ON THE face of it multi-national businesses got everything the could have hoped for when chancellor George Osborne delivered his Budget statement to the House of Commons on 21 March.
For some the Budget was driven more by political motivation than economics. By laying the 50p tax rate debate to rest by cutting the top rate of tax by five pence and increasing the personal allowance to £9,205 from April next year Osborne was able to appease both the Liberal Democrats and his own backbenchers.
But there was welcome news for business. Osborne claimed that the government ‘unashamedly backs business’ and to a certain extent made good on that pledge by accelerating the cuts in corporation tax announced last year.
Osborne announced a reduction in corporation tax from 26% to 24% from 1 April 2012, with a further reduction to 22% by April 2014, a move he said would give the UK the lowest corporation tax in the G7 and the fourth lowest in the G20.
Menzies tax partner Simon Massey hailed the decision as ‘positive news that will help the competitiveness of the UK’.
“We have seen that the current headline rate of 26% has been a real incentive for attracting business into this country…It is also great that this rate will drop to 20% if the government’s policy goes to plan,”Massey said.
Open for business
Cutting the rate of tax on incomes over £150,000 also removed one of the biggest barriers to businesses trying to attract top executives. The previous rate was labelled ‘unattractive’ and ‘ant-business’.
Osborne has undoubtedly come under fire for given tax breaks to the rich, but the flak will probably be worth it if, as Chris Sanger, head of tax policy at Ernst & Young, predicts, the UK’s arrivals lounges start booming “as entrepreneurs respond to a far more positive message from the chancellor.”
“The chancellor has matched his reforms of the business tax environment by addressing the much maligned 50p rate. By removing this deterrent, the chancellor has put the substance behind his rhetoric; the UK is
open for business,” Sanger said.
Osborne’s confirmation that the government would introduce the so-called patent box – that allows corporations to pay a lower rate of tax corporation tax on profits generated from UK-owned intellectual property – reaped an immediate dividend with drugs firm GlaxoSmithKline (GSK) confirming that it would build its first new manufacturing facility in the UK for 40 years as part of a £500m investment across the country as a result of the change.
“The introduction of the patent box has transformed the way in which we view the UK as a location for new investments, ensuring that the medicines of the future will not only be discovered, but can also continue to be made here in Britain,” said GSK’s CEO Sir Andrew Witty.
Although the announcement was a piece of stage-managed PR – GSK first announced the investment in the autumn of 2009 – there is no doubt that the news, coupled with Osborne’s confirmation he will introduce an above-the-line R&D tax credit and reform Controlled Foreign Company rules so that profits made overseas will not be subject to UK tax, sets the tone for attracting future investment into the UK.
“The reform of Controlled Foreign Companies , the introduction of the Patent Box regime, and improvements to R&D tax credits all encourage companies to base themselves and carry out new activity in the UK,” said Bill Dodwell, head of tax at Deloitte.
There was also some welcome news for some of the country’s smallest businesses with the announcement that the government will aim to “radically change” the administration of tax for the UK’s smallest companies.
Osborne said that small businesses with a turnover of up to £77,000 could be allowed to calculate their tax on the basis of cash that passes through their business, rather than the traditional accrual method.
The changes, based on original recommended by the Office of Tax Simplification, would make filling in tax returns simpler for up to three million companies, the chancellor said.
The chancellor also said that the government is pressing forward with plans to integrate the operation of income tax and national insurance. A detailed consultation will be published next month.
“The document also sets out a new approach to working with small business, and sets a far more positive tone in the way that HMRC will engage with them,” said Patrick Stevens, tax partner at Ernst & Young.
Relief for creative industries
Osborne also announced corporate tax relief from April 2013 for video games, animation and high-end television industries.
Although the tax relief is worth only a relatively small amount (£50m by 2014/15) compared to other types of tax relief, the announcement was welcomed as “terrific” news for the games development industry. The tax breaks are a similar idea to tax relief for the British film industry.
The announcement cam on the same day as shares in Game Group, the video game retailer, were suspended and the company said it intended to appoint an administrator.
Stephen Bristow, an expert in film and TV tax at RSM Tenon said the tax relief could generate at least £350m per year by encouraging more “high-end” TV production in the UK, as well as an overall boost of around £1bn to the UK economy.
“This is fantastic news for the creative industries and it’s especially good to see the government putting its money where its mouth is,” Bristow told Accountancy Age.
Papering over cracks
But there were some gripes about the lack of change that took place in other areas of corporate tax.
Smith & Williamson national tax director Richard Mannion felt Osborne was “papering over the cracks”, and felt the real problem was “…the sheer complexity of the UK tax system.”
Some felt that little major positive change had taken place. Bridge Houghton LLP partner David Houghton pointed National Insurance as an area that went untouched.
“There was nothing on employers’ Nation Insurance to help ease the burden on employing people, the small companies tax rate has remained unchanged and it would have been great to see greater incentives for businesses to invest through additional capital allowances.”
The benefits of any changes Osborne makes now are unlikely to filter through to the real economy for another two years, while the economy remains fragile despite the OBR revising up its K growth forecast. Growth for 2011 is expected to be 0.8%, with 2% growth in 2012, 2.7% in 2013 and 3% for both 2015 and 2016, although corporate investment is expected to be £117.2bn this year, much lower than the £127.7bn predicted at the time of the Autumn Statement.
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