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Budget 2011: Corporation tax proposals

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Next week’s Finance Bill will include legislation to reduce the main rate of corporation tax to 26% from 1 April 2011 and 25% from 1 April 2012. The small profits rate will be reduced to 20%, as announced in the June 2010 Budget, from 1 April 2011.

The supplementary charge levied on profits of UK oil and gas production will be increased from 20% to 32% to fund the government’s new ‘fair fuel stabiliser’.

‘If in future years the oil price falls below a set trigger price on a sustained basis, the government will reduce the supplementary charge back towards 20% on a staged and affordable basis while prices remain low,’ the Treasury said, suggesting that a trigger price of US $75 per barrel would be appropriate.

The Finance Bill will also include interim improvements to the controlled foreign companies (CFC) rules ‘as a first step to make the rules easier to operate ahead of full reform in 2012’. The interim changes will have effect for accounting periods beginning on or after 1 January 2011, subject to certain transitional rules.

‘Following consultation, a number of changes were made to ensure that the improvements delivered the desired outcome,’ the Treasury said. A consultation document on the ‘full’ CFC reform will be published in May. Draft legislation is planned for autumn 2011, for inclusion in Finance Bill 2012.

Some ‘significant’ changes have been made to draft legislation introducing an exemption for foreign branch profits.

Small busineses ‘will be disappointed’
Chris Lee, Partner in the business tax team at accountants James Cowper, said: ‘Small businesses, often cited as the life-blood of Britain PLC, will be disappointed that changes to the small profits rate will not fall further than the one per cent previously announced.’

But John Cridland, the CBI’s Director-General, said the Budget ‘will help businesses grow and create jobs’. The extra 1p cut in the main rate of corporation tax will help firms increase investment, he said.

He added: ‘Businesses and consumers will benefit from reduced fuel taxes, but the increased tax on North Sea oil and gas could be counterproductive, and will create uncertainty for future investment.’

Bradley Phillips, Head of Tax at Herbert Smith, said: ‘Oil company profits have clearly been seen as a soft target, inflated as they are by current high oil prices.’

‘Exactly the right message’
Chris Sanger, global Head of Tax Policy at Ernst & Young, said the Chancellor had ‘subtly changed his mantra’, committing to giving the UK the most competitive tax system in the G20.

‘By widening this from his previous commitment, which applied only to corporate taxes, the Chancellor has once again signalled the intent for a low tax, high incentive country, sending exactly the right message to investors, wealth creators and those with aspirations.’

Bank Levy
Bank Levy rates will be increased from 1 January 2012. Sanger observed that the Chancellor ‘has once again chosen to raid the banks to pay for the cuts in corporation tax’.

He added: ‘By increasing the burden faced most by banks headquartered in the UK, the Chancellor continues to increase the incentives for banks to migrate.’

Ian Young, Technical Manager at the ICAEW Tax Faculty, said: ‘Anything that makes the UK a more competitive location for multinational companies should be welcomed.’

Commenting on the proposed reform of the taxation of foreign branches of UK companies, Young said: ‘The key point is to reduce the uncertainty and inconsistency that has existed and has led to many companies leaving the UK.’