Corporation tax numbers game that leaves businesses out of pocket
Britain may have a low headline rate but the true picture is not as generous, discovers Tim Wallace
Cutting corporation tax has been a staple Conservative policy for the past decade. Eager to boost the economy by encouraging businesses to start up and grow in Britain, the Government cut the headline rate from 28pc in 2010 to 19pc by 2017, with promises to lower it further.
That plan was abandoned by the Prime Minister last year.
In the election campaign he “postponed” a planned cut to 17pc, on the basis that the Government needed the money for the NHS, and in any case British companies already enjoyed “the lowest [rate] of any major economy”.
Yet that might come as a surprise to anyone who tries to run a business in the UK.
The headline rate is indeed relatively low. At 19pc, it is the joint-fourth lowest of any OECD economy.
Only Hungary (9pc), Ireland (12.5pc) and Lithuania (15pc) are lower.
Spain is far above at 25pc. The US charges just over one-quarter, as the OECD adds together its typical national and state taxes.
Germany comes in at 29.9pc. France trails the pack, just shy of one-third.
This would appear to justify the Prime Minister’s claim. But the headline rate is only one factor. In practice, a whole raft of reliefs and allowances affect the level of corporation tax actually paid by businesses.
The OECD also crunches these numbers to work out how much tax would be paid on a business investment project that breaks even.
This composite effective marginal tax rate, as it is snappily known, represents something closer to the true tax burden for an entrepreneur.
As the UK’s allowances kick in, the effective rate falls from the headline level of 19pc to 13.6pc.
A reasonable fall, one might think. Yet other nations’ numbers plunge much more dramatically. In the US, the rate is cut by more than half, overtaking the UK in terms of competitiveness. Germany, Canada, Israel, Japan and many others surge past Britain. Italy’s rate collapses to minus 56.3pc, effectively showing subsidies through the tax system for these break-even projects. Belgium, Portugal and Poland all join it in negative territory.
It means Britain is 25th in the league, not fourth as the headline numbers indicated.
When it comes to funds raised by corporation taxes, Britain rakes in the equivalent of 2.8pc of GDP, almost bang in line with the OECD average of 3pc.
Australia is at the top, hauling in 5.3pc. Lithuania takes least at 1.5pc.
All of which provides food for thought for Treasury hawks hungry for fresh income.