Budget 2013: Corporation tax cut to boost UK competition

Slashing an extra 1 per cent from the corporation tax rate – now expected to be 20 per cent in 2015 – will give the UK the lowest business tax in the G20.

The Chancellor’s most significant supply-side reform will see the rate of tax, currently at 24 per cent, cut to 23 per cent next month and now to 21 per cent in April 2014, with the final cut arriving in 2015.

John Cridland, CBI director-general hailed the move as a way of making the UK more competitive. He said: “An extra one penny cut in corporation tax will also make the UK one of the most internationally competitive locations in which to do business.”

If other countries do not undercut the UK in coming years, then the reduction to 20 per cent means that in 2015 the UK will have the same rates as Russia, Saudi Arabia and Turkey.

The CBI Scotland said the move was “significant and encouraging”, arguing that retained profits would then “play a bigger role in financing firms’ future investment plans given the constraints on traditional lending”.

The cut is expected to cost about £1.5 billion in 2015-16, although some have raised doubts it will actually boost companies. Peter Young, tax partner with Johnston Carmichael, said: “It sends a message – perhaps it is more of a political message than a real message. The vast majority of businesses in Scotland don’t pay anywhere near the main rate of corporation tax – because they are all SMEs or they tax plan – they ensure they can get profits in the most tax-efficient way possible.

“It is an interesting headline grabber – but it won’t make a great deal of difference. Certainly it won’t make any difference until 2015.”

But he did argue that it could make more individuals and partnerships look at incorporation. He said: “Why be a sole trader when you can set up a company and pay lower than personal tax rates.”

Many have suggested cutting corporation tax is a “race to the bottom” as countries vie to have the lowest tax in an effort to boost inward investment.

But Richard Baron, head of taxation at the IoD, said the Chancellor “will need to go further in future budgets. A medium-term target of 15 per cent would be ideal”.