COMMENT: Why Brown needs to rethink corporation tax

`As a direct result of Gordon Brown's Budget measures, we are now faced with the prospect of one of the most unfair corporate taxation systems anywhere in Europe'

Britain now has the lowest rate of corporation tax of any of our main competitors, and, at just 31 per cent, the lowest rate ever in the UK, Gordon Brown proudly announced in his Budget speech. That was quite a boast for a Labour Chancellor to be able to make, and he did so in the context of a Budget which stressed the importance of "fairness" in taxation policy, of equipping the country for the future with "a modern taxation system based on principle".

Noble thoughts indeed. Unfortunately - and for some reason the Chancellor didn't mention this - they don't quite accord with the reality. As a direct result of his Budget measures, we are now faced with the prospect of one of the most unfair corporate taxation systems anywhere in Europe, one held together with bits of string and Sellotape, and one which in parts is so discriminatory that it might even fall foul of European law.

What's caused the problem is those wretched things, tax credits on dividends. By abolishing the credits but at the same time leaving the old connected system of advance corporation tax (ACT) in place, the Chancellor has created a whole raft of new anomalies in the tax system. Lasmo, the oil and gas company, has become the latest in a long line to write to the Chancellor warning of dire consequences if he doesn't do something to correct the position before it comes fully into force two years hence. In terms that admittedly seem just a little alarmist, Joe Darby, the chief executive, says the very independence of Lasmo and many other successful international British companies are put at risk by the proposals.

Actually this doesn't seem very likely in Lasmo's case, since the net effect of the measures would be to increase its tax bill by only pounds 2.5m a year. Some of the other predicted consequences, such as a mass exodus of companies to overseas domiciles, also seem exaggerated. The point is reasonably made all the same. British companies which don't earn much in the way of profits in the UK stand to get taxed twice, once on their earnings overseas, and a second time by way of advance corporation tax on dividends paid in the UK.

This is actually the situation that used to pertain before 1993, when Norman Lamont introduced his Foreign Income Dividends (Fids) scheme allowing companies that pay their dividends out of overseas earnings to reclaim the ACT. Now we are about to return to the bad old days.

It would be tempting to view this as just a soon-to-be-corrected oversight by the Treasury, as some executives do. Already the Government has made clear that the mirror system protecting overseas companies operating in Britain from ACT will be unaffected. Just as well, that, otherwise most of the City might have uprooted and moved to Frankfurt. But are we really now to have foreign companies better treated than British ones?

The truth of the matter is that the Chancellor has got his knickers in an awful twist over this. The reason is not hard to fathom; it is the usual one of revenue raising, for the abolition of Fids could be worth anything up to pounds 500m a year to the Treasury. To disentangle himself will therefore cost him dear. In the interests of fairness, however, he needs to address it. He's in danger of introducing an excessively complex, random and discriminatory system of corporation tax. It hardly accords with all those fine words.

Start your day with The Independent, sign up for daily news emails
Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
Voices
Vivienne Westwood and her son Joe Corré deliver an anti-fracking letter to No 10 last week
voicesThe great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick