In an interview with the Financial Times, George Osborne said the cut is one of five measures he is planning that will build a “super competitive economy” with low business taxes and a global focus. A treasury spokesperson confirmed the Financial Times article was correct, but could not provide additional details on the plans or when a lower rate might be introduced.
A cut in the corporate tax rate from 20% to a rate closer to Ireland’s 12.5% would give the UK the lowest corporation tax rate of any major economy. Such a change could accelerate the “race to the bottom” on corporation tax rates among EU nations and potentially give the UK a tax haven status.
"The Chancellor has clearly turned his attentions to maintaining the competitiveness of the UK in attracting investment and ensuring that it holds on to big businesses, who may now be looking at transferring operations overseas to ensure access to the single European market," said Tim Wach, managing director at Taxand. "The decision marks an escalation of corporate tax rate reductions across the globe and will undoubtedly spark the next round of inter-country competition, as rates hurtle towards those seen in countries such as Ireland – at 12.5% - which have previously been seen as outliers," he said.
OECD Director for the Centre for Tax Policy and Administration Pascal Saint-Amans has warned that the “negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer,” according to an internal memo cited by Reuters. However, he said that further steps in that direction ”would really turn the UK into a tax haven type of economy,” adding that there were practical and domestic political barriers to doing this.
The UK's move "will no doubt re-open the debate over what constitutes a ‘tax haven’. At 15% or less, the UK looks set to be confirming its position in this bracket, which will no doubt anger those, across the G20, who have long been working to garner support for a more harmonised global tax system," Wach said. "This move, on the back of the Brexit decision, is a step backwards for harmonisation, though multinationals will no doubt welcome the fact that their interests are high on the agenda in an increasingly uncertain economic environment," he added.
Besides the tax cut, Osborne's five-point plan includes pushing for investment from China, ensuring support for bank lending, increasing efforts to invest in the Northern powerhouse, and maintaining the UK’s fiscal credibility.
Stark contrast
The Chancellor's efforts to boost foreign investment in the UK post-Brexit is a change in approach.
Before the June 23 referendum, Osborne said he would announce an emergency budget if the UK chose to leave the EU, including tax rises and spending cuts. Since the vote, however, he has tried to calm fears among businesses and investors, stressing that the British economy remains stable and reliable. “I want to reassure the British people, and the global community, that Britain is ready to confront what the future holds for us from a position of strength,” Osborne said in a published statement after the referendum vote.
The plans for a reduction in the corporation tax rate go further to reassure businesses. Osborne is awaiting official forecasts before announcing new measures in the Autumn Statement.
“Hollow gesture”
“A cut way in the future will have little impact. Without any indication as to when this will happen, it is virtually meaningless,” Richard Murphy, chartered accountant and Director of Tax Research UK, said in an article posted online today.
“It is also something of a hollow gesture when the chance that Osborne will be Chancellor [in] September looks to be very remote indeed,” he added.
Murphy said Osborne could choose to amend the current Finance Bill to introduce the rate cut, but this would “look like a poisoned chalice for his successor.”
Tax avoidance
According to Murphy, reducing the corporation tax rate would also “massively increase the return to tax avoidance when even the basic rate of income tax is 20% and one can be a substitute for the other in our tax system.”
“Worse though, it may not work to attract business. With country-by-country reporting in place, any company that artificially relocates profits to the UK to exploit this new tax rate can easily be identified by its home tax jurisdiction, and therefore be subject to challenge. Most tax cuts in the past have not been subject to such challenge: now that they are, George Osborne shows that he does not understand the risk to companies now of being seen to go near low tax jurisdictions in any way that looks artificial. The risk to them will be real,” Murphy said.
