Corporation tax: rate changes


The measure

The Chancellor announced that:

  • The main rate of corporation tax will fall to 27% for 2011-12, with further 1% cuts in the following three years: to 26% in 2012-13; 25% in 2013-14; and 24% in 2014-15;
  •  The small profits rate of corporation tax will fall to 20% for 2011-12, rather than increasing to 22% as previously announced.

These rates apply to the majority of companies. The main rate of corporation tax for oil and gas ring fence profits will remain at 30% and the small profits rate of corporation tax for oil and gas ring fence profits will remain at 19%.

Who will be affected?

Companies with taxable profits of any size.

When?

The main rate of corporation tax will initially fall on 1 April 2011, with further annual reductions in the following three years. The small profits rate of corporation tax will fall on 1 April 2011.

Our view

This is a welcome change, a permanent saving for companies of all sizes. Capital intensive businesses' celebrations will be dampened by simultaneous changes to the capital allowances regime which will reduce the rate at which they receive tax relief for investment in plant and machinery, but the Chancellor is at pains to point out that his estimates suggest that even investment-heavy industries such as Manufacturing should be net winners from these reforms.

The coalition Government is staking a bold claim to competitiveness for the UK's corporation tax regime at a time when tax rises and spending cuts are otherwise widespread. They have identified corporation tax as a key area where they want to invest and are aiming high, with talk of creating the most competitive corporate tax system in the G20, a broad tax base, low rate and more territorial corporation tax system. David Gauke MP, Exchequer Secretary to the Treasury, has been delegated the task of consulting with multinational businesses to find ways to do this, with these staggered rate changes his head start.

Based on comparisons today, a 24% corporation tax rate would be the lowest in the G7 and the fifth lowest rate in the G20 but it is worth remembering that it will be 2014-15 before the rate reduces to that level. It will be interesting to see how the rest of the G7 and G20 respond in the meantime.