There weren't many surprises in the March Budget, but the further reduction to the main rate of corporation tax was one of them. From 1 April 2012, UK companies will pay corporation tax at just 24%, a rate that is lower than any of the other G7 countries and the fourth lowest in the G20. Further reductions are planned so that the main rate of corporation tax will be as low as 22% by April 2014.
Promoting the UK
A low corporation tax rate, along with other measures such as reforming the Controlled Foreign Company rules, continuing improvements to research and development tax reliefs, and the introduction of the patent box regime from 1 April 2013 (a special lower rate of taxation for income derived from qualifying patents), are key components in the Government's plans to promote the UK as 'open for business'. But is this enough?
The carefully stage-managed announcement the day after the Budget that GlaxoSmithKline (GSK) will invest £500m in a new biotech plant in the north of England as a direct response to the Government's proposals would appear to indicate the strategy is working. But what if you're a company with a market cap of less than £70bn? What is the Government doing for those smaller companies in the UK on which the economy relies?
Access to funding
Here the evidence is less compelling. Yes, the reduction to the main rate of corporation tax is a boost and will impact any company or group earning taxable profits of more than £1.5m. However, many companies are struggling to earn profits on which they will pay tax anyway and a key reason for this is the difficulty in obtaining funding for expansion and growth. The expansion of the EIS and VCTs has opened up this valuable source of funding to many more companies, some of which will be listed on AIM. However, the increase to the limit of funds, from £2m to £5m is disappointing, as the Government initially proposed increasing this limit to £10m. On balance, although the impact of these changes will be reduced, the expansion of the EIS and VCT regimes should still be positive for companies looking for investment.
Will it be enough?
It is a bold move to reduce the rate of corporation tax down to 22% by April 2014 – 12% lower than the current rates in the US and Germany. Companies like GSK, which undertake extensive research and development will applaud the Government's efforts to promote the UK as a global centre for innovation, and the video-gaming and TV and film industries will also benefit from planned tax breaks. But what about the majority of companies that do not operate in those specialist sectors? Time will tell whether the promise of low corporate taxation, coupled with a reduction in the top rate of income tax (although a 45% top rate of income tax is still high when compared to other countries), is enough for them to play their part in the recovery of the UK economy.
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