Corporation Tax – How Low Can You Go?

Corporation Tax in the UK currently stands at 20%,  the lowest in the G20.  As the Treasury now reaches deep into it’s toolkit to kick-start an idle economy, big business and city institutions are making the case that further cuts may prove counterproductive.

The Establishment’s curious case against tax cuts

To put a potential cut into perspective, France and Germany have rates set at 33.3% and 29.9% respectively, while the U.S. imposes a whopping 40%.  What “The Donald” thinks of this he has not yet shared with ’60 Minutes’.  The former chancellor George Osborne had earmarked a further cut to 17%, a measure still scheduled to be implemented in 2020.  This would be a historic low, down from 28% from when he took office.

A recent survey of accountancy and financial services firms found that bosses believed that any further cuts might risk “alienating the public”.  The head of tax at PwC, Kevin Nicholson stated:

“There comes a point when rate cuts have diminishing impact and can send unhelpful messages about business’ contribution, even though corporation tax is just one of the taxes business bears. Businesses think there should more focus on the taxes that generate the most revenue such as national insurance contributions and VAT. ”

A brief history of Corporation Tax

In the U.K., Corporation Tax has been collected from companies since 1965, when Labour’s election ushered in the policy objective of encouraging capital to be put to productive use, while conversely penalising passive investment.

Then, in 1973, Advance Corporation Tax was introduced. This new code was linked to the basic rate of income tax until 1993 and saw rates climb as high as 52%.  Even though these rates were lowered in the 1980s, the advent of myriad financial instruments in the early 1990s led to greater scrutiny of accounts and calls for a simplification of the tax system.

The Gordon Brown Budget of summer 1997 abolished the means for pension funds and various tax-exempt companies to reclaim tax credits (as well as individuals from April 1999).  This move has been blamed for the dire state of some sectors of British pension provisions.

Next, the new millennium heralded the rewriting of much tax law and the separation of corporate and individual tax bases.  There arose new issues around compatibility with the EU, but the dramatic lowering of the general corporate tax rate in recent years helped to stifle dissent over what is still essentially a very complicated system, which in turn holds no real check on the Revenue’s predilection for proposing ever more uncoordinated rules.