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Last Updated: Wednesday, 21 March 2007, 17:23 GMT
Brown cuts corporation tax to 28%
Worker overseeing production line
Companies have been calling for a lower tax burden
Business groups have given a mixed reaction to the revamp of corporation tax which will see the headline rate cut from 30% to 28% in April 2008.

While business was pleased to see the main rate cut, there was dismay among smaller firms that the rate they pay would rise from 19% to 22% in 2009.

Analysts also said that changes to tax allowances would benefit service sector firms but manufacturers might suffer.

"There will be losers as well as winners," the CBI said.

'Investing for the future'

Mr Brown said that by cutting the mainstream corporation tax rate - which is paid on annual profits of more than 1.5m - from 30p to 28p in the pound, the UK's rate would be "lower than America, Germany, France, Japan, and all of our other major competitors".

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The cost of the tax cut will be recouped by adjusting the capital allowance rate on general plant and machinery.

Mr Brown said the rise in the rate of corporation tax on small businesses was to reduce the tax difference between those who are self-employed and small companies.

He said he needed to do this to avoid individuals "artificially" incorporating themselves as small companies in order to "avoid paying their due share of tax".

The business sector as a whole will not be popping the champagne corks tonight
Richard Lambert, CBI director general

Although he said the rate of corporation tax for small firms would rise, the revenues raised would be recycled to "legitimate businesses investing for the future".

Small firms will be able to claim a new 100% relief for new capital investment up to 50,000, claim a new tax credit for environmental investment, and the tax credit for research and development (R&D) will rise to 175%.

Mixed picture

"The cut in the main rate of corporation tax is welcome, showing that the UK is once again on a competitive path," said Paul Davies, UK head of tax at Ernst & Young. "This will reassure those companies thinking of moving offshore."

The CBI also welcomed the cut in the headline rate, saying the chancellor had "recognised the need to restore the UK's international tax competitiveness".

However, CBI director general Richard Lambert said the corporation tax reforms would not help all firms.

"The change will benefit those big profitable companies that might otherwise be thinking of shifting their activities to lower-tax regimes," he said.

"However, the business sector as a whole will not be popping the champagne corks tonight.

This budget could be damaging for small and medium-sized business in the long term
David Frost, British Chambers of Commerce

"Some big companies that for one reason or another don't pay much tax will lose out. So will small companies that don't invest much, and so will not be able to benefit from the new capital allowances."

The director general of the manufacturers' group EEF, Martin Temple, warned that the changes to capital allowances on would hit "cashflow for manufacturers who invest in greater levels of capital equipment than other sectors of the economy".

"As always with the chancellor, it is important to look at the detail. Whilst there are measures to welcome in today's Budget, few manufacturers will feel a benefit in the short term," he said.

'Let down'

The Federation of Small Businesses (FSB) was unhappy with the rise in smaller firms' tax rate.

"On the face of it, the rise in the small companies rate is very disappointing for our members because it is addressing a problem that I don't think exists, which is the notion that people incorporate for tax reasons," said FSB tax spokesman Simon Sweetman.

The British Chambers of Commerce (BCC) said small businesses felt "let down" by the rise in the small companies' rate.

"This budget could be damaging for small and medium-sized business in the long term," said its director general, David Frost.

"Whilst the chancellor has offered incentives for investment he has also increased the amount of tax that those covered by the small companies' rate have to pay by over 800m."

R&D help

The Budget announced that the value of the R&D tax credit would increase by 100m.

Roulette wheel
Casino operators are facing higher taxes

In addition to raising the small company R&D tax credit from 150% to 175% from April 2008, the large company rate will also rise from 125% to 130%.

"We welcome the chancellor's extension of the R&D tax credit, which is an important incentive for companies to invest in innovation and locate in the UK," said the CBI.

The chancellor also said environmental capital allowances will be expanded by an extra 40m.

Advice support and incentives available from Business Links and the Regional Development Agencies to small businesses for environmental improvements will also rise from 140m to 240m.

Betting blow

The Budget brought little cheer for UK casino operators, with the chancellor ending the lowest tax rate for smaller casinos and introducing a new, higher 50% rate for the most profitable.

Leisure group Rank announced that profits at its casinos would be knocked by 8m a year as a result of the changes.

The government also offered little incentive to internet gaming firms currently located in tax havens to move back to the UK.

Remote Gaming Duty was set at 15% - in line with the rate faced by land based bookmakers and bingo firms.

"The Remote Gaming Duty has been set breathtakingly high, it will do nothing to attract the existing offshore industry onshore and it may indeed have the contrary effect," said BDO Stoy Hayward tax principal Martin Dane. l


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