Corporation Tax: Government acts to help the private sector

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The Independent Online

Corporation tax is to drop by 4p to 24p in the pound over the next four years as the coalition Government looks to the private sector to help rebalance the economy and underpin recovery from recession.

Business groups welcomed the plans yesterday, but the manufacturing sector was less enthusiastic about cuts to capital allowances to help pay for the lower tax rate.

Describing corporation tax as an "advert" for the country, the Chancellor outlined plans to cut Britain's 28 per cent rate by 1p to 27p in the pound from March 2011, and by another 1p in each of the following three years. In total, corporation tax will come down to 24p from 2014.

"[The plans] will give us the lowest rate of any major Western economy, one of the lowest rates in the G20, and the lowest rate this country has ever known," Mr Osborne said.

The new Government is not reversing its predecessor's plans to increase national insurance rates by 1 per cent next April. But it will increase the threshold for employer contributions by £21 per week above indexation. It is also planning to reform the controversial controlled foreign company rules and review the taxation of intellectual property.

Business groups broadly endorsed the Budget yesterday. "There was clear recognition of the role that business needs to play in getting the economy back into shape, and generating the jobs and wealth needed to sustain economic recovery," Richard Lambert, the director-general of the CBI, said. "The five-year route map for corporation tax provides much-needed consistency and certainty. Taken together with proposals on foreign profits and intellectual property, these will help prevent and could even reverse the flow of companies overseas."

But the main source of funding for the lower corporation tax rate is a cut in capital allowances, which hits manufacturers particularly hard. Under the new regime, rates for the majority of plant and machinery assets will fall from 20 per cent to 18 per cent. Allowances for longer-lived assets will also come down by 2 percentage points to 8 per cent. The measures will not be introduced until April 2012.

Together with investment allowances cut from £100,000 to £25,000, the measures received short shrift from manufacturers' lobby group, the EEF, which warned they could hit investment and "predictability has come at the cost of competitiveness".

Small companies

*Small business corporation tax will be cut by one percentage point to 20 per cent for companies making a profit of less than £300,000 a year from next April.



*New companies that are set up outside London will be entitled to £5,000 in employers' national insurance contribution relief for the first 10 people they employ.



*Plans to create an independent credit adjudicator – proposed by the last Government in March's Budget to hear appeals by small companies that have been denied loans by taxpayer-owned banks – will now not be implemented.

Case study: 'I applaud the restructuring of corporation tax'

Andrew Churchill, 41, is Managing Director of JJ Churchill, a manufacturing firm in Market Bosworth



"I run a business, which has been in the family since 1937. We specialise in aerospace, power and defence precision engineering, supplying big companies like Rolls-Royce, BAE Systems and Siemens.

Our turnover was £20m a year until the recession, but it then halved to £10m up to Christmas last year and we reduced our employees from 160 to 100. We now have 110.

Having voted Conservative, I applaud the long-term restructuring of corporation tax and laying out the changes for the next four years to have increased predictability, which is very important.

We got some much-needed clarity on how the deficit is going to be cut, but it was a job part done in terms of rebalancing the economy. There was a lot of talk about the importance of manufacturing, but from a small company position the changes are actually mildly retrogressive.

As for corporation tax, for existing UK companies, a 1 per cent cut is within statistical noise. By the time you get to the 4 per cent cut though, it will become relevant to overseas investors, but not really to companies already domiciled here.

I'm happy from a macro perspective, although there's still detail lacking, but I'm less happy that they don't get manufacturing yet. It's still seen as just an adjunct to business, but often what benefits business harms manufacturing. There is little experience of manufacturing on the front bench, and I think that's reflected in the modest cuts manufacturing will face.

If it is seen as a core part of the economy on the rebound, where are the policies encouraging entrepreneurs to invest in manufacturing, which is more risky than other business sectors? They are consummately absent."

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