James Morris

Written by: James Morris

James Morris

Partner, Head of Corporate Tax

Is PMs corporation tax announcement economic or political?

The Prime Minister’s plan to revoke the reduction in corporation tax rate to 17 per cent from April 2020 generated significant attention at the start of the week. 

Whilst not as dramatic as Labour’s proposed corporation tax rate hike to 26 per cent, it does perhaps signal an end to the Corporate Tax Road Map published by David Cameron’s Government in 2010 and a decade long decline in the headline rate of corporation tax. 

Against a background of limited growth in the domestic economy and a looming Brexit, consideration must be given to whether the Prime Minister’s tax policy is driven by economic evidence or political necessity. 

If economic evidence has influenced the policy, it is a clear move away from an OECD report in 2010 that found corporate income taxes to be the most harmful to growth as they discourage investment in capital and productivity improvements. 

Similarly, in 2010, the Conservative Party policy of corporation tax rate deduction was supported by HMRC’s General Equilibrium Model as a measure to stimulate growth and investment through supply side reforms. Have these now been proved wrong or is 19 per cent the optimum level of corporation tax with no further gains to be made through further reduction? It will be interesting to see whether further evidence is provided to substantiate the policy. 

An alternative view that the sceptical among us may hold is that the Prime Minister’s proposed corporation tax policy is a political roll of the dice. Has the Prime Minister surrendered to pressure to avoid the perception of being the leader of a party of corporate tax giveaways? Only time will tell on this point.

Finally, for those who enjoy a bit of deferred tax, we should consider the impact of recent announcements as neither a Conservative nor Labour Government plan to maintain the reduction in corporation tax rate. In the short term the announcements will have no impact upon the rate applicable in deferred tax calculations. Until we’ve had the general election, established a Government and enacted legislation to maintain or increase the headline rate the proposed corporation tax rates are simply speculation and the 17 per cent rate continues to apply.

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