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Brexit and business: will corporate tax cut really help?

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Brexit and business: will corporate tax cut really help?

The recently deposed British Chancellor George Osborne’s proclamation that a 5% reduction in corporation tax is on the cards will have caused as much delight as consternation. Many remain convinced that lowering corporation tax is a sure-fire means to boosting any economy, and could be the key to retaining Britain’s status as a ‘gateway to Europe’. But what are the realities of such a move for businesses and citizens, and will it even happen now that he’s gone?

Lowering corporation tax has obvious long-term benefits. After a sustained period of recession, the Republic of Ireland has recovered in large part due to its low rate of corporation tax. The 12.5% levy has encouraged businesses including Google, Apple and drug manufacturer Pfizer to relocate to the Emerald Isle, boosting an economy that was so recently considered along with Greece as one of Europe’s most destitute. A move to 15% would bring the UK in line with Canada, the world’s 10th largest economy (pre-Brexit figures put the UK in 5th).

The obvious issue is a short-term fall in government revenue. A Tax Foundation report assessing the potential for a corporation tax cut in the U.S. found that even accounting for an increase in GDP, dropping to 15% would have resulted in an initial $1.5 trillion shortfall in public funds. This would represent a much larger drop of 20% from the current U.S. rate, but it hints at the issues an unstable government and untested leadership could face over the next few years.

The unknown element here is where the axe might fall. A rise in VAT to cover this gap might discourage people from spending, presenting a challenge to government and businesses. Equally, the long-term prospect of increased investment could be a rise in employment and wages as more businesses enjoy success. This might offset the impact of a rise, as well as providing a fillip to the currently downtrodden housing market, where enquiries were already falling before the referendum decision.

For many, it may even boil down to an ideological issue: the continuation and extension of cuts to local authorities and public services. Further burdens on already struggling police, health and education services could potentially lower people’s basic quality of life, and make the UK a less attractive proposition all round.

Is it likely to happen? Like any Chancellor, Osborne will have taken most of his cues from advisors and civil servants, so the idea likely has wider backing. But it should also be taken with a grain of salt. It would take some serious cognitive dissonance for new Prime Minister Theresa May to give businesses a helping hand, when her maiden speech was all about the needs of the poor and disadvantaged.

The tax affairs of large businesses remain under the microscope, too. When a beaming George Osborne announced earlier this year that less than £100m of historic tax had been wrangled from Google, he drew little more than ridicule. An assault on big business wasn’t enough to win the Labour Party a general election, but the sense of public disdain is palpable. People seem to trust the motives of business, particularly international corporations, about as much as the motives of politicians.

Perhaps more importantly, European leaders and analysts have long been worried that steadily falling rates of corporation tax could trigger a ‘race to the bottom’ where corporations are the main beneficiaries. Indeed, one of the UK’s recent worries was being drawn into a unified European system of corporation tax, losing an element of fiscal independence. With tense Brexit negotiations on the horizon, proposing this tax cut could yet be a bartering chip in order to remain in the European Economic Area.

A former journalist and scriptwriter, Katya Puyraud is the co-owner of Euro Start Entreprises – helping expats, entrepreneurs and businesses with company formation, international tax advice and accounting across Europe and the rest of the world.

 

I am the founder of Startup Today. I am the main writer and have put in many hours of work into creating this blog. If you want to find out more about me then lets get in contact.

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