Corporation Tax
Michael Devereux
Oxford University Centre for Business Taxation
and Institute for Fiscal Studies
Overall changes
• Tax rate reduced from 30% to 28%
• R&D tax credits increased
• But a revenue neutral reform, paid for by
• Reduction in capital allowances
• Increase in small companies rate from 19%
to 22%
Rationale for reforms
“to promote growth by enhancing international
competitiveness, encouraging investment and
promoting innovation”
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R&D tax credits
•
Increase in generosity
• SME credit
• Deduction increases from 150% to 175% of
eligible expenditure from April 2008
• Large firms’ credit
• Deduction increases from 125% to 130% of
eligible expenditure from April 2008
• Total cost £150m in 2009-10
Capital allowances
• Expenditure on plant and machinery
• At present
• Written down against taxable profits on 25%
declining balance basis (6% for long-life plant
and machinery)
• From April 08
• Writing-down allowance reduced to 20%
• Long-life rate raised to 10%
• New Annual Investment Allowance – first
£50,000 offset immediately – final design
subject to consultation
Capital allowances
• Industrial buildings
• At present:
• Written down against taxable profits at 4% on
straight line basis
• To be phased out by April 2011
• Effective rate falls to 3% from April 2008, 2%
from April 2009, 1% from April 2010
• Exchequer gain £225m, 2009-10
Small companies rate
• At present: 19%
• Applied to small profits, up to £300k, rather than small
companies
• To be raised to
• 20% in 2007-8, 21% in 2008-9, 22% in 2009-10
• Exchequer gain £820m, 2009-10
• Some irony here!
• a rate-cutting, base-broadening reform for large
companies
• a base-reducing, rate-raising reform for small
companies
Will reforms enhance international
competitiveness?
Possible reasons:
1. Competition is for taxable income (ie. profit
shifting), not for capital
• Reducing the tax rate will reduce gains
from shifting profit abroad
• Purpose of rate cut would be to maintain
or increase revenue
• But rate cut to 28% will cost £2,230m in
2009-10
Will reforms enhance international
competitiveness?
2. Reforms tend to favour more profitable
companies
• for whom allowance rates are relatively
less important
• They may undertake more investment and
innovate more
• They may be more internationally mobile
• (though they may also be better at shifting
profit)
Will reforms enhance international
competitiveness?
3. Investment and location decisions may
depend on tax rate, not on allowance rates
• Maybe an element of truth in this, but
evidence that effective tax rates affect
location