New Chancellor Philip Hammond has stressed that “Britain is open for business” and it is thought he is likely to honour former Chancellor George Osborne’s commitment to reduce corporation tax to 15 per cent.
It is also thought possible that he might repeal the widely disliked £3bn apprentice tax, as the Government is desperate for big businesses not to move their headquarters to the continent in the wake of the vote for the UK to leave the European Union.
However, while many believe that cutting corporation tax would keep firms in the UK and stimulate investment, some critics maintain that other options, such as increasing allowances for capital investment, could be equally beneficial.
In addition, cuts in the rate of the tax to below 15 per cent would have a significant impact on the wider tax system, particularly for small firms, as they would exacerbate the so-called ‘tax-motivated incorporation’ problem.
This is the distortion that encourages smaller business owners to set themselves up as companies and take their remuneration as dividends rather than salary, which last year cost the Exchequer over £1bn a year.
A further reduction in corporation tax would require dividend tax rates to rise again and the alignment of rates of personal tax across different forms of income has already been described as “double taxation”, with further increases being unlikely to be popular with many small business owners.
Meanwhile, even if he is unwilling to repeal it, Mr Hammond is being urged on all sides to at least delay the new apprenticeship levy, which is due to come into effect next April, as many see it as purely a tax on big business. However, he may be loath to do so, as the move is likely to take in £2.7bn in its first year.