UK Budget: UK Corporation Tax Slashed – But Not for Banks

UK Chancellor of the Exchequer George Osborne announced aggressive cuts to corporation tax as he pledged to make the UK more competitive in his second full budget Wednesday.

Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.
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Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.

Britain’s corporation tax rate will fall to 24 percent from April and to 22 percent by 2014, ahead of previously announced plans.

The UK’s banks – blamed by many for the current economic downturn - will not benefit from the change, as their levy is raised to 0.105 percent from January.

Wealthy people trying to buy multimillion pound houses in the UK will face a 15 percent rate of stamp duty – a one-off transaction tax which will be much higher than the usual 5 percent - if they try to avoid the tax by buying property through a company. That 5 percent will rise to 7 percent from midnight on Wednesday, Osborne said.

“I regard tax evasion and aggressive tax avoidance as morally repugnant,” Osborne said as he announced the new measure and pledged an increase in the number of staff working to close tax loopholes and stop tax avoidance.

He also announced a reduction in the top rate of income tax from 50 percent to 45 percent, which was widely expected.

Ed Miliband, leader of the opposition Labour Party, attacked the budget as "unfair" and "based on economic failure."

He said the planned cut to the top rate of income tax is, "for Britain's millionaires, a massive income tax cut each and every year."

UK businesses and Conservative politicians have been lobbying for an end to the 50 percent tax rate on income above 150,000 pounds ($235,500) a year since it was brought into effect two years ago. Critics argued that it brings in little revenue and could lead to some higher earners leaving the UK.

The FTSE 100 moved up after Osborne finished his speech. Sterling rose against the euro but fell slightly against the dollar.

Upmarket estate agent Savills suffered a fall in its share price following the announcement on stamp duty. UK-based oil explorers including Faroe Petroleum received a boost from the announcement of £3.5 billion in new oil fields allowance

“The UK’s arrivals lounges are likely to be booming next year as entrepreneurs respond to a far more positive message from the Chancellor," Chris Sanger, head of tax policy at Ernst & Young, said in a statement. "In his speech, the Chancellor has matched his reforms of the business tax environment by addressing the much maligned 50p rate. By removing this deterrent, the Chancellor has put the substance behind his rhetoric; the UK is open for business

Osborne said that he wants to move the UK away from financial services by focusing on industries such as aerospace, pharmaceuticals and science. There are also tax breaks for the creative industry, including television exports such as Downton Abbey.

He also promised to expand export finance to help UK businesses get their products out to other economies.

“This country became seduced by large deficits and the illusion of cheap finance. Do we watch as the Brazils power ahead of us or do we want to be out in front? We want to be out in front and that is our government’s resolve,” Osborne told MPs.

The government is “actively seeking” investment from overseas pension and sovereign wealth funds.

It is also hoping that London could emerge as a new offshore market for the Chinese currency.

There was criticism from union the TUC over the lack of specific measures to target job creation for young people.

Osborne vowed: “We will not waver from our deficit reduction plan” and announced several populist measures to support army families.

“Britain is going to earn its way in the world,” he said as he claimed that the country’s tax system would become “more competitive” than anywhere else in the world.

He described the budget as “fiscally neutral” after cutting both taxes and spending, and announced plans to look at a new long-term gilt of more than 50 years.

The Office for Budget Responsibility, an independent body set up by Osborne’s government to monitor the economy and the public finances, raised its forecast for the UK economy’s growth in 2012 to 0.8 percent, and up to 2 percent next year. In November, the OBR revised its forecasts for 2012 down substantially to 0.7 percent, which caused consternation in the markets at the time.

"Disappointingly it seems that the cupboard is bare in terms of new ideas around using government spending to promote growth," Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said in a statement.

"In previous Budgets the focus has been on the huge spending cuts that will be implemented over the next five years. It’s clear that the Government has now moved on to reforming the tax system, seeing that as the key to promoting growth."

Earlier in the day, there was bad news for the Chancellor when it emerged that UK public sector borrowing was almost double forecasts in February as income tax receipts fell.

“There is a Spring-like feel to this Budget: a brighter growth outlook, some high profile tax cuts, marginally less public borrowing and lower inflation to come," Ian Stewart, Deloitte chief economist, wrote in a note.

“But I wouldn’t get carried away. The vast majority of the cuts in public spending lie ahead. The margin for error in reducing the UK’s still huge deficit over the next five years is small and dependent on the unpredictable path of growth. There’s still a long haul ahead for the UK economy.”