The chancellor has unveiled a series of measures to raise more tax from multi-national corporations while “levelling the playing field” for small firms.
Delivering his eighth Budget to the House of Commons today (16 March) George Osborne announced corporation tax will fall to 17 per cent by April 2020.
The move was part of what Mr Osborne called the government’s ‘business tax roadmap’, aimed at making Britain’s business tax system “fit for the future”, with crackdowns on avoidance by large corporations.
Measures which affect smaller businesses were also introduced, in what the chancellor said was a package of £7bn in tax cuts for small firms.
This includes two new tax-free allowances, each worth £1,000 a year, for both trading and property income aimed at micro-entrepreneurs who sell services online or rent out their homes through the internet.
And to help the self-employed Mr Osborne said he would abolish Class 2 National Insurance Contributions altogether from 2018.
Tax avoidance that will be targeted included tightening rules around termination payments, which from 2018 will attract employer NI.
Termination payments are severance payments to employees on termination of their employment. They can arise in a number of ways, for example, in connection with retirement.
The government will also shut down disguised remuneration schemes, moving to end the use of “personal service companies” by public sector employees to minimise their tax liabilities.
Some multinationals borrow here and then offset the payments against tax. Mr Osborne said he will cap interest deductibility at 30 per cent.
He said there will be changes to hybrid mis-matching rules (arrangements exploiting differences in the tax treatment of instruments, entities or transfers between two or more countries).
Tax payment dates will be aligned more closely to when profits are earned, he added.
Overall Mr Osborne said £12bn will be raised through tax crackdowns in this parliament.
Former pensions minister Steve Webb said on Twitter that the £12bn from tax avoidance is “huge”.
Mr Osborne said: “This is a Budget which gets rid of loopholes for multi-nationals. And gets rid of tax for small businesses.
“A tax system that says to the world: we’re open for business. A government that’s on your side.”
The government’s reforms of business tax mean that from April next year interest deductibility for the largest companies will be restricted at 30 per cent of UK earnings, while firms whose activities justify higher borrowing are protected with a group ratio rule.
It also means that the government will strengthen its withholding tax on the royalty payments that allow some firms to shift money to tax havens.
It will also restrict the maximum amount of profits that can be offset using past losses to 50 per cent.
Mr Osborne said: “All of these reforms to corporation tax will help create a modern tax code that better reflects the reality of the global economy.
“Together, they raise £9bn in extra revenue for the Exchequer.”