In my blog on the 2016 Budget, I commented on the Chancellor’s continued theme of lowering corporation tax rates, in which he announced the rate of corporation tax being lowered to 17% by 2020. Even before his comments in the Financial Times this morning – where the Chancellor announced his plan to cut rates to 15% - the UK had the lowest corporation tax rates in the G8.
The purpose of the proposed further cut, which has already been well publicised, is to show that Britain is still ‘open for business’ and encourage investment post Brexit.
Lower tax rates would appear to mean that it is likely that overall revenue the Government would receive from corporation tax would fall. This point may have been in the Chancellor’s mind last week, when he was forced to abandon his plan to restore government finances to a surplus by 2020.
However, this is not necessarily the case based on previous evidence - this is on the basis that if significant business is attracted, or encouraged to remain, by lower tax rates, the overall tax revenues received by the Government could still be higher. For example, if the total amount on which corporation tax is paid at a rate of 20% was £100bn, this would result in £20bn tax revenue, whilst if corporation tax is paid at 15% and, as a result of the lower rate, the total amount on which corporation tax is paid has risen to £150bn, then this results in tax revenue of £22.5bn. And such a figure does not take into account the jobs and other tax revenue either created or saved from that retained or new business.
The proposed move has been criticised by the shadow chancellor, John McDonnell, who said the tax cuts were “counter-productive” and were not the right way to open negotiations with the EU. However, the UK has been lowering corporation tax rates steadily over the last few years anyway and already has the lowest rates of all the G8 members in the EU, so this is not a complete change of tack in light of Brexit. John McDonnell suggested more targeted tax reliefs for investment, rather than a change to the headline rate, would have been a better way to proceed – although would this have grabbed the attention of potential new businesses coming into the UK, or retaining those thinking of leaving?
The FTSE 100 initially opened strongly this morning, although this was thought largely down to commodity prices rising and the resultant increase in the share price of those companies, rather than the Chancellor’s announcement.