On the other hand, the Labour Party made major gains,
winning 29 seats with 40% of the vote share. The outcome goes
against the predictions made in April that the May government
would easily get a super-majority in this election.
A coalition government also means even less tax certainty as
Brexit negotiations loom.
"The general election results have come as a surprise and
any hopes of any political certainty have been dashed for the
time being," said Alicia Videon, partner at McDermott Will
& Emery. "The impact for Brexit negotiations is unclear.
This is on top of a deteriorating domestic economy and global
economic and geopolitical uncertainty."
Officially, Prime Minister Theresa May called the snap
election in the hope of gaining a sizeable majority to
strengthen her hand in negotiations with the European Union.
The lack of a majority in Parliament may change the agenda for
corporate tax cuts as the UK government goes into talks over
its withdrawal from the European Union (Brexit).
"In the short term, the election result will inevitably
create uncertainty about the direction of corporate tax
policy," said James Ross, partner at McDermott Will &
Emery. "However, it probably also increases the likelihood of a
'soft’ Brexit, so groups worried about losing the
benefit of EU directives to minimise withholding tax on
intra-group interest, dividend and royalty payments may want to
hold fire before unwinding their UK holding company
Brexit comes before tax cuts
When the Conservatives came to power in 2010, the rate of
corporation tax was 28%. Subsequent cuts have lowered the rate
to 20% and the May government plans to reduce it further to 17%
by 2020. The Conservative Manifesto reiterated the
government’s commitment to a low tax model for
business and individuals.
"The Conservatives had intended to oversee a continued
reduction in the rates of corporation tax," George Bull, senior
partner at RSM UK, told International Tax Review. "A
strong Labour opposition that wishes to increase corporation
tax rates may frustrate Conservative objectives." Though the
implications of the election results have a much wider
"What is most important is not the level of corporation tax,
but how we will leave Europe in terms of the Customs Union and
also the impact on VAT," said Bull. "Where we end up after
Brexit is more important than what the corporation tax rate
will be because paying a bit more on profits is simple compared
to what the impact on imports and exports might be."
"There have been efforts to update the customs system for
trade after Brexit goes through. This project had greenlight
status but now the light has turned to amber," Bull continued.
"And this is a serious problem because a 'hard’
Brexit with a software upgrade not fit for purpose would be
Leadership troubles risk Brexit success
From the outset, the UK election seemed to be a foregone
conclusion. It looked like May would claim an easy victory with
many predicting a super-majority for her party, allowing her to
negotiate Brexit as the UK’s governing party.
However, the campaign trail proved treacherous for the
Conservative leader and Labour’s standing in the
polls surpassed initial expectations. It began to look like a
much closer race in the last few weeks.
"Basically she thought strike now, lock it in and then yeah,
okay it might strengthen your hand a bit in terms of the
negotiations and it will dramatically strengthen your hand in
control of your own party," said Steve Keen, professor of
economics at Kingston University. "Well, it blew up in her face
in the same way that the Brexit vote did."
In 2015, the combined vote of the Conservatives and UK
Independence Party (UKIP) amounted to 48% of the electorate. It
was widely assumed that May’s stance on Brexit
would allow the party to win over the UKIP vote, whereas such
voters would never turn towards Labour. But, as the campaign
progressed, it became clear that the election would not be
decided on this issue alone.
Since the results have not produced the mandate May wanted,
there have been questions raised about whether or not she will
be able to lead the country. "I don’t think May is
going to survive the result," said Keen. "She has so weakened
her own position that she’s shot herself in the
foot with what she claimed was the motivation for the
The elections result is likely to have an impact on major
decisions by UK companies and international investors, who had
been proceeding on the basis of a continuing Tory majority.
"Businesses are likely to react with caution until a government
is put in place, as concerns of Labour’s proposed
changes to the tax regime become perhaps a little more real,"
said Videon. "Real estate investors and others will no doubt
worry of being hit by higher corporation and other taxes and a
stricter anti-avoidance regime if the Tories are in fact
ousted. Even if that is not the immediate result of this
election, it becomes a real possibility in the near term.
International investors may decide to reconsider investment
into the UK as they assess what may be another very significant
change in the political landscape, albeit the weakening pound
may offset this."
Tax planning gets difficult
As the news of the hung parliament was announced, the
situation reminded some people of past precedents.
"We had two elections in 1974 and there was a lot of
uncertainty then, but I can’t think of anything
comparable to the levels of uncertainty right now," Bull told
International Tax Review. "This isn’t
just domestic politics because it affects Europe and
constitutional questions. It’s unlikely we will
see a second referendum on Scottish independence now."
"What I would like to see in terms of tax is stability and
certainty," said Bull. "It’s difficult enough for
business to plan in an uncertain environment, and they deserve
to know what their tax framework will be."
Prime Minister May has made it clear that she intends to
stay in office and is seeking the help of the DUP, a Northern
Irish party, in getting her agenda through the House of
Commons. In the past, the DUP has cut public spending to fund
tax cuts in Northern Ireland, where the party’s
base voted for Brexit but they were outnumbered by voters
wanting to stay in the EU.
With the EU talks just 10 days away, the question of what
kind of deal is needed on Brexit is highly relevant. At Tax
Research, Richard Murphy argues that the best approach would be "a
Norwegian style agreement with us out of membership but working
closely with the EU within the Single Market". Whether this
will be on the negotiating table is another matter.