The UK legislature has decided to cut the corporation tax from 28% to 24% to make the country more attractive to businesses.  The goal is to encourage businesses to relocate their headquarters to the UK and use that country as its base of operations.  It also makes it more attractive to companies wanting to do business there on a regular basis, as a lower tax base means more money in their pockets.  Small businesses already pay a tax of 21%, so a reduction in the rate will bring the large businesses closer to the smaller ones.  But why does this matter so much and how will it affect businesses within Chorley?

Let’s begin by defining what a corporation tax is.  A corporation tax is a tax levied on businesses that are incorporated in that country.  In other words, it’s the cost of having a business in that country.  This tax is for merely existing.  This means that in the UK, 21% of the income small businesses make is taxable, whereas 28% of the income large businesses make is taxable.  By comparison, the United States corporation tax can be as much as 35%.  The discrepancy in the amounts is due to smaller businesses having fewer employees and comparatively lower incomes than larger businesses.

How will the corporation tax cuts affect businesses?  Small businesses won’t see a difference, as their tax rates will remain the same.  On the other hand, large businesses will gladly welcome a 4% reduction in rates.  A reduction in taxes encourages businesses to make investments in their companies, which the government hopes will lead to more jobs.  Furthermore, potential investments from other companies wishing to do business in the UK due to the more attractive tax rate will pay dividends for years to come.  So, the goal is to make it easier for businesses to operate by giving them more money to operate with.

The UK is cutting the corporation tax to remain competitive with other countries, whose lower tax rates have attracted businesses to incorporate there.  The UK wants a piece of this pie for itself, which is why it is trying to position itself as business friendly.  The increase in the Value Added Tax might offset any gains from the corporation tax reduction, however, which may make it troublesome for businesses looking to incorporate in the UK.  Reducing one tax on businesses while raising another doesn’t exactly look like a government is being business friendly.