Lower UK Corporation Tax rate raised tax receipts from manufacturing companies

Corporation Tax (CT) is a direct tax charged on the profits made by companies. The Irish Revenue Commissioners collected €3.5 billion (10.3% of all taxes) in 2011. CT also represents 10% of all taxes in the UK. The Irish collected €6.4 billion in CT receipts in 2007 when the Celtic Tiger was in full gallop and that represented 13.5% of all Irish tax receipts that year.

Ireland charges CT at the rate of 12½% on trading income and 25% on passive income. The main rate of CT in the UK was reduced from 30% to 28% from 1 April 2008 and to 26% from 1 April 2011.

The impact of these changes was that British Corporation Tax receipts rose in 2011 by 18% to £42.1 billion and the industrial and commercial sector accounts for 61% of the total.

UK Corporation Tax receipts in the past decade peaked at £46.4 billion in the year ended April 2008. This sum included £5.7 billion in respect of North Sea oil companies; €4.4 billion from manufacturing companies; £5.7 billion from the Distribution Sector; £18.1 billion from other industrial and commercial companies in Britain and overseas companies; £10.2 billion from the Financial Services sector and £700 million from life assurance companies.

The impact of lower CT rates since 2008 has subsequently increased CT receipts from manufacturing companies to £5.3 billion – a record high level of receipts throughout the past decade. The number of manufacturing company taxpayers remained in the region of 25,000+ during this period. But CT receipts from the other sectors, except life assurance have declined since 2008 with the Financial Services sector reducing by almost 50% from £10.2 billion to £6.1 billion.

There are 1.25 million companies with trading profits and of those, 892,000 companies pay CT in the UK and these earned chargeable profits of £185.5 billion. 34 pay CT of more than £100 million per annum and another 34 pay over £50 million in CT per annum. Banking, finance and insurance is the largest sector in terms of Corporation Tax followed by Business Services and Energy and Water Supply. Over 95% of all profitable UK companies paid tax at the 21% Small Companies rate or were granted marginal relief. 40,000 companies were charged CT at the main rate (28% or 26%).

While wider economic conditions influence profit levels CT liabilities are also influenced by other factors, such as rate changes, payment dates and changes in CT in other jurisdictions – all of which can lead to large multinational companies increasing or decreasing their level of operations.

Taxable profits for CT include income such as trading profits or investment profits; capital gains, known as chargeable gains for CT purposes. A system of capital allowances can give rise to a difference between the pre-tax profits published in annual accounts and taxable profits liable to CT. There are other reliefs, such as group reliefs which arise when companies are owned or own 75% of another company(ies) and some components of that group suffer trading losses.