Last week, while he was still in office, George Osborne announced a possible 5% drop in UK corporation tax, pending reports on the UK’s future. But will it actually happen, and what would the impact be on businesses and the public at large?
Local examples seem to suggest a positive outcome. Since cutting its rate of corporation tax to 12.5% in 2003, the Republic of Ireland has enjoyed the patronage of numerous international companies, with the likes of Google, Apple and Pfizer bringing their European headquarters to the country. While the tax decision significantly pre-dates the devastating economic crash, it is reasonable to suggest that these companies played a part in its resurgence over the last few years. And while 15% is still low for a major economy, it’s not unprecedented: Canada also has a 15% rate of corporation tax, and also resides in the world’s top 10 economies as of 2015.
There are however numerous political drawbacks to such a move. The tax affairs of Google and Amazon are still fresh in the public consciousness, and any move to reduce their tax burden could be met with heavy resistance. Nor is the economic impact likely to be wholly positive. The long term gains in business profits are offset by a significant short term drop in tax revenue. Where this money will be made up is almost impossible to predict in the current political climate.
Any tax levied on individuals risks nullifying the potential benefits of business growth, while further cuts to services like the NHS might be undesirable in the wake of arguments that payments into the EU could be reinvested following the Leave vote. But the money has to come from somewhere. Although they are ultimately in favour of a cut in U.S. corporation tax, the American Tax Foundation’s 2015 report predicted a $1.5 trillion shortfall in the event of a fall to 15%. This is from a much more substantial cut in a more successful economy, but it can be taken as a reasonable reflection of the proportional impact in the short term.
Former director of the World Trade Organisation Pascal Lemy characterised the move as “activating one of the weapons in this [Brexit] negotiation,” launching a ‘race to the bottom’ that has worried EU members seeking a unified approach to corporation tax. The average rate across the world’s largest economies is 25%, with top UK competitor France sitting at 33.33%. If Osborne's plans go through, it could launch two years of tense Brexit negotiations.
Whether any of this will happen is still open to some doubt. Osborne specifically stated that while his intention was to cut tax to 15%, he has subsequently been replaced as Chancellor of the Exchequer by Philip Hammond. It remains to be seen if he will follow through on his predecessor’s plan to reduce corporation tax.
This post was written by Russell Lebe, managing director of Open A European Company.com - helping small businesses, startups and entrepreneurs with company formation and tax planning advice throughout Europe.