This note discusses the Coalition Government’s approach to corporate tax reform over the period 2010-2015, 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, before looking at the debate over corporate tax avoidance.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. In 2014/15 the tax raised £42.4 billion. 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 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. It is anticipated that in 2015 the UK will 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. Overall the Institute for Fiscal Studies estimate that the net annual cost of the Government’s reforms to corporation tax reached about £7.9 billion by 2015/16.
One of the changes made in the 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. In the Autumn Statement in December 2012 the Chancellor 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.
Commons Briefing papers SN05945
Author: Antony Seely