AS2012: Early Christmas present for business as CT cut

by Richard Crump

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05 Dec 2012

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UK BUSINESSES were handed a welcome early Christmas present after the chancellor announced an unexpected 1% cut to corporation tax.

George Osborne told parliament during his Autumn Statement that the main rate of corporation tax, already scheduled to fall to 22%, would be cut further to 21% from April 2014, giving Britain the lowest rate of tax of any major Western economy.

"It is an advert for our country that says: come here; invest here; create jobs here; Britain is open for business," Osborne said.

Kevin Hindley, managing director at Alvarez & Marsal Taxand UK, expects the rate to eventually be cut even further.

"Osborne is clearly targeting 20% after 2014," Hindley says. "The idea is to unite it with the small companies tax rate."

Banks, however, will not benefit from the reduced rate, the chancellor said. In fact, the banks were hit with a 0.13% increase to the annual levy on their balance sheets.

In a further cut to business taxes, Osborne announced the temporary doubling of the Small Business Rate relief scheme to April 2014, and an increase to the annual investment allowance in plant and machinery.

From 1 January, the allowance will be increased tenfold – so that rather than £25,000 worth of investment being eligible for 100% relief, £250,000 worth of investment will now qualify.

"It is a huge boost to all those who run a business, who aspire to grow and expand and create jobs," Osborne said.

Geraint Jones, private client partner at Reeves, labelled the move "strange" and criticised the government's "yo-yo position" on investment allowances.

The two-year increase represents the fourth change in five years to the allowance. It was introduced at £50,000 by the last government and increased to £100,000 before being cut to £25,000 in April this year.

"Anything that encourages capital investment is a good thing, but you have to question how many businesses this will affect," Jones says.

Such rapid changes could look incoherent, but this is not necessarily the case, according to Chris Sanger, head of tax policy at Ernst & Young.

"These incentives are clearly linked to the state of the economy and can accelerate investment. At a time of economic need, such yo-yo policy changes can nevertheless be rational," Sanger said.

Among the other business incentives announced by the chancellor in an effort to encourage growth will be the provision of new money to support Local Enterprise Partnerships, confirmation of £1bn funding for Vince Cable's business bank and an injection of cash into the government's Regional Growth Fund.

The decision to scrap a planned 3p rise in fuel duty was also praised by Jones. "It will help haulage companies and anyone with a big logistics operation," he says.

Though welcome, the incentives announced by Osborne do not amount to a bonanza for business. And there are other incentives advisors would like to see in next year's Budget – or beyond.

"There was no rabbit out of the hat moment," says Hindley, adding he would like to see a scrap to the worldwide debt cap, which restricts company tax deductions for interest expense payable by UK members of a group of companies to the consolidated gross finance expense of the parent.

"It is a compliance nightmare," says Hindley.

Jones at Reeves also called for a break to employers' national insurance contributions. Currently, employers pay 13.8% of their employees' salary to the government as NICs, which Jones says acts as "a real disincentive" to taking on staff.

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