Business owners should keep an eye on Corporation Tax this year, as cuts could give them cause to reallocate capital.
In an interview with a German newspaper at the weekend, Philip Hammond warned that an end to single market access might oblige the UK to change its economic model – and resort to a far lower level of Corporation Tax.
On Tuesday, in her first substantial speech about Brexit priorities, the prime minister confirmed that the UK would leave the single market, and argued that UK citizens should relish their imminent “freedom to set the competitive tax rates and embrace the policies that would attract the world's best companies and biggest investors to Britain”.
In short, UK business owners should be prepared for a significant shift in how they are taxed. Moreover, momentum appears to be with the rate-cutters on a global basis too. Donald Trump, who is today inaugurated as US president, has proposed lowering the Federal corporation tax rate to 15% from 35% in an effort to put more money into the hands of businesses to hire, innovate and expand.
Donald Trump’s plans matter in the UK too. Ahead of the Autumn Statement, Prime Minister Theresa May stated she was committed to keeping the UK’s Corporation Tax rate the lowest in the G20, despite Trump’s pledge. If Trump keeps his pledge of a 15% rate, then Theresa May would need to drop the UK rate (currently 20%) by at least five percentage points in order to keep hers. For UK business owners, such a steep drop could have major implications for financial decision-making.
It is worth noting that the UK rate is already around ten percentage points lower than the corporation tax rates in Germany, Japan and France – and further still below the current US rate.1
For UK business owners, a further lowering of Corporation Tax rates would be a useful counter to the increased tax on dividends.
Self-evidently, the lower the Corporation Tax rate falls compared with personal tax (and National Insurance contributions), the more attractive trading through a company looks to reasonably successful businesses.
Investing and extracting corporate funds in the most tax-efficient manner will require both prudence and expertise, especially in light of the changes. Moreover, while business and personal financial planning are distinct, they also need to be considered together, especially in relation to funds not needed for the business. Informed advice on how to best deploy these funds will be of considerable value.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
1 KPMG Corporate tax rate table, accessed 20 January 2017