By Antony Seely 9 July 2021 Corporate tax reform (2010- 2020) Summary 1 Introduction: corporation tax in 2015/16 2 Budget 2010: the Corporate Tax Road Map 3 Budget 2011: cutting the main rate, reducing capital allowances 4 Budgets 2012-2015: further cuts in the main rate 5 Corporate tax avoidance 6 The Conservative Government’s approach commonslibrary.parliament.uk Number 5945 Corporate tax reform (2010-2020) Image Credits Gladstone’s red box by The National Archives UK. Image cropped. No known copyright restrictions. Disclaimer The Commons Library does not intend the information in our research publications and briefings to address the specific circumstances of any particular individual. We have published it to support the work of MPs. You should not rely upon it as legal or professional advice, or as a substitute for it. We do not accept any liability whatsoever for any errors, omissions or misstatements contained herein. 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If you have general questions about the work of the House of Commons email [email protected]. 2 Commons Library Research Briefing, 9 July 2021 Corporate tax reform (2010-2020) Contents Summary 4 1 Introduction: corporation tax in 2015/16 7 2 Budget 2010: the Corporate Tax Road Map 14 3 Budget 2011: cutting the main rate, reducing capital allowances 20 4 Budgets 2012-2015: further cuts in the main rate 27 5 Corporate tax avoidance 43 5.1 Taxing multinational companies 43 5.2 Avoidance & the Corporate Road Map 49 The Controlled Foreign Companies (CFC) rules 49 Vodafone’s legal challenge to the CFC rules 54 Reforms to the CFC rules in 2012 63 Starbucks, Amazon, Google & using a ‘GAAR’ 72 The new Diverted Profits Tax 80 5.3 International efforts to tackle evasion & avoidance 90 6 The Conservative Government’s approach 95 6.1 Budgets 2015-2016: further rate reductions 95 6.2 Tax avoidance and evasion 109 The OECD’s Base Erosion & Profit Shifting initiative 109 Restricting interest relief 120 The Google tax settlement 128 Country-by-country reporting 137 6.3 Recent developments 145 Budget 2020 : freezing the rate at 19% 145 Digital Services Tax 148 3 Commons Library Research Briefing, 9 July 2021 Corporate tax reform (2010-2020) Summary Corporation tax is charged on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations. Currently the tax is charged at a flat rate of 19%.1 Dividends paid out are taxed as income in the hands of shareholders at special dividend rates.2 Corporation tax (CT) is estimated to raise £40.3 billion in 2021/22. It is the fourth largest contributor to the Exchequer after income tax, National Insurance contributions (NICs) and VAT.3 Nearly all corporation tax receipts are accounted for by ‘onshore’ corporation tax; a separate corporation tax regime is in place for offshore firms operating in the oil and gas sector.4 Over the past decade onshore corporation tax receipts have risen as a share of GDP since 2011/12. As the Office for Budget Responsibility note, “this has been driven by a rising tax base as well as a rising effective tax rate. The tax base reflects strong growth in commercial and industrial company profits from the depressed level they reached in the 2007/08 recession.”5 This trend in CT receipts is notable because over this period the headline rate of CT was successively cut from 28 per cent in 2010/11 to 20 per cent in 2015/16, and cut again to 19 per cent in 2017/18.6 The Coalition Government set out its priorities for taxation in its agreement, published in May 2010; in this, it stated that it would “reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”7 In his first Budget on 22 June 2010 the then Chancellor, George Osborne, announced that the main rate of corporation tax would be cut by 1% each year over the period 2011 to 2014, from 28% to 24%. The small profits rate, paid by companies with annual profits below a set threshold, would be cut by 1% to 20% from April 2011. These rate reductions would be funded partly by cuts in the rates of capital allowances and the annual investment allowance 1 HMRC, Corporation Tax rates and reliefs, ret’d March 2021. For a summary of the key features of CT see, HMRC, Background and guidance to interpreting Corporation Tax statistics, 24 September 2020 2 HMRC, Tax on dividends, ret’d March 2021 3 Office for Budget Responsibility, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts). Receipts from these taxes are estimated to be: income tax: £198bn; NICs: £147bn; VAT: £128bn. 4 HMRC, Oil and gas: Ring Fence Corporation Tax, July 2015 5 OBR, Onshore corporation tax, updated 14 January 2021. A statistical overview of the tax is provided in, HMRC, Corporation Tax Statistics 2020: commentary, September 2020. 