Risk & Economy » Tax » Budget 2016: Government to raise £8bn with corporation tax changes

Budget 2016: Government to raise £8bn with corporation tax changes

The corporation tax rate drop will be more than offset by the tightening of a number of rules that have seen multinationals lower their tax bill

CORPORATION TAX will be reduced to 17% from April 2020, but Osborne looks to boost the government’s coffers by £8bn via a series of revenue raising measures in corporation tax.

With Britain potentially set to leave the European Union in the summer, Osborne needed to make Britain more appealing for overseas investment, so has lowered the rate of corporation tax by 17%, something which Kevin Hindley, managing director at Alvarez & Marsal Taxand UK, believes will encourage inward investment.

However, multinational companies will be hit by a series of revenue-raising measures, which aim to raise approximately £8bn between 2016 and 2021.

In line with the outcome of the Base Erosion and Profit Shifting (BEPS) initiative, the chancellor is implementing a restriction on deductions for interest payable, which will gain the Treasury roughly £1bn a year.

Hindley believes that this is a “major change in direction for the UK”, which has been historically generous when it comes to the treatment of debt, with relief for interest cost will be restricted to 30% of earnings.

“A threshold of £2m of net interest will keep many companies outside of the regime and a group rule may allow larger deductions for groups which are highly geared for business reasons,” continued Hindley.

In addition, there are also changes to restrict certain deductions made by some of the largest companies in relation to the structured financing arrangements, as well as changes to withholding tax on royalties and a fundamental reform of corporation tax loss relief.

When the loss relief changes are implemented it will take longer for businesses to obtain economic relief for their losses.

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