McDermott Comment | Budget 2021: UK Corporation Tax and CGT
Sarah Gabbai, attorney at law firm McDermott Will & Emery, said:
“Over the past 10 years or so, the headline corporation tax rate went from 28% down to 19%. But the effective tax rate for all UK corporation taxpayers – being the amount of corporation tax paid as a percentage of total taxable profits – has consistently remained somewhere between roughly 10% and 15% over the same period. This suggests that as the headline rates decreased, so did reliefs and exemptions. Thus, even a moderate increase in corporation tax rates could hit profitable companies hard if no additional reliefs or allowances are given to offset the impact of a headline rate increase. In this vein, businesses will no doubt be pleased to hear that the U.K. Government has floated the idea of a three-year loss carryback and enhanced capital allowances as examples of base-narrowing measures that could be used to help businesses hard-hit by the pandemic; although many larger businesses will probably also want to see at least a temporary reinstatement of loss carryforward relief from 50% to 100%. However, even if a rate increase were to be accompanied by a narrowing of the base, investment and structuring decisions are often informed by headline rates alone, which itself may have a deterrent effect where U.K. inbound investment is concerned.
Increasing the rate of CGT to that of income tax could also negatively affect U.K. inward investment. An increase in CGT rates coupled with an increase in the headline corporation tax rate would make incorporated businesses less tax-efficient for UK resident individuals, who already suffer double economic taxation with respect to their shares because of the corporation tax on their company profits. This could potentially lead to perverse restructuring incentives that may no longer align with the tax needs of certain types of foreign co-investors, particularly those who are tax-exempt in their own jurisdiction of residence. While increasing the rate of CGT to that of income tax might remove avoidance opportunities, it would also threaten the tax benefits associated with employee incentives or genuine entrepreneurship. Again, this could potentially have a deterrent effect on international perception of the U.K. as an attractive place to do business, particularly as many other countries’ tax systems treat capital gains more favorably than income.”