View the article online at http://citywire.co.uk/money/article/a891917
Osborne raids big business to fund £7bn small firm tax cut
Chancellor delivers tax cut to small firms funded by £9 billion raid on multinationals, as he seeks to recover from fallout of Google tax deal.
Chancellor George Osborne has claimed he will raise £9 billion from large multinational businesses through a tax clampdown that will help to pay for a slashing of business rates for small firms.
In his Budget, Osborne said the clampdown would 'deliver a low tax regime that will attract the multinational businesses we want to see in Britain, but ensure that they pay taxes here too'.
The clampdown comes as Osborne sought to repair some of the damage done by the £130 million tax deal struck with Google (GOOGL.O) earlier this year, branded 'derisory' by critics.
The government will cut the tax relief that businesses are able to receive on the interest they pay on their borrowings. The Treasury said the availability of this relief had led to some multinational businesses borrowing more in the UK than they need to for their UK activities, claiming the relief but then using the money to fund work outside the country.
From April next year, businesses will only be able to claim relief amounting to 30% of their UK earnings, although that rule may be relaxed for those that need higher levels of borrowing for 'genuine commercial purposes'. The measure is expected to raise nearly £4 billion over the course of the next five years.
Osborne also used his Budget speech to attack 'the complex structures that allow some multinationals to avoid paying any tax anywhere, or to deduct the same expenses in more than one country'. The Treasury said its clampdown on 'hybrid mismatch arrangements', used by multinationals to exploit differences between tax rules in different countries would raise nearly £1 billion over the next five years.
Royalty payments made by multinationals will also come under scrutiny. These can be exploited by businesses to shift profits from the UK to other countries with lower tax rates. Typically, a business could generate UK profits but then use them to pay 'royalties' for intangible assets, like use of trademarks or brand names, to another branch of the business in another country, where the money will be taxed at a lower rate. These payments will be hit by 'withholding tax', helping the government raise £735 million over the next five years.
A further £1.3 billion will come from restricting the amount of tax businesses can avoid on their profits by offsetting losses made in previous years against them. Where businesses make a profit of more than £5 million, they will only be allowed to offset previous losses on 50% of that.
For banks, which were already subject to a similar rule, the restriction has been tightened, with losses only allowed to be offset against 25% of profits. Gary Greenwood, analyst at Shore Capital, said Royal Bank of Scotland (RBS) and Lloyds (LLOY), with the biggest historic losses, would bear the brunt, but the changes would not be 'that material to the sector'.
Business taxes cut
Osborne coupled that tax clampdown with a corporation tax cut. Having already pledged to bring down the rate, currently at 20%, to 18%, he said the tax would fall further to 17% by 2020. This would be the lowest level of any country of the G20, less than half the 40% levied by the US.
Toby Ryland, corporate tax partner at accountants HW Fisher, said the two moves had allowed Osborne to offer 'an ingenious pitch to foreign firms: come to Britain, pay your fair share of tax and enjoy the lowest rate of corporation tax in the G20'.
That will reduce the Treasury's coffers by over £1 billion, but is dwarfed by the chancellor's giveaway for small businesses. Osborne announced that business rates for half of all business properties would be cut, in a move which will cost the Treasury £6.7 billion over the next five years.
Currently, businesses obtain 50% relief on rates if their property has a 'rateable value' based on the rent it would attract in 2008 - of £6,000 or less. Osborne said that under his changes businesses with properties with a rateable value of £12,000 or less would now pay no rates at all. The threshold for higher rates has meanwhile been raised to £51,000, bumping 250,000 businesses down to the lower rate, and increases in the rates from 2020 will be tied to the consumer prices index measure of inflation, rather than the higher retail prices index.
'This is a Budget which gets rid of loopholes for mutinationals and gets rid of tax for small businesses,' said Osborne. 'A £7 billion tax cut, for our nation of shopkeepers.'
Chris Sanger, head of tax policy at accountants Ernst & Young, said that while small firms would welcome the move, larger business would be disappointed to enjoy only a small portion of the savings. 'Manufacturers and larger retailers will be disappointed with the lack of action by the government, with those sectors currently paying 40% but contributing 16% of the economy,' he said.
'This retains the distortions in the current system, deterring manufacturers from improving their buildings and penalising the largest bricks and mortar retailers.'
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