Corporate tax reform (2010-2020)

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. Currently the tax is charged at a flat rate of 19%.[1]  Dividends paid out are taxed as income in the hands of shareholders at special dividend rates.[2]

Corporation tax (CT) is estimated to raise £40.3 billion in 2021/22. It is the fourth largest contributor to the Exchequer after income tax, National Insurance contributions (NICs) and VAT.[3] Nearly all corporation tax receipts are accounted for by ‘onshore’ corporation tax; a separate corporation tax regime is in place for offshore firms operating in the oil and gas sector.[4] Over the past decade onshore corporation tax receipts have risen as a share of GDP since 2011/12. As the Office for Budget Responsibility note, “this has been driven by a rising tax base as well as a rising effective tax rate. The tax base reflects strong growth in commercial and industrial company profits from the depressed level they reached in the 2007/08 recession.”[5] This trend in CT receipts is notable because over this period the headline rate of CT was successively cut from 28 per cent in 2010/11 to 20 per cent in 2015/16, and cut again to 19 per cent in 2017/18.[6]

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.”[7]

In his first Budget on 22 June 2010 the then 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%. The small profits rate, paid by companies with annual profits below a set threshold, 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.[8] 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.[9]

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.[10] Over this period the small profits rate was kept at 20%, resulting in a single rate of corporation tax from April 2015. In its last Budget in March 2015 the Coalition 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.[11]  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. The reductions in the main rate alone were estimated to cost about £7.6bn by 2015/16.[12]

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.[13]

In the Conservative Government’s first Budget after the 2015 General Election, the then 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 AIA would be set permanently at £200,000 from 1 January 2016. [14] Subsequently in his 2016 Budget 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.[15] 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’.[16] Taken together these further reductions in the CT rate were forecast to cost just over £3.8 billion by 2020/21.[17] At the time the Government estimated that the reductions in corporation tax since 2010 would “be worth almost £15 billion a year to business by 2021.”[18]

After the EU referendum vote in June 2016, Mr Osborne indicated that the Government might announce further rate reductions in its next Budget.^[19] However, the next month Theresa May succeeded David Cameron as Prime Minister, and appointed Philip Hammond to be Chancellor. Mr Hammond did not announce any further CT rate cuts in his Autumn Statement that year,[20] nor in subsequent Budgets,[21] although in the 2018 Budget the Government announced a temporary two-year increase in the AIA from £200,000 to £1m to cover the period January 2019 to January 2021.[22]

Following the 2019 General Election the Chancellor Rishi Sunak presented the Johnson Government’s first Budget on 11 March 2020, and as part of this announced that the 2% point rate cut to come in from April 2020 would be cancelled.[23] At the time this was forecast to raise £4.6bn in 2020/21, rising to £7.5bn by 2024/25.[24]

This paper provides an overview of corporate tax reforms introduced by the Coalition Government, focusing on the reductions made to the main rate, the decision to set a single rate of tax, and the reforms made to tax reliefs for capital investment. It goes on to examine the debate there has been over the past decade on corporate tax avoidance and international efforts, led by the OECD, to tackle avoidance by multinationals through the ‘Base Erosion and Profit Shifting’ (BEPS) initiative.  It concludes by providing an update on these issues up to the end of 2020.

In the 2021 Budget the Chancellor, Rishi Sunak, announced a major reform to the corporate tax regime, which marks a major change in approach from the past decade: this includes an increase in the rate of tax from 19% to 25% from April 2023, and the reintroduction of a small profits rate for companies with profits under £50,000, with a tapered rate to apply for businesses with profits up to £250,000.[25] This is examined in a second Commons Briefing paper.[26]

Notes

[1]     HMRC, Corporation Tax rates and reliefs, ret’d March 2021. For a summary of the key features of CT see, HMRC, Background and guidance to interpreting Corporation Tax statistics, 24 September 2020

[2]     HMRC, Tax on dividends, ret’d March 2021

[3]     Office for Budget Responsibility, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts). Receipts from these taxes are estimated to be: income tax: £198bn; NICs: £147bn; VAT: £128bn.

[4]     HMRC, Oil and gas: Ring Fence Corporation Tax, July 2015

[5]     OBR, Onshore corporation tax, updated 14 January 2021. A statistical overview of the tax is provided in, HMRC, Corporation Tax Statistics 2020: commentary, September 2020.

[6]     see, OBR, Why have onshore CT receipts performed so well since 2013-14?, 4 December 2018

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

[8]     HC Deb 22 June 2010 cc174-5

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

[10]    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

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

[12]    Helen Miller & Thomas Pope, Corporation tax changes and challenges, IFS Briefing Note BN163, February 2015 p9.

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

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

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

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

[17]    Budget 2016, HC 901, March 2016 p85, p87 (Table 2.1 – item 18; Table 2.2 – item ac)

[18]    op.cit. para 1.159. For a survey of this period see, Helen Miller, What’s been happening to corporation tax?, Institute for Fiscal Studies, 10 May 2017.

[19]    HM Treasury press notice, Statement by the Chancellor following the EU referendum, 27 June 2016; HC Deb 4 July 2016 c622.

[20]    Autumn Statement 2016, Cm 9362, November 2016 para 4.22-3

[21]    Budget 2018, HC 1629, October 2018 para 3.1

[22]    op.cit. para 3.22. In November 2020 the Government announced a further 12-month extension, up to 31 December 2021 (Written Statement HCWS572, 12 November 2020). See also, HMRC, Temporary increase in annual investment allowance for plant and machinery, 3 March 2021.

[23]    HC Deb 11 March 2021 c291. This measure had been mentioned in the Conservative Party’s election manifesto: Conservative and Unionist Party Manifesto 2019: Costings document, December 2019 p6

[24]    Budget 2020, HC 121, March 2020 p67 (Table 2.1 – item 45)

[25]    HC Deb 3 March 2021 cc256-8; Budget 2021, HC 1226, March 2021 para 2.81-2, para 2.111, para 2.51

[26]    Corporate tax reform, Commons Briefing paper CBP9178, 1 July 2021