Corporation tax: The race Britain can never win
Created: August 2017
Like it or not, Brexit is beginning and the effects are impacting businesses in the UK. But, while we are starting to see the fallout, many questions remain unanswered. And one of these questions involves corporation tax.
Britain already has one the lowest headline rates of corporation tax of any major economy – and the government is determined to cut it further.
Earlier this year Philip Hammond reconfirmed the rate will fall to 17 per cent by 2020. Before that, predecessor George Osborne speculated it could be cut to as low as 15 per cent. So, if the rate falls, we can expect a reduced tax take for the government but more money for the economy – right? No, not quite.
We’re told that cutting these rates will stimulate young UK businesses and persuade global firms to relocate here (after Brexit we’ll need all the help we can get). But we’re not the only country to have this idea. Ireland has had a low rate for several years and the US seems set to slash its federal tax rate too.
Britain will never win a race to the bottom. The more other countries drop rates, the more we’re forced to keep up. It’s a fight we can’t win.
Besides the danger of being left behind, will drastically dropping corporation tax rates actually do the job it’s supposed to? Arguably not.
In theory, lower rates should stimulate economic growth; new businesses will create jobs and, although less will be earned in corporation tax, it will be offset by greater employee contributions (income tax and National Insurance).
That’s not what we’ve seen in practice. We’ve seen businesses try to benefit from the lower corporation tax rates by hiring as few new people as possible – and on a low wage.
Is that really the economy we want? Do we really value a shaky financial system with higher tax yields over stimulating real and substantial business growth?
Britain’s future should not be as an offshore tax haven. There will always be other countries, for example Ireland and Singapore, which are willing to cut taxes just that bit lower. It doesn’t matter how fast you are, there’s invariably someone able to go that little bit faster.
More importantly, it’s likely that any headline-grabbing cuts in the official corporation tax rate are likely to be funded by raising other business taxes; in fact, official data shows that Britain’s effective corporate tax rate (i.e the total tax companies face) is not as low as the headline corporation tax rate implies.
The effective rate is the tax burden that British businesses face on a daily basis – attempts to disguise the real effective rate by promoting reductions in the headline corporation tax rate isn’t just doomed to fail, it risks taking our economy into a downward spiral from which it will be extremely difficult to escape.
Toby Ryland, Corporate Tax Partner
T 020 7874 7959