Oxford: University expert slams Budget’s contradictory announcements on corporation tax

Michael Devereux, director of the Oxford University centre for business taxation, said the Budget announcement on corporation tax contradicts the chancellor’s aim to attract more business to the UK.

He commented: “In his Budget speech, the chancellor said he would deliver a low-tax regime that would attract the multinational businesses we want to see in Britain. But he then went on to announce changes to corporation tax which would raise £9 billion in extra revenue for the Exchequer.

“The two most significant elements announced were a restriction on the deductibility of interest payments, and a restriction on the use of past losses to offset against current profit.

“Both of these are arbitrary changes to the definition of taxable profit. Neither is justified by any rational change to a more principled tax regime. They are offset mainly by a one-percentage-point reduction in the tax rate to take effect only in 2020.

“The tax system in the UK and many other countries has a bias towards the use of debt finance. This bias can be exploited by multinational companies to shift their profits out of countries with high tax rates. But the solution to this problem should be to equalise the treatment of investment financed by debt and equity. Simply introducing an arbitrary restriction on relief for interest payments does not remotely achieve this. 

“The chancellor announced a restriction on the use of past losses to offset against current taxable profit. The UK has always maintained the principle that losses should be available to offset against profit – losses can be carried forward without limit to set against subsequent profit.

“This principle was first eroded in 2015 for banks. It has now been significantly attacked by restricting the use of past losses to 50% of current profit for most companies, and only 25% of current profit for banks.

“The only possible rationale for such a change is to raise additional revenue from taxes on corporate profit. The reform flies in the face of economic principles by deterring risky investment, and also contradicts the chancellor’s aim to attracting more business to the UK.”