Now that George Osborne has finally made it to 11 Downing Street and is planning his “Emergency Budget”, I hope he look seriously at reducing the headline rate of Corporation Tax in order to attract international businesses to the UK as well as stemming the flow of UK companies moving their tax residence elsewhere.

The fact is that in the multi-national and open border world that businesses operate in these days it is relatively easy for international groups to arrange their affairs so that they pay the majority of their tax in a low tax jurisdiction. I should know – I earn a lot of money advising businesses on how to go about this.

However my personal experience shows that when considering this issue the boards of most companies only look at the main, or “headline” rate of corporate tax and it is hard to get them to see that more often than not a low headline rate can be offset by other – hidden or stealth – taxes.

For example, there are countries in the EU with headline rates of corporate tax as low as 10 or 15% but which impose taxes and charges on, for example transactions. Several former Eastern European countried impose tax – as much as 4% in one case – on loan agreements. There are two EU member states who levy what we would call “capital gains tax” on the value of land or property even when these are not changing hands. You could have bought some land for €X but sometime later the local government valuer says it has doubled in price so you get a tax demand on that “gain” even though you have not sold it and so have received no profit. Hmmmm.

A low headline rate can also hide other costs. Some countries require monthly VAT returns and even monthly interim accounts on which corporate tax is due within 10 days. In the event that you make a loss one month you can’t carry that forward to the next or back to the previous month but wait until the annual accounts are agreed at which point you can claim a refund which could take up to nine months to be approved. So, you could be out of pocket for between 10 and 21 month.

So, why should George Osborne consider reducing the headline rate?

Well the fact is that unlike most other countries who publish a low headline rate but top it up with stealth taxes, the UK operates in the exact opposite. The UK lists a high headline rate (currently 28%) but then gives lots of allowances and incentives which reduce that rate, often to a lower level than the countries who attract businesses with claims of 10%,12.5% or 15% rates of corporate tax.

George Osborne could dramatically cut the headline rate tomorrow simply by reducing the main rate of capital allowances on plant and machinery. There are plenty of other similar allowances which could be cut or even done away with altogether.

I don’t think that it would be unreasonable to expect the new government to be able to bring the headline rate down to 15% and I believe this would result in more money flowing into the UK Treasury. Certainly more than 50% of my clients would be happy to pay UK tax at that rate rather than pay me to design – perfectly legal – ways that they can reduce their current tax bills.

You might say that I’m doing myself out of work here but frankly I don’t have enough time to deal with the more complex (and interesting and well-paid) tax planning strategies that need my attention as I spend such a lot of time on simple strategies which should not really be necessary.

Lower, simpler corporate taxes are one of the most effective ways of improving the environment for business and enterprise.

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Category: Taxation


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