This note discusses the Coalition Government’s approach to corporate tax reform since 2010, focusing on the reductions made to the main rate, the decision to set a single rate of tax, and the reforms made to tax reliefs for capital investment. It goes on to examine the debate over corporate tax avoidance and the international efforts, led by the OECD, to tackle avoidance by multinationals through ‘Base Erosion and Profit Shifting’ (BEPS). It concludes by looking at developments in both these areas following the establishment of the new Conservative Government after the 2015 General Election.Jump to full report >>
Corporation tax is charged on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations.
Corporation tax is estimated to raise £44.1 billion in 2015/16. It is the fourth largest contributor to the Exchequer after income tax, National Insurance contributions and VAT.
The Coalition Government set out its priorities for taxation in its agreement, published in May 2010; in this, it stated that it would “reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”
In his first Budget on 22 June 2010 the Chancellor, George Osborne, announced that the main rate of corporation tax would be cut by 1% each year over the period 2011 to 2014, from 28% to 24%. In addition the small profits rate would be cut by 1% to 20% from April 2011. These rate reductions would be funded partly by cuts in the rates of capital allowances and the annual investment allowance from April 2012. In November 2010 the Government set out its wider programme for reform in its ‘corporate tax road map’: specifically, changes to the ‘controlled foreign company’ (CFC) rules, the tax treatment of innovation and intellectual property, and the taxation of foreign branches.
Over the next three years the Chancellor announced four further reductions in the main rate of tax, so that it fell from 26% in 2011/12 to 20% in 2015/16. From April 2015 the main rate is aligned with the small profits rate, setting a single rate of corporation tax. In its last Budget in March 2015 the Government noted that the UK was expected to have the joint lowest rate of corporation tax across the countries composing the G20, and a rate significantly lower than the US, Japan, France and Germany. At the time the Institute for Fiscal Studies estimated that the net annual cost of the Coalition Government’s reforms to corporation tax reached about £7.9 billion by 2015/16.
One of the changes made in the Coalition Government’s first Budget in June 2010 was a cut in the value of capital allowances – the reliefs given to business to offset their capital investment against their taxable profits. Subsequently in December 2012 Mr Osborne announced that the value of the Annual Investment Allowance (AIA), which had been cut from £100,000 to £25,000, would be increased to £250,000 from 1 January 2013, for two years. In his 2014 Budget Mr Osborne announced that from April 2014 the allowance would be doubled, to £500,000, until December 2015.
In his first Budget after the 2015 General Election, the Chancellor, Mr Osborne, announced two further reductions in the rate of corporation tax over the next Parliament: a cut to 19% in 2017, and to 18% in 2020. In addition the Annual Investment Allowance would be set permanently at £200,000 from 1 January 2016.  Subsequently in his Budget on 16 March 2016 Mr Osborne confirmed that the rate would be cut to 17% in 2020, to ensure that the UK would have the lowest tax rate across the G20. The Chancellor also announced a series of measures for the next four years to reduce tax avoidance and to simplify and modernise the tax regime, set out in a ‘business tax road map’ published alongside the Budget. Taken together these further reductions in the rate of corporate tax are forecast to cost just over £3.8 billion in 2020/21.
The Government estimates that the cuts in corporation tax since 2010 “will be worth almost £15 billion a year to business by 2021.” In a recent report on the changes to the composition of tax revenues, the Institute for Fiscal Studies has commented that, on current forecasts, the Government’s policy choices will lead to a decline in corporation tax receipts: “this marks a break with a long-run trend that shows volatility with the economic cycle but no persistent decline in receipts.”
 Office for Budget Responsibility, Economic and fiscal outlook, Cm 9212, March 2016 p111 (Table 4.6). Receipts from these taxes are estimated to be: income tax: £169.9bn; NICs: £114.9bn; VAT: £115.8bn.
 HC Deb 22 June 2010 cc174-5
 HM Treasury, Corporate tax reform: delivering a more competitive system, November 2010
 Helen Miller & Thomas Pope, Corporation tax changes and challenges, IFS Briefing Note BN163, February 2015 p9. This is based on official policy costings. The reductions in the main rate alone were estimated to cost about £7.6bn by 2015/16.
 op.cit. para 1.159
 Helen Miller & Thomas Pope, The changing composition of UK tax revenues, IFS Briefing Note BN182, April 2016 p2
Commons Briefing papers SN05945
Author: Antony Seely