News

Summer Budget 2015: Cut in corporation tax welcomed by British businesses

5 min read

08 July 2015

One of the celebrated announcements for British businesses in George Osborne's speech was the cut in corporation tax. It is to be cut to 19 per cent in 2017, followed by a follow-up reduction to 18 per cent by 2020.

Summer Budget 2015: A 500-word summary for the UK business community

The chancellor said that Britain currently enjoys the joint lowest rate of corporation tax of the G20 countries and he would continue on this path so “businesses can grow with confidence”. Osborne reflected on the strength of the British economy, mentioning that it is growing faster than “any other major advanced economy”, and also credited businesses with creating two million more jobs.

He pointed to the fact the Conservatives had cut corporation tax from 28 per cent to 20 per cent over the course of the last parliament, deeming it “one of the biggest boosts British business has ever seen”.

In order to take it lower, something had to be done about the strong incentives that existed for people to self-incorporate and pay lower rates of tax due on dividends. Osborne said the government had inherited “a very complex and archaic system” and he would be undertaking a “long overdue reform”.

Bobby Lane, business advisor and partner at accountancy firm Shelley Stock Hutter, welcomed the news but warned: “Our largest companies are paying the same rate as our micro businesses. It would have been a real further boost if a lower rate for the smallest businesses and start-ups had been introduced.”

The dividend tax credit is to be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers. Rates will be set at 7.5 per cent, 32.5 per cent and 38.1 per cent, with an increase of 7.5 per cent where dividend income exceeds £5,000. Osborne said that 85 per cent of those who receive dividends will see no change or be better off and over a million will see their tax cut. Dividends paid within pensions and ISAs will remain tax-free and unaffected by the changes.

Read more from our summer Budget commentary:

The dividend reforms were a precursor to Osborne announcing further cuts in corporation tax as Britain “cannot afford to stand still while others rush ahead”.

Howard Sears, managing director of VC firm Astuta, said it was “a barnstorming budget” for British businesses.

“Confidence among businesses is already strong but these latest reductions in corporation tax will supercharge it,” he said. Sears said the changes sent an important message to UK business owners as well as giving them “a strong competitive edge and all-important breathing space to grow”.

Osborne also mentioned that there would be a broadening of the base for corporation tax by removing “for future transactions only” the annual deduction for acquired reputational value.

For big companies with profit of over £20m a year, corporation tax payment dates will be brought forward, “so tax is paid closer to the point at which profits are earned”. The chancellor said he felt this was fair and more in line with what the government is doing in personal tax.

Stella Amiss, international tax partner at PwC, called it a “bold and surprise move”. “

“Businesses weren’t calling for a further rate reduction, and it’s expensive –  £6.6bn over five years,” she added. “But it sends a clear signal that the Government is pro tax competition and this message may be helpful in attracting overseas business to UK shores.” 

Amiss also said the anti-avoidance measures for corporates were “relatively piecemeal” and would simply be “tinkering around the edges rather than making a big difference”.