It is believed that Chancellor George Osborne’s surprise cut in Corporation Tax in his Budget last week could increase foreign investment in the UK by up to 2 per cent, with a cut to 18 per cent; the lowest in the G20 promised by 2020.
However, according to the Oxford University Centre for Business Taxation, the UK offers relatively low levels of tax relief for capital spending, which means it will still lag behind Russia and Turkey when it comes to the effective tax rates that influence investment location decisions.
That said, the Centre, which conducted a study on the impact of such a move, believes that the tax cut would have a “significant cost in terms of foregone tax revenue”, which could come to around £2.5bn by 2020-21.
A spokesman for the Centre described the cut as “aggressive” and said that the decision to dip below the main personal income tax rate was a surprise, as it had been believed that 20 per cent would be as far as the Chancellor would go.
He added that the cut in corporate tax rates could herald the end of the tax in its present form within the next 20 years. Meanwhile, other critics fear that the cut could upset other governments in the EU and the US, who see the country becoming a tax haven in relative terms.
Others say it could mean that the UK would fall foul of Japanese anti-tax haven laws, known as controlled foreign companies rules, unless Japan decides to loosen its rules again, as it did before the UK cut the rate to 20 per cent in April.
However, other commentators, such as the Institute of Directors, have welcomed the cut in the corporation tax rate and have no concerns over its impact on foreign trade, as even after the cut, there will be seven other G20 countries with a lower effective marginal tax rate.