George Osborne’s plan, announced this week, to reduce the UK’s headline corporate tax rate from 20% to 15%, fired the starting pistol for a possible revolution in tax policy. Free from EU regulation the UK will, in theory at least, be able to rewrite its laws to increase competitiveness and create a regulatory framework favourable – even attractive – to business.
But, considering the international tax landscape and the work conducted by the OECD on tax transparency and anti-avoidance, much of which the UK has spearheaded, could our corporate tax laws really change that much? Let us consider four key areas.
A major concern for business is whether tariffs will increase once we are outside the Single Market, with businesses of every size lobbying for the UK to negotiate terms to maintain access. Should the UK not be successful in negotiating access, businesses will face the tough decision on whether to absorb these additional costs or pass them on to their customers – similar to the VAT system. However, if the UK is successful and retains access it is likely to come at a cost, with the EU likely to stipulate compliance with a number of rules and regulations including state aid restrictions.
Introduced in 1973, VAT is the third largest source of Government revenue after income tax and National Insurance. It helpfully tops up the coffers of the Exchequer and for that reason the Government is unlikely to abolish it under the new world order of Brexit. That said, there may be some positive outcomes for business with the potential to introduce lower or zero rates for certain goods and services, which it cannot do under current EU law. Companies with relatively low sales volumes of goods to non-business customers in the EU may also benefit by taking advantage of treating them as zero rated exports.
Compliance with the OECD’s Base Erosion Profit Shifting (BEPS) initiative is unlikely to change. Its reach is far wider than the EU and the UK has played an integral role in its development, adopting a number of the recommendations ahead of other nations. However, the UK will no longer be constrained by the EU’s terms and timetable for implementing BEPS, allowing greater flexibility to go at its own pace.
Headline corporate tax rate
In a bid to lure and retain business within the UK, the Chancellor has embarked on a race to the bottom with a proposal to lower the headline corporate tax rate to 15% – the lowest of any major economy. At present, there are only four nations within the EU with a lower headline rate: Cyprus and Ireland at 12.5% and Bulgaria and Hungary at 10% so the intention clearly signposts the UK as a favourable business landscape – from a tax perspective at least. The UK will be free to introduce subsidies for specific industries and activities, much like Ireland has with its Knowledge Development Box, to further entice companies from neighbouring countries.
While these four tax areas are key for business there are plenty of others and of course, no one yet knows how discussions will pan out during the coming months, and subsequent negotiations following the triggering of Article 50. Perhaps the UK will not have as much power as a truly ‘independent’ country could have, as the EU battles to retain some authority.
However, the Government should seek to negotiate agreements which benefit the business community and which provide stability to continue business as usual as far as is practicable. Businesses will need to keep pace with these discussions and should opportunities arise to participate, they should engage on a sector level to try and protect their interests, and the tax regime will be an important part of that.
As has been quoted in the past, no matter how unpredictable the world becomes, taxes, in some shape or form, will remain one of the few certainties.