UK Business Welcomes Corporate Tax Cut

by Robert Lee, Tax-News.com, London

27 June 2010

British business will welcome the cut in corporation tax announced in Tuesday’s emergency budget but some reservations remain about delays in announcing further reforms to the corporation tax system.

The announcement will lead to Britain having one of the lowest headline rates of corporation tax in the G20. Compared to Japan and the US, with headline rates of 41% and 35% respectively, the new, lower rate of tax in Britain will prove attractive to foreign investors wishing to set up business in the country.

There will be some reservations about the further reforms to the corporation tax system still to be announced, notably the treatment of Controlled Foreign Companies (CFCs). The final provisions affecting CFCs will not now be introduced until 2012. There is also some disappointment that the reduction in corporation tax is being phased in over four years rather than introduced earlier.

Paul Smith, Head of International Tax at Grant Thornton, commented: “We have known for a long while that the mainstream corporation tax rate was scheduled to come down but it is disappointing that this cut will now be introduced in phases. Companies of all sizes need assistance and a cut is welcome but it's frustrating that any positive change will come in so slowly. However the long-term plan is at last clear”.

Commenting further on the delay in introducing the new measures affecting CFCs, Smith added that “controlled foreign companies rules act as the main deterrent for most companies to headquarter themselves in the UK. The previous government had set up a consultation on how to simplify the existing rules but [the] decision not to introduce final legislation until 2012 is a great disappointment especially considering that the coalition government's main message to the business community was on simplification”.

One disappointing note was the reduction in capital allowances. The Annual Investment Allowance (AIA) will be reduced from GBP100,000 to GBP25,000 by April, 2012. There is concern that this will adversely affect manufacturing industry and might cancel out the benefit of the lower rate of corporation tax.

Peter Cussons, tax partner at PricewaterhouseCoopers LLP was upbeat in his comments about the taxation of profits of foreign branches: “We welcome the Chancellor’s confirmation that the move to a more territorial basis for taxing the profits of foreign branches which will go ahead on the timetable previously given, with legislation in spring 2011."

He added: “We also welcome the consultation this summer on options for retaining foreign branch loss relief as part of this reform. The decision by a business to operate through a foreign subsidiary rather than a foreign branch should therefore become more tax neutral and would enhance the UK’s tax competitiveness”.

The general view that business will welcome the changes was summarized by Tim Lyford of accountancy and financial services group Smith & Williamson, who observed that: "We now have a five year plan to reform the corporation tax system which helps to provide certainty for larger and small businesses. If the consultation on Intellectual Property, R&D and foreign profits meets business expectations it will be helpful. These announcements should undoubtedly help to stem the flow of any businesses thinking of leaving the UK”.

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