start of the negotiation.
"And I'm quite convinced that at the end of the day, if you want a proper balanced win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation."
Other critics of the plan include shadow chancellor, John McDonell who has told the BBC that the proposal was “counter-productive” and that the cuts would not create the business investment that the UK needed.
“Offering up Britain as a tax haven” to Europe, he warned, could hit tax payers. And mirroring Pascal Lamy’s thoughts, he said he didn’t believe cuts to corporation tax was the right way to open negotiations to get the best deal in Europe.
"I don't think it sends the right message to those countries that wish to establish a co-operative relationship with us in the future, so that we get some of the benefits we had in the EU, even though we're outside of it,"
The chancellor announces his plans to cut corporation tax just days before the Bank of England is due to publish the outcome of its latest Financial Policy Committee meeting, which reviews risks to the UK’s financial stability.
Following governor Mark Carney’s promise last week that the Bank of England would take “any further actions it deems appropriate to support financial stability”, there have been reports that the bank may lower the amount of capital banks are required to hold, to help stimulate the economy.
The report is due to be published on Tuesday.
Steve Olejnik, sales director, Mortgages for Business, said:
"The announcements from both Osborne & Carney could potentially be brighter news for landlords. We have already seen a move towards Ltd Co buy to let and if we are to see further reductions in Corporation Tax then we will undoubtedly see a continuation of growth in the Ltd Co BTL market.
Carney’s words could also allay fears that banks were having to consider setting aside increased capital for BTL lending which would have potentially pushed up pricing – any delays in this would be welcome following the recent battering of landlords by the Treasury."
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4th July 2016