Budget2011: Corporation tax cut could encourage foreign investment

THE ANNOUNCEMENT of a 2% cut in the main corporation tax rate in today's Budget was a pleasant surprise for many tax advisers and businesses. Most were expecting a 1% cut in corporation tax, which is currently at 28%.
 
The money involved in the tax cut isn't huge (£425m in 2011/12, rising to £1.07bn in 2015/16). However, tax experts reckon that the reductions could help encourage more foreign businesses to invest in the UK. Experts also reckon that a lower business tax rate will make corporate tax avoidance schemes less tempting because there will be less of a saving.
 
In his 2011 Budget statement earlier today, Chancellor George Osborne said that from 1 April, corporation tax will be reduced to 26%, and by 1% in each of the following three years, to bring it to 23%.
 
The hope is that a lower corporation tax will make the UK a more attractive place to do business than countries with higher corporation tax rates - for example Germany and France. "A reduction in the main rate of corporation tax will reduce capital losses for businesses and promote higher levels of business investment," HM Revenue & Customs said in a Budget statement.
 
Larger businesses, rather than small and medium-sized enterprises, will be the main beneficiaries of the cut to the main corporation tax rate. This is because there are three rates of corporation tax, based on the size of a business's profit. The rates are 21% for profits of up to £300,000; a 'marginal rate' of 29.75% on profits between £300,001 to £1.5m; and a main rate of 28% for profits of more than £1.5m. The cuts to corporation tax announced in today's Budget affect only the main rate of corporation tax.
 
Kevin Hindley, managing director at Alvarez & Marsal Taxand, a tax advisory firm, said the announcement of cuts to corporation tax was "fantastic" news and would "send a message" that the UK is a good place to do business in.
 
"Foreign businesses always look at the headline corporation tax rate when deciding where to base themselves," he said.
 
Barry Murphy, partner at accountant PwC, agreed: "[The corporation tax cuts] will allow UK business to thrive internationally without hampered by the UK tax system."
 
Business groups also welcomed the corporation tax cut. John Cridland, director general of employers' group, the CBI, said: "This Budget will help businesses grow and create jobs. The chancellor has made clear the UK is open for business. The extra 1p cut in corporation tax will help firms increase investment."