Corporation Tax: Bigger tax cuts for business, but the banks will not benefit

The bigger-than-expected cut in corporation tax in yesterday's Budget underscored one of the Chancellor's already well-worn themes: Britain is open for business. However, the UK's banks are unhappy that George Osborne felt the need to make sure they would not benefit.

Mr Osborne signalled a switch in taxation policy in his emergency Budget last June by announcing that corporation tax would fall by one per cent each year, starting next month, to reach 24 per cent by the end of the Parliament.

The move cost about £4bn. At the same time, he announced a tougher, if more predictable, regime for personal taxation.

The move was intended to attract businesses to the UK and to encourage rich people to pay tax through simple corporation tax instead of using a myriad of vehicles and wheezes punted by their advisers.

Now, Mr Osborne is cutting corporation tax by two per cent this year to reduce the rate to 23 per cent by the end of the Parliament, at a cost of about an extra £1bn to the exchequer.

There are also changes which reduce taxes on overseas financing income. These moves, he said, would give Britain the lowest corporation tax rate in the G7 group of advanced economies.

Mr Osborne is also doubling entrepreneurs' relief on business sales up to £10m to encourage start-ups and reward enterprise.

John Cridland, the director general of the CBI employers' group, said: "The extra 1p cut in corporation tax will help firms increase investment. Meanwhile, significant changes to entrepreneurs' taxation will rightly focus much-needed support on businesses with growth potential."

Angela Beech a tax partner at accountants Blick Rothenberg, said: "Expect a flood of incorporations as the tax gap between income tax and corporation tax widens," she said. "Increased entrepreneurs' relief encourages this further."

Mr Osborne's original decision to cut corporation tax last year was greeted by jeers because it also reduced the total tax bill for banks.

Yesterday, he was not caught out and announced that banks would pay a higher bank levy over the Parliament to offset their gains from the corporation tax cut.

The banks will pay an extra charge of about £100m a year over four years, on top of the planned £2.5bn a year levy, to offset the extra one-point reduction in corporation tax.

This has upset the banks because their Project Merlin deal on pay and lending was meant to draw a line under the Government's unfriendly measures.

Angela Knight, chief executive of the British Bankers' Association, said: "This is putting banks operating in the UK at a long-term disadvantage – both internationally, as they compete against banks not paying such a levy, and domestically, as they compete with other sectors of the financial services industry. "This change is not as straightforward as it first appears. Banks like other businesses want a predictable tax regime so they can plan their business accordingly."

The banks will not be any worse off than they expected to be on Tuesday but – in a budget heralded as rebalancing the economy and supporting genuine enterprise – they remain the wrong kind of company.

* Other Budget plans for business included the scrapping of 43 tax reliefs; the removal of £350m worth of regulations; and the amendment of planning rules to allow for certain class use changes, introduce time limits on applications and pilot auctions of planning permission.