Brown woos big business

  • Robert Peston
  • 21 Mar 07, 03:08 PM

There were howlers in my hastily drafted initial budget blog. Here is my more considered view with - I hope - fewer solecisms.

The big point is that the corporate tax reforms, including the changes to depreciation allowances, are good for most big profitable companies - especially those which might consider relocating to lower tax countries.

The reason is simple: they'll be paying two percentage points less of corporation tax.

But the changes to the allowances and also the increase in the small-company tax rate means there will also be losers.

A small company that invests a fair chunk of its profits will probably be better off. But those that don't invest will definitely be poorer.

Among bigger companies, any business with lots of hotels or industrial buildings or runways will lose, as a result of the abolition of the industrial buildings allowance

There's also a redefinition of what counts as fixed long-life assets and what counts as plant and machinery, to crack down on companies that obtain generous equipment allowances on fixtures and fittings in buildings.

Broadly, if a bit of kit is nailed down, it can no longer be classified as plant and machinery. So henceforth it will only obtain long-life asset relief of 10 per cent (which is being raised from 6 per cent) as opposed to the previous 25 per cent relief on equipment.

This is where it all becomes a bit complicated and involved. That 25 per cent per annum relief on investment in plant and machinery is being cut to 20 per cent. So any company that invests in lots of equipment will be hurt.

And, as I said, any company that has lots of buildings will be hit.

All of that doesn't sound like good news for BAA, or some transport businesses, or energy companies and utilities, or Network Rail or the Royal Mail (and in Royal Mail's case, that's a potential headache for Government, as its owner).

And my hunch is that BT will also be quite significantly hit.

But what the losers have in common is that it's rather harder for many of them to base themselves abroad for tax purposes.

The winners are those businesses with fewer industrial buildings or which have significant net cash flows, such as creative companies, banks, assorted financial service providers, other service companies, retailers, pharma and high tech.

For many of them, if the subscription price of being a member of the club of British companies - in terms of tax payable - were to become too steep, it would be relatively easy for them to emigrate.

Today Gordon Brown has cut that membership fee and hopes the likes of WPP, Vodafone, HSBC and Barclays can be persuaded to pay their reduced British tax with pride and enthusiasm (or at least not to do a runner to Dublin, or Amsterdam).

A tax reforming budget

  • Robert Peston
  • 21 Mar 07, 12:52 PM

George Osborne will be feeling pretty pleased with himself, because the Chancellor’s plans to cut the headline rate of corporation tax and simplify the company taxation system bear a striking resemblance to proposals he announced on Monday.

Brown is cutting the headline rate of corporation tax by two percentage points to 28 per cent from April 2008. And he’ll recoup the cost of that by recalibrating a series of depreciation allowances (or changing the rates at which companies can offset the costs of the deterioration of assets against their tax charges).

For small companies, there’s a similar mix of positives and negatives. The headline rate of small company tax is going up from 20 per cent to 22 per cent. The reason is that the Treasury wants to stem the tide of individuals classifying themselves as companies to take advantage of the low small-company tax rate.

However, the Treasury is endeavouring to ensure that genuine small companies aren’t disadvantaged, by massively increasing the depreciation allowance on investment up to £50,000 per annum (which will apply to all companies, big or small). On up to £50,000 of investment, there’ll be an annual tax allowance of 100 per cent – which certainly looks very generous.

There will also be some big-company losers: the depreciation allowance for industrial buildings will be abolished; and there’ll be a crackdown on the way some companies classify fixtures and fittings in buildings as “equipment” in order to benefit from generous depreciation allowances.

However, the depreciation rate for so-called long life assets is going up from 6 per cent to 10 per cent. But the depreciation rate on short life assets is being cut rom 25 per cent to 20 per cent.

There’ll also be yet more tax incentives for research and development, with the tax credit for R&D going up from 150 per cent to 175 per cent.

All in all, I would expect big companies to welcome these measures. They will see it as a welcome attempt to restore the tax competitiveness of the UK, in the face of a worldwide downward trend for corporate taxes.

For small businesses, the reaction will be more mixed. Some won’t like the increase in their tax rate, but many small businesses may end up paying less tax thanks to the introduction of the more generous investment allowance.

The net cost of this corporate tax package looks broadly neutral to me – but I can’t yet be certain of that.

Company taxes at Budget heart

  • Robert Peston
  • 21 Mar 07, 07:25 AM

Part of the background to today's Budget is a growing concern that businesses in Britain are paying too much tax and that the tax system here is a bit too complicated.

banks_2.jpgFor example - and as I wrote here last night - it has emerged that the head office of the giant bank being created by the merger under negotiation between Barclays and ABN would be in the Netherlands.

That means that the new superbank would probably be registered for tax purposes in the Netherlands, which over time would lead to quite a significant loss in tax to the Exchequer.

Now Barclays is being careful to say that the decision hasn't been taken. And it is very keen not to lay into the chancellor at this delicate juncture.

But accountants tell me that it would be mad not to base itself in the Netherlands, because the tax advantages would be huge.

So part of what the chancellor will attempt to do today is restore the competitiveness of the UK in a tax sense.

According to the CBI, in 1997 the UK had the third lowest rate of corporation tax among the 15 countries which were then members of the European Union.

At the time, Gordon Brown took very public pride in cutting the corporation-tax rate.

However the headline corporation tax rate has been unchanged at 30% since 2000, while other countries have been cutting their tax rates.

Today, the UK's corporation tax rate is the seventh highest among the current 27 members of the EU.

It's important not to overstate the gravity of our fall down this league table.

The tax rates of some of our very biggest competitors remain higher than ours, as does the actual burden of taxation (which includes the impact of all taxes on companies, not just corporation tax).

The Treasury for example is keen to point out that the UK still has the lowest rate among the G7 leading global economies. And for example the tax burden on companies in Germany and France remains significantly higher than it is in the UK.

But the trend, of the UK becoming less competitive when it comes to company taxes, is clear and unambiguous.

Among the chancellor's great obsessions of the moment is that the British economy mustn't become less competitive at a time of intense worldwide competition for the best jobs between countries.

I therefore expect him to announce measures in the Budget to lift Britain's position in the league table of tax competitiveness.

That could mean that the rate of corporation tax would be cut over time - and almost certainly that steps will be taken to reduce the complexity of the tax system.

If he does do that - and as I say, the odds of something happening in that direction are high - the shadow chancellor, George Osborne, would be able to do the "I-told-you-so" dance.

On Monday, he urged the chancellor to cut three pence off the headline rate of corporation tax, funded mainly by a streamlining between the allowances the tax man gives companies for wear and tear or depreciation of physical assets and the rate at which companies in practice write off those assets.

Osborne's suggestion highlights perhaps the most important constraint on Brown's tax reforming ambitions. The chancellor simply doesn't have the money available to cut taxes unless he can boost revenues to the Exchequer in other ways or cut outgoings.

So whatever he does would probably be a long term process. And it would be funded by constraining the growth of public spending or finding compensating revenues.

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