Will Osborne cut and simplify corporation tax?

Posted by Admin on May 18, 2010 in Stock Market | 0 comments

Tonight, the new Chancellor has his first outing in front of what you might call middle business, as opposed to Middle England, when he addresses the CBI’s annual dinner.

George Osborne’s theme, for a change, won’t be cuts, but growth – or how to engender the kind of renaissance in Britain’s private sector that would generate the tax revenues and jobs that can help us out of our malaise.

So what’s his cunning plan?

Well, when he thought and hoped the Tories would be governing alone, his flagship policy on all of this was to simplify the tax system for companies and reduce the headline rates of corporation tax – from 28p in the pound to 25p for larger businesses and from 21p to 20p for small companies.

The costs of reducing these taxes was to be financed, according to the Tories’ manifesto, by “reducing complex reliefs and allowances”.

And the Tories told me that they would do all this in the emergency budget they’ve consistently said would take place within 50 days of a general election.

Readers of this column will know that I’ve highlighted on a number of occasions that in respect of this particular tax policy, there has been a significant and unusual ideological divide between the Tories and Labour: Osborne wanted to streamline the tax system for companies, in contrast to the Treasury of Gordon Brown and Alistair Darling, whose philosophy was to target tax reliefs and fiscal aid at sectors thought to be particularly deserving.

So I was slightly surprised that there was no mention of any of these tax reforms in the agreement between the Conservatives and the LibDems that underpins their governing alliance.

Did that mean Osborne had ditched these ambitions to simplify that are redolent of his Conservative predecessor at the Treasury, Nigel Lawson?

I’m told not, by those close to Osborne.

On the other hand, his new LibDem colleagues have been pointing out that Gordon Brown’s jibe – that the policy amounts to a tax cut for banks and a tax increase for manufacturers – is not a total canard.

The fiscal reality is that manufacturers tend to be big beneficiaries of allowances for capital spending of the sort that Osborne would reduce – and banks have less opportunity to reduce their tax payments by exploiting such reliefs.

Also most biggish businesses, in my experience, rather like the existing tax credits for research and development, and are unenthusiastic about the Tory manifesto promise to redirect them at “hi-tech companies, small businesses and new start-ups”.

It’s true therefore that a policy of reducing the various business tax allowances would have the effect of pushing up the tax burden on the kind of companies that make and export things deemed vital to the UK’s economic future, even if the headline rate of tax were reduced – whereas the tax burden on banks would tend to be reduced in these circumstances.

That’s why the LibDems themselves never went further than flirting with the idea of simplifying the corporate tax system two or three years ago: they couldn’t see how to implement such a policy without penalising too many businesses necessary for the UK’s ability to pay its way in the world.

What will Mr Osborne actually do, now that the levers are in his hands?

I can’t see him abandoning the commitment to cut and simplify corporation tax. To do so would be a humiliating U-Turn on a genuinely flagship policy.

On the other hand, I would be staggered if he didn’t do something to ease the transitional pain of those companies that invest a great deal, and therefore benefit most from the tax break on capital spending.

Somehow it doesn’t seem plausible that Osborne would stand up tonight in a room full of boozed-up manufacturers and tell them that their subscription price for operating in the UK is about to rise sharply.

View full post on BBC NEWS | Peston’s Picks