In his Budget speech earlier this year George Osborne announced that the rate of corporation tax in the UK would be cut to 20 per cent with effect from April 2015. The intention is that foreign companies will be more inclined to invest in a country with a favourable tax regime, thereby stimulating economic growth.
Whether this is successful or not is something that will be judged over the long term. More immediate concerns are the various organisations that pay minimal tax in spite of their UK operations, as well as the impact of rising business rates on smaller companies.
Corporation tax is levied on the profits of limited companies and other large organisations within the UK.
HMRC rules stipulate that organisations based within the country are liable to corporation tax on all of their taxable profits, regardless of where in the world they are generated. Conversely if a company is not based in the UK but has a branch here, then corporation tax is only payable on profits arising from its UK activities.
This is an important distinction and has been a source of controversy in recent months because many multi-national companies with UK operations are paying just a token amount of the tax.
Amazon generated revenues of £3.3 billion in the UK last year, but paid no corporation tax. Despite accounting for 25 per cent of all the books sold in the UK last year, all payments were routed through Luxembourg. The Guardian estimates that the company avoided a corporation tax bill of approximately £100 million as a result.
Rolls Royce is another company that paid no corporation tax in the UK last year. The company employs 12,000 people in Derby but conducts 85 per cent of its business abroad and paid £218 million in overseas tax. However a number of MPs have argued that companies based in the UK, benefiting from the country’s infrastructure and public services should not be able to avoid corporation tax.
The Chancellor sets out the rates of corporation tax in his Budget speech each year, with the amount levied being dependent on the company’s taxable profits. It is payable on a self-assessment basis meaning that it is the responsibility of the company to calculate their own liability and pay the correct amount to HMRC. Evidently foreign businesses looking for an overseas base of operations will place a major emphasis on the tax regimes of the countries under consideration. From April 2015 the UK’s corporation tax rate will be cut to 20 per cent.
This is emblematic of an effort by the G20 group of countries to encourage foreign investment by lowering their charges on business profits. The UK is ahead of the curve in this regard - corporation tax is levied at a rate of 30 per cent in Germany, 36 per cent in France and 40 per cent in the USA.
George Osborne has stated that the reduction in the rate is a way to ‘send a message to anyone who wants to invest here, to create jobs here, that Britain is open for business.’ The new rate will cost the Chancellor £800 million but it is hoped that by reducing the UK’s corporation tax to a rate lower than that even of Luxembourg, benefits will be felt in the future.
Ultimately though corporation tax is only levied on the country’s largest companies and there are concerns that smaller businesses have been forgotten. According to reports, Helen Dickinson, director general of the British Retail Consortium feels that ‘business rates and people taxes’ are more significant for the unincorporated entities that play a vital role in the UK economy.
This sentiment is echoed in the Financial Times by the chief executive of Sainsbury’s, Justin King. He believes that high street retailers and their online competitors are not operating on an equal playing field. At a time when corporation tax is being cut, business rates are gradually increasing and King has urged the Government to take action in order to address this issue.
* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.