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Taking care of business - The UK's falling corporation tax rate should be good for its economy

01/05/2013

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

“I want us to send a message to anyone who wants to invest here, to create jobs here, that Britain is open for business,” said chancellor George Osborne as he announced in his budget that, with effect from April 2015, corporation tax would fall from 21% to 20%. The UK is not the only country trying to stimulate its economy in this way, however, so how is it measuring up against its global competitors?

A comparison of the corporation tax levels across the ‘G20’ grouping of countries reveals a broadly downward trend as most of the world’s richest nations pursue a strategy of lowering corporate tax rates to make it more attractive for both domestic and overseas companies to invest in their economies. The UK is to the forefront of that trend.

Current figures suggest that, by April 2015, the UK will have the equal lowest rate of corporation tax in the G20, along with Russia, Saudi Arabia and Turkey. The 20% rate boasted by that quartet compares with 25% in china, 30% in Germany, 36% in both France and Japan and 40% in the US.

although the UK still has some way to go to match the 12.5% rate of corporation tax that has presumably helped to persuade so many businesses to locate their European headquarters in Ireland, which is not a g20 nation, it is difficult not to see the cut as incrementally positive news for the health – and potentially also the rebalancing – of the domestic economy.

Arguably even more interesting is a comparison of the degree to which g20 corporation tax levels are set to have fallen between 2005 – what we might call ‘pre-crisis rates’ – and 2015. Once again, the UK heads the list, the cut from 30% to 20% representing a 33% fall that this time is matched only by Turkey.

Over the same period, China’s rate will have fallen 24%, Germany’s 23% and Japan’s 8% while the US’s rate will be unchanged. Of the G20 nations, only France will have raised its corporation tax rate – up 3% from 35% to 36% – which may not bode too well for its economy. By contrast, taken purely as a forward-looking indicator, the UK’s cutting ought to make it a more attractive place for business.

 

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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