Low Corporation Tax Rates in the UK

Many countries around the world have long competed to attract foreign businesses by having an attractive business tax regime and low corporation tax rates. This explains why Google is based in Ireland, why eBay operates their business from Luxembourg and why McDonalds operates from Switzerland.

And the United Kingdom has been a part of this competition, cutting its corporation tax rate from 30% back in 2007 down to 21% in 2014 and it is set to go down even further to 20% next year, the lowest level in any major economy. This approach has not been without its critics both in the UK and in Europe. Nevertheless, the UK now has a corporation tax below the European average and soon to be half the 40% rate in the USA, which explains why so many US corporations are seeking a more favourable country to operate from.

KPMG recently produced statistics showing the variation in corporation tax around the world, which clearly showed the UK at the lower end of European rates, unlike France, Germany and Italy which have corporation tax rates of 33%, 29% and 31%, respectively.

Low Corporation Tax Graph

 

UK tax incentives have been intended to generate jobs and attract “genuine business investment”, according to the Chancellor, George Osborne but there have been claims that the United Kingdom is becoming a tax haven for foreign companies.

So what do these low corporation tax rates mean for small businesses?

Many small businesses are more concerned about the high cost of Business Rates than low corporation tax because these have to be paid regardless of how much profit a company makes and have been rising steadily in recent years.  Whereas the corporation tax rate is already 20 per cent of profits for companies with profits less than £300,000.

Nevertheless, the UK’s low corporation tax rate is significantly lower than the income tax rate so this does offer small business owners the opportunity to minimise their tax burden with efficient tax planning.

However, only last month Lord Saatchi, the chairman of the Centre for Policy Studies, called on the UK Government to abolish corporation tax altogether for small companies with less than 50 employees in order to increase competition with larger companies. It remains to be seen whether this will ever happen but if it did it would be a major cultural shift that could increase economic growth and lower unemployment.

 

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