Making the UK the Singapore of Europe.
One of the implicit threats in the government’s negotiating position is that if they do not get a satisfactory deal from the European Union, they will look to trigger substantial competitive advantages in terms of taxation. The obvious move would be on corporation tax which came down from 28% to 20% during the Coalition Government and is set to be reduced to 17% by 2020.
Perhaps the UK is looking at the example of the Republic of Ireland which has a rate of 12.5%. It has been mooted that there may be a further reduction in the UK rate to 15%. This would compare well to France which even with the Corporation tax cuts will have a rate of 28% in Germany with the rate of over 30%.
Of course, foreign direct investment is not only governed by the rates of tax and certainly not only by the rate of corporation tax. But it has been a policy for 20 years followed by both Labour and Conservative governments to reduce corporation tax. The Brown/Blair governments reduced the rate of CT from 35% to 28%.
There are of course other elements which affect corporation tax; notably the areas where allowances are commonly given. Here the UK is restricting allowances particularly for large companies in terms of both the use of losses and also interest deductions. In carrying out the recommendations of the OECD BEPS report, the UK should look to protect its tax revenues going forward.
It is unlikely that a substantial reduction CT below 15% would make a material difference to investment choices. The UK also has a competitive national insurance system compared to continental Europe. The one area where it could make an impact would be to reduce the top rate of income tax. As most foreign executives are either tax protected or tax equalised, the relatively high rate of UK income tax tends to fall as a burden on companies, particularly multinationals. Moreover, when the UK has had a lower income tax rate than its neighbours, more individuals have opted to be resident in the UK if they have had a choice.
Given the current attention of the government on the lower to medium paid individuals, a higher rate tax cut would seem a long shot. However, if things get really hot with the EU, that may be their best tax weapon in reserve.
