Documents to download

Corporation tax is charged on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations.[1] 

Corporation tax is estimated to raise £44.1 billion in 2015/16. It is the fourth largest contributor to the Exchequer after income tax, National Insurance contributions and VAT.[2]

The Coalition Government set out its priorities for taxation in its agreement, published in May 2010; in this, it stated that it would “reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”[3]

In his first Budget on 22 June 2010 the Chancellor, George Osborne, announced that the main rate of corporation tax would be cut by 1% each year over the period 2011 to 2014, from 28% to 24%. In addition the small profits rate would be cut by 1% to 20% from April 2011. These rate reductions would be funded partly by cuts in the rates of capital allowances and the annual investment allowance from April 2012.[4] In November 2010 the Government set out its wider programme for reform in its ‘corporate tax road map’: specifically, changes to the ‘controlled foreign company’ (CFC) rules, the tax treatment of innovation and intellectual property, and the taxation of foreign branches.[5]

Over the next three years the Chancellor announced four further reductions in the main rate of tax, so that it fell from 26% in 2011/12 to 20% in 2015/16.[6] From April 2015 the main rate is aligned with the small profits rate, setting a single rate of corporation tax. In its last Budget in March 2015 the Government noted that the UK was expected to have the joint lowest rate of corporation tax across the countries composing the G20, and a rate significantly lower than the US, Japan, France and Germany.[7]  At the time the Institute for Fiscal Studies estimated that the net annual cost of the Coalition Government’s reforms to corporation tax reached about £7.9 billion by 2015/16.[8]

One of the changes made in the Coalition Government’s first Budget in June 2010 was a cut in the value of capital allowances – the reliefs given to business to offset their capital investment against their taxable profits. Subsequently in December 2012 Mr Osborne announced that the value of the Annual Investment Allowance (AIA), which had been cut from £100,000 to £25,000, would be increased to £250,000 from 1 January 2013, for two years. In his 2014 Budget Mr Osborne announced that from April 2014 the allowance would be doubled, to £500,000, until December 2015.[9]

In his first Budget after the 2015 General Election, the Chancellor, Mr Osborne, announced two further reductions in the rate of corporation tax over the next Parliament: a cut to 19% in 2017, and to 18% in 2020. In addition the Annual Investment Allowance would be set permanently at £200,000 from 1 January 2016. [10] Subsequently in his Budget on 16 March 2016 Mr Osborne confirmed that the rate would be cut to 17% in 2020, to ensure that the UK would have the lowest tax rate across the G20.[11] The Chancellor also announced a series of measures for the next four years to reduce tax avoidance and to simplify and modernise the tax regime, set out in a ‘business tax road map’ published alongside the Budget.[12] Taken together these further reductions in the rate of corporate tax are forecast to cost just over £3.8 billion in 2020/21.[13]

The Government estimates that the cuts in corporation tax since 2010 “will be worth almost £15 billion a year to business by 2021.”[14] In a recent report on the changes to the composition of tax revenues, the Institute for Fiscal Studies has commented that, on current forecasts, the Government’s policy choices will lead to a decline in corporation tax receipts: “this marks a break with a long-run trend that shows volatility with the economic cycle but no persistent decline in receipts.”[15]

Following the EU referendum vote on 23 June, Mr Osborne suggested that there was likely to be a Budget statement this autumn.[16] Subsequently Mr Osborne argued that as part of its ongoing strategy to attract business investment the Government should aim to cut the rate of corporation tax further to its existing plans for a 17% rate.[17] However, on 13 July Theresa May succeeded David Cameron as Prime Minister, and appointed Philip Hammond to be Chancellor. In his first interview Mr Hammond ruled out an emergency Budget, while confirming that he would set out the Government’s revised economic strategy in the Autumn Statement.[18]

Notes :

[1]     A basic description of the tax is given with statistics on its yield, the cost of allowances, and liabilities by sector, in HM Revenue & Customs, Corporation tax statistics, August 2015.

[2]     Office for Budget Responsibility, Economic and fiscal outlook, Cm 9212, March 2016 p111 (Table 4.6). Receipts from these taxes are estimated to be: income tax: £169.9bn; NICs: £114.9bn; VAT: £115.8bn.

[3]     HM Government, The Coalition: our programme for government, May 2010 p10

[4]     HC Deb 22 June 2010 cc174-5

[5]     HM Treasury, Corporate tax reform: delivering a more competitive system, November 2010

[6]     Budget 2011 HC 836, March 2011 para 1.74; Budget 2012 HC 1853, March 2012 para 1.186; Autumn Statement Cm 8480, December 2012 para 1.130; Budget 2013 HC 1033 March 2013 para 1.121

[7]     Budget 2015, HC 1093, March 2015 p36 (Chart 1.10)

[8]     Helen Miller & Thomas Pope, Corporation tax changes and challenges, IFS Briefing Note BN163, February 2015 p9. This is based on official policy costings. The reductions in the main rate alone were estimated to cost about £7.6bn by 2015/16.

[9]     Autumn Statement, Cm 8480, December 2012 para 2.74; Budget 2014 HC 1104, March 2014 para 2.107

[10]    HC Deb 8 July 2015 c332; Summer Budget 2015, HC264, July 2015 para 1.239-42

[11]    HC Deb 16 March 2016 cc957-8; Budget 2016, HC901, March 2016 para 1.54-9

[12]    HM Treasury, Business tax road map, March 2016

[13]    Budget 2016, HC901, March 2016 p85, p87 (Table 2.1 – item 18; Table 2.2 – item ac)

[14]    op.cit. para 1.159

[15]    Helen Miller & Thomas Pope, The changing composition of UK tax revenues, IFS Briefing Note BN182, April 2016 p2

[16]    HM Treasury press notice, Statement by the Chancellor following the EU referendum, 27 June 2016

[17]    In answer to an urgent question on his plans, Mr Osborne said, “we should aim for a rate of 15% and preferably lower, because if we are pro-business, we are pro-jobs, pro-living standards and pro-working people” (HC Deb 4 July 2016 c622).

[18]    “Philip Hammond: Financial markets ‘rattled’ by Out vote”, BBC news online, 14 July 2016; “New chancellor Philip Hammond to scale back austerity”, Financial Times, 14 July 2016

Documents to download

Related posts

  • This paper discusses the way that Parliament scrutinises the Government's proposals for taxation, set out in the annual Budget statement. It looks at how this procedure may be affected by the timing of a General Election, and the decision in 2017 to move the Budget from the Spring to the Autumn. It also provides some suggestions for further reading.

  • This note sets out the rules regarding the tax treatment of alcohol and tobacco purchases made by passengers, and sets out proposals the Government has published for reforming these rules in the context of Brexit, and the UK’s departure from the EU single market.