Gordon Brown Faces Corporate Tax Hole

by Jason Gorringe, Tax-News.com, London

09 October 2002

UK Chancellor, Gordon Brown may face a greater than expected shortfall in corporate tax revenues, according to a Financial Times report.

Blaming a weak stock market and the bleak short-term outlook for company profitability, Martin Weale, director of the National Institute of Economic and Social Research, told the business daily that:

'The Treasury's projections rely on a cyclical recovery in corporation tax revenues which seems to me to be optimistic.'

Corporate tax revenue rose sharply in the 1990s, in part fuelled by the increasing tax contribution being made by the country's growing financial services sector. However, Mr Weale suggested to the FT on Monday that this performance is unlikely to be repeated in the near future: 'It was arguably an industry based on a bubble, and that bubble has been deflated,' he explained.

In his most recent budget, Gordon Brown predicted that corporate tax revenue would represent 3.5% of national income in 2006-07 (up from 2.8% this year). However, experts have observed that, allowing for the government's corporate tax cuts, his figures assume a better corporate revenue performance over the next few years than has been seen at any time in recent years.

According to the FT report, this potential 'hole' in the Chancellor's tax calculations has cast doubt on whether taxes will need to be raised still further to fund his spending plans. The Institute for Fiscal Studies this week called for the Treasury to publish more details of how its forecasts are calculated, arguing that:

'The real question is how much those profits from financial services and the bull market have been feeding into tax revenues, and how much they are expected to contribute in the future.'

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