Labour’s equity allowances could hit corporation tax take

PLANS unveiled by Labour to encourage businesses to shift away from their reliance on debt funding could harm the corporation tax yield, according to Baker Tilly.

The proposal, included in the party’s manifesto, seeks to make equity funding more attractive through a system of tax reliefs known as allowances for corporate equity (ACE), which provide incentives for businesses to invest in shares.

There is a precedent in Belgium which operates such a scheme, but the impact of such a measure could see a reduction in corporation tax yields.

That shortfall could “conceivably be offset by a corporation tax rate increase”, according to Baker Tilly’s head of tax George Bull.

He said Labour’s pledge to maintain the most competitive corporate tax rate in the G7 affords it the scope in its manifesto to raise the corporate rate.

“Currently, the G7 country outside the UK with the lowest corporation tax rate is Canada at 26.5%. This means that a Labour government would have the flexibility to raise UK corporation tax rates by up to six and half percentage points from its current level of 20% without breaking its manifesto commitment,” said Bull.

“In a nod to small businesses, Labour has also promised to cut and then freeze business rates for more than 1.5 million small business properties, instead of going ahead with another cut to corporation tax.”