UK corporation tax lowered to 21% from 2014
Chancellor says tax rate lowest of any major Western Economy
By Gaurav Sharma | CFO UK | Published 17:40, 05 December 12
The UK will lower its main rate of corporation tax to 21 percent in 2014 from 22 percent in 2013, chancellor of the exchequer George Osborne announced on Wednesday.
Delivering his autumn budget statement to parliament, Osborne urged investors to: "Come here, create jobs here; Britain is open for business. This would be the lowest rate of (corporation) tax for any major Western economy."
In a range of fresh announcements, the chancellor said the government would allocate £5 billion in capital investment for UK infrastructure including £1 billion towards major roads upgrade and expanding the London Underground’s Northern Line to Battersea.
In a populist move, he said there would be no 3 pence rise in UK fuel duty in January, cancelling the measure altogether.
Osborne also announced an increase in funding for the UKTI of 25 percent per annum, a new £1.5 billion finance facility to support UK exports, plans for replacement of the "discredited" private finance initiatives (PFI) and gave the HMRC more resources and upto £77 million in funding to tackle tax avoidance.
However, the government's bank levy will increase from 0.105 percent of banks' balance sheets to 0.130 percent, he said. In other measures, Osborne announced a consultation exercise on new tax incentives for the shale gas industry.
The raft of new measures were accompanied by a tacit acknowledgement that his plans for reducing the country's deficit were not on song and were being accompanied by low economic growth.
"The UK economy is healing - it is a hard road but we're getting there. Turning back now would be disaster, Eurozone will continue to impact UK growth for several years. The economic contraction of 2008-09 was deeper than thought with GDP shrinking by 6.3 percent; the largest shock since World War II," Osborne told Parliament.
Bleak data in "austere" times
According to the Office for Budget Responsibility (OBR), the UK economy will see -0.1 percent growth in 2012 followed by 1.2 percent next year, then 2.0 percent in 2014, 2.3 percent in 2015, 2.7 percent in 2016 and 2.8 percent in 2017, Osborne said.
On the UK deficit front, the chancellor forecast a fall from 7.9 percent in 2011 to 6.9 percent in 2012, then 6.1 percent, 5.2 percent, 4.2 percent, and 2.6 percent, reaching 1.6 percent in 2017-18.
Osborne said fiscal consolidation will now take three more years than the government originally planned for. He indicated that it would take £17 billion of extra cuts per annum to hit the current debt target, but announced that the government is sticking to its current spending plans.
To this effect, Whitehall department resource budgets are to be cut by 1 percent next year and 2 percent in 2014, with the NHS and schools exempted. Local government budgets will be cut by 2 percent in 2014. However, the chancellor said strategic departments such as the Ministry of Defence would be given flexibility to meet their cuts target.
In summation, Osborne described the measures as "fiscally neutral", neither pushing money into nor taking it out of the economy.
Market's mixed response
Commenting on the autumn statement, Ian Stewart, chief economist at Deloitte, opined that for the wider economy the worst is probably past.
"OBR and most other forecasters expect the UK economy to grow modestly next year. However, for now, at least, this looks like a choppy, fragile recovery. The big economic numbers in the Autumn Statement are catching up with the reality of the last six months – a double dip recession in Europe and a weaker global backdrop than expected," he said.
"The Chancellor has sensibly decided to spread the fiscal squeeze over a longer period than to try to make up for lost ground now with still more tightening," Stewart added warning that 70 percent of the planned tax rises have already taken effect, but 70 percent of the cuts to public spending still lie ahead.
KPMG chief economist Andrew Smith said "austerity" means what it says on the tin and getting even the 1 percent economic growth, which the OBR has pencilled in next year, may require further help from the Bank of England.
"The government strategy is to combine deficit reduction with economic recovery, but at the moment we are not getting much of either. Output is undershooting and government borrowing overshooting even the March Budget’s modest expectations. Growth forecasts have been downgraded, the austerity programme extended to 2018 and the debt rule rolled on a year," Smith added.
With concerns being raised about the UK’s cherished AAA rating, agency Fitch Ratings said the chancellor's statement confirmed the scale of the multi-year fiscal consolidation challenge the country faces against a weak economic backdrop.
The OBR now judges that the "supplementary target" of falling public sector net debt by 2015-16 is likely to be missed.
Gergely Kiss and Douglas Renwick of Fitch's sovereign ratings team in London said, "This is consistent with our assessment in September. The government has chosen not to chase the supplementary target by deploying additional consolidation measures over the next two years. In our view, missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the rating."
"We forecast gross general government debt to peak at 97 percent in 2015-16, approaching the upper limit of the level consistent with the UK retaining its 'AAA' status," they added.
Fitch placed the UK's AAA rating on Negative Outlook in March 2012. The agency will conduct a further formal review of the rating in 2013, incorporating the government's 2013 budget.
Away from macroeconomic permutations, the Chancellor’s move to cut the headline rate of corporation tax was largely well received.
Francesca Lagerberg, head of tax at Grant Thornton UK, said, "Against expectations the Chancellor managed to find a small sticking plaster to help with 'healing' the economy by finding enough money to accelerate the cut in the mainstream rate of corporation tax…This makes the UK one of the most competitive corporate tax rate jurisdictions in Europe.”
However, Lagerberg felt the Chancellor did not go as far as merging the small corporate tax rate (20 percent) with the mainstream rate and that may be one for the future. If the Treasury does go down this route, it will provide simplification as well as a competitive framework, she added.
Toby Ryland, corporate tax partner at HW Fisher & Co, also described the tax move as a positive development which may attract more businesses to the UK.
"Indeed, the Chancellor is supporting the corporate sector but at the expense of taxpayers. The reduction in corporation tax is being funded through below-inflation increases in tax bands and the restriction of pension tax relief," he said.
Industry lobby groups seek silver lining
Michael Izza, chief executive of ICAEW, said, "The Chancellor has gone for growth and wants to show that the UK is open for business. The reduction in corporation tax will be welcome news for larger companies and will encourage inward investment."
Osborne will hope that the new measures will impress the 67 percent of ICAEW business members who are not confident that the Government’s current plan for the economy will deliver growth this Parliament, Izza added.
The CBI said infrastructure funding announced in the statement should boost investment and create jobs. The business lobby group’s director general, John Cridland, said, "The government now has everything to prove by delivering. Businesses need to see the chancellor's words translated into building sites on the ground."
British Bankers' Association chief executive Anthony Browner did not seem irked by the rise in the banks' levy but demanded stability and consistency when it came to taxation.
"The levy is designed to offset the effect of the corporation tax cuts for other business sectors. The banks are committed to meeting all of their tax obligations. What they ask – along with all businesses – is stability in the tax system so they can reasonably plan for the future," he said.
Photo © Reuters, 5 December, 2012: UK Chancellor George Osborne and Treasury Secretary Danny Alexander leave for Parliament.
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