GEORGE Osborne yesterday said he would lower the headline rate of corporation tax, but bowed to pressure from his Liberal Democrat coalition partners and promised to protect manufacturing allowances.
In his first major speech as chancellor, Osborne said he would use an emergency Budget on 22 June to kick-start a five-year plan to overhaul the corporation tax regime.
“We will reform the corporate tax system by simplifying reliefs and allowances and tackling avoidance, in order to reduce headline rates,” he said quoting from the final Lib-Con coalition agreement that will be published this morning.
But he told an audience of CBI members that any changes would “protect manufacturing industries”, amid uproar from Lib Dems who said that abolishing the Research and Development tax credit would decimate manufacturers.
Previously, the Tories planned to scrap the R&D credit to help pay for a reduction in the headline rate from 28p to 25p. If they keep the allowance in place, they could struggle to achieve the 3p cut.
Lib Dem business secretary Vince Cable has been lobbying the chancellor on behalf of the manufacturing industry, who say they would struggle to invest in machinery if certain allowances were abolished.
“There is the obvious point that capital intensive industries depend relatively heavily on allowances, and that tends to be manufacturing,” Cable told City A.M. last night.
And a source from deputy Prime Minister Nick Clegg’s office said: “There is a broad common agreement on lowering corporation tax. The concern was that to do so means reducing allowances, which would be totally damaging to manufacturing. So, if we can find a way of doing it without – then fine”.
A Treasury aide insisted that the Liberals and Tories had come to an amicable agreement on corporation tax and denied there was a rift between Osborne and Cable on the issue.
However, the Institute of Directors urged Osborne to stick to his guns and fund a 3p cut in the headline rate by scrapping allowances.
“To cut the headline rate of corporation tax by reducing capital allowances is a sensible simplification of the tax system and would support the broad business interest, all at little or no cost to the Exchequer,” said IoD director-general Miles Templeman.
Meanwhile, Osborne said he would announce a “substantial increase in the personal income tax allowance” in his emergency Budget and outlined a “long-term goal” to raise it £10,000 in due course.