Corporate Tax

2021 price range: UK corporate tax base

On Wednesday, the UK will release its 2021 budget after the autumn budget has been delayed due to the pandemic. In addition, the UK government will launch several consultations on March 23 on the future of the country’s tax strategy. Corporate tax changes – particularly a 19 percent increase in the UK corporate tax rate – are reportedly among the reforms under consideration.

As the UK looks for ways to increase tax revenues to meet the revenue shortfalls and additional expenses resulting from the short and long-term COVID-19 pandemic, investment will be vital to getting the economy back on its feet and the To ensure profitability growth. Corporate tax policy can play a central role here; However, the focus should be on changes in the tax base rather than the tax rate.

In particular, accelerated depreciation – or full allowance – of capital assets would lower the marginal effective tax rate on investments and make new investments less costly. This in turn could stimulate investment and thus economic growth. A number of OECD countries – including Australia and Germany – introduced accelerated depreciation on various assets back in 2020 to stimulate investment.

Over the past two decades the UK has cut its corporate tax rate from 30 percent in 2000 to 19 percent since 2017.

However, these reforms have often been paired with base-broadening measures that penalize new business investment. Between 2008 and 2013 the UK reduced the value of depreciation on machinery and industrial buildings. The present value deduction (the percentage of the cost of an investment that a company can deduct over its lifetime) for machinery decreased from 83 percent to 76 percent between 2008 and 2013. During the same period, the cash value deduction for industrial buildings fell from 48 to 48 percent to zero.

It was only in 2019 that the UK reintroduced an annual allowance of 2 percent for industrial buildings, which was increased to 3 percent in 2020 and now allows a value deduction of 62 percent. Despite this change in policy, capital relief in the UK is still lower on average than in France and the US and at the same level as Germany.

Comparison of the present value of the all-in cost of capital as of March 2020

country machinery Industrial building Patents Weighted average
France 88% 55% 87% 74%
United States 100% 35% 63% 68%
United Kingdom 76% 39% 83% 62%
Germany 74% 39% 87% 62%

Note: A fixed inflation rate of 2.5 percent and a fixed interest rate of 5 percent are assumed to calculate the current discounted values. The average is weighted with the respective share of the share capital in an economy (machines: 44 percent; industrial buildings: 41 percent; intangible assets: 15 percent).

Source: Elke Asen, “Capital cost coverage throughout the OECD”, Tax Foundation, April 8, 2020, https://taxfoundation.org/publications/capital-cost-recovery-across-the-oecd/. The calculations have been updated to reflect the 3 percent construction and building allowances introduced under the UK Finance Act 2020.

The UK was ranked 35th out of 36 countries in the OECD in terms of cost recovery in our 2020 international tax competition index. This part includes capital relief as well as the tax treatment of losses, storage costs and equity. This makes it a composite measure of how investment-friendly a country’s corporate tax base is.

Although the UK corporate tax rate is fairly competitive among developed countries, the UK has a reformable corporate tax base. The UK could ensure immediate cost recovery on all investments so that companies can deduct the cost of new investments immediately, rather than relying on lengthy depreciation plans to cover only a fraction of their real costs.

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