6 see, OBR, Why have onshore CT receipts performed so well since 2013-14?, 4 December 2018 7 HM Government, The Coalition: our programme for government, May 2010 p10 4 Commons Library Research Briefing, 9 July 2021 Corporate tax reform (2010-2020) from April 2012.8 In November 2010 the Government set out its wider programme for reform in its ‘corporate tax road map’: specifically, changes to the ‘controlled foreign company’ (CFC) rules, the tax treatment of innovation and intellectual property, and the taxation of foreign branches.9 Over the next three years the Chancellor announced four further reductions in the main rate of tax, so that it fell from 26% in 2011/12 to 20% in 2015/16.10 Over this period the small profits rate was kept at 20%, resulting in a single rate of corporation tax from April 2015. In its last Budget in March 2015 the Coalition Government noted that the UK was expected to have the joint lowest rate of corporation tax across the countries composing the G20, and a rate significantly lower than the US, Japan, France and Germany.11 At the time the Institute for Fiscal Studies (IFS) estimated that the net annual cost of the Coalition Government’s reforms to corporation tax reached about £7.9 billion by 2015/16. The reductions in the main rate alone were estimated to cost about £7.6bn by 2015/16.12 One of the changes made in the Coalition Government’s first Budget in June 2010 was a cut in the value of capital allowances – the reliefs given to business to offset their capital investment against their taxable profits. Subsequently in December 2012 Mr Osborne announced that the value of the Annual Investment Allowance (AIA), which had been cut from £100,000 to £25,000, would be increased to £250,000 from 1 January 2013, for two years. In his 2014 Budget Mr Osborne announced that from April 2014 the allowance would be doubled, to £500,000, until December 2015.13 In the Conservative Government’s first Budget after the 2015 General Election, the then Chancellor, Mr Osborne, announced two further reductions in the rate of corporation tax over the next Parliament: a cut to 19% in 2017, and to 18% in 2020. In addition the AIA would be set permanently at £200,000 from 1 January 2016. 14 Subsequently in his 2016 Budget Mr Osborne confirmed that the rate would be cut to 17% in 2020, to ensure that the UK would have the lowest tax rate across the G20.15 The Chancellor also announced a series of measures for the next four years to reduce tax avoidance and to simplify and modernise the tax regime, set out in a ‘business tax road map’.16 Taken together these further reductions in the CT rate were forecast to cost just over £3.8 billion by 2020/21.17 At the time the Government estimated that the 8 HC Deb 22 June 2010 cc174-5 9 HM Treasury, Corporate tax reform: delivering a more competitive system, November 2010 10 Budget 2011, HC 836, March 2011 para 1.74; Budget 2012, HC 1853, March 2012 para 1.186; Autumn Statement, Cm 8480, December 2012 para 1.130; Budget 2013, HC 1033, March 2013 para 1.121 11 Budget 2015, HC 1093, March 2015 p36 (Chart 1.10) 12 Helen Miller & Thomas Pope, Corporation tax changes and challenges, IFS Briefing Note BN163, February 2015 p9. 13 Autumn Statement 2012, Cm 8480, December 2012 para 2.74; Budget 2014 HC 1104, March 2014 para 2.107 14 HC Deb 8 July 2015 c332; Summer Budget 2015, HC264, July 2015 para 1.239-42 15 HC Deb 16 March 2016 cc957-8; Budget 2016, HC901, March 2016 para 1.54-9 16 HM Treasury, Business tax road map, March 2016 17 Budget 2016, HC 901, March 2016 p85, p87 (Table 2.1 – item 18; Table 2.2 – item ac) 5 Commons Library Research Briefing, 9 July 2021 Corporate tax reform (2010-2020) reductions in corporation tax since 2010 would “be worth almost £15 billion a year to business by 2021.”18 After the EU referendum vote in June 2016, Mr Osborne indicated that the Government might announce further rate reductions in its next Budget.19 However, the next month Theresa May succeeded David Cameron as Prime Minister, and appointed Philip Hammond to be Chancellor.