TaxCorporate TaxBudget 09: Comment – ‘not a budget for business’

Budget 09: Comment - ‘not a budget for business’

‘Not a budget for business, or anyone else’ says Michael Devereux, director of Oxford University Centre for Business Taxation

A historic budget, indeed. Attention will focus on the huge mountain of debt
to be steadied over time only in the event of rather optimistic growth forecasts
coming true.

And what the chancellor didn’t even mention in his speech was the
confirmation of the reform of our system of taxing international business that
has been around for a century or more. That really is an important change in
principle, if not immediate practice. In effect, the UK no longer asserts the
right to tax the worldwide income of UK resident companies.

Instead, it seeks only to tax income arising in the UK. That change ought to
– though may not – have profound implications for the new controlled foreign
company regime, over which discussions are still taking place.

But what of the immediate help to business? The capital allowance rate has
been increased to 40% for one year only. That may have a small effect on
investment, but mainly to accelerate expenditure so that it takes place by the
end of the fiscal year.

Cash flows will be helped a little by the extension of the scheme to permit
tax losses up to £50,000 to be carried back for three years, and by allowing the
inflation uprating of business rates to be smoothed over three years.

But these three measures together cost only £2.4bn in 2009/10. This is small
beer by most of the standards of this budget. It is a drop in the ocean compared
to the borrowing requirement. It is a fraction of the cost of the VAT reduction
of £7.8bn.

And it is small in relation to the drop in the expected revenue from
corporation tax, which is forecast to fall from £46.9bn in 2007/08 to £43.4bn in
2008/09 and to only £34.7bn in 2009/10.

Of course, a £12bn fall in corporation tax may seem like a benefit to
business. But at a 28% tax rate, that represents a drop in profit of over £40bn.
If business profit is expected to fall by that figure next year, then investment
and employment will be badly hit.

The chancellor was constrained by the debt mountain in how far he could
offset the effects of the downturn. But we cannot realistically expect a boost
of only £2.4bn to make much difference.

So not a budget for business, or indeed really for anyone else either.

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