UK Chancellor follows Irish lead by cutting corporation tax

UK businesses are to see corporation tax slashed to 23% as British Chancellor George Osborne pledged to make Britain more attractive and stop international firms quitting the country.

The tax rate will be cut in April by two percentage points from its current 28%, rather than the 1% reduction previously announced, and will fall by 1% in each of the next three years.

The reduction will be offset by a £285m (€327.5m) increase in the bank levy from next January to ensure it is not a "net tax cut for banks", Mr Osborne announced.

Mr Osborne said: "Other countries are attracting multinationals away from the UK. I want this to be a place that international companies go to, not leave."

The British government has promised to radically simplify the UK tax system and reform taxes on profits collected overseas, under an overhaul of the controlled foreign company rules.

This is seen as a move to woo businesses back to the UK after a number of British firms - including marketing and communications giant WPP, office group Regus and pharmaceutical firm Shire - recently switched their headquarters from the UK to escape hefty tax bills.

Mr Osborne said Britain needs a more competitive tax system to keep companies and jobs in the UK.

The UK has "the sixth highest corporation tax rate in the world; a tax system so complex that it overtook India" in complexity, he said.

The corporation tax reduction will ensure the UK has the lowest rate of corporation tax in the G7, according to the British Treasury.

Today's move will see a reduction in the corporation tax take of £425m (€488.5m) in the financial year to March 2012, with the new 23% rate cutting the haul by £1bn (€1.15bn) in 2014/15.

Mr Osborne had previously intended to bring corporation tax down to 24% by 2014/15.

Toby Ryland, a senior tax partner at chartered accountants Blick Rothenberg, said the cut was "unexpected, but very welcome".

"Coupled with the increase in tax deductions for research and development expenditure, the UK will be an attractive territory to overseas companies looking to locate their businesses in Europe," he added.

The British government's attempts to halt the flow of UK companies abroad includes the introduction of new controlled foreign company rules, with interim measures due in the 2011 Finance Bill.

A consultation document will be published in May and draft legislation due in the autumn before being introduced in full in 2012.

New rules will also apply a 5.75% rate on overseas financing income to attract international investment.

As part of aims to simplify the tax system, the British government is also abolishing 43 tax complexities and stripping 100 pages out of the tax code.

Today's Plan for Growth will also remove £350m (€402.3m) worth of regulation on businesses.

But Chris Sanger, global head of tax policy at Ernst & Young, warned the increase in the bank levy could force British banks overseas.

He said: "The Chancellor has once again chosen to raid the banks to pay for the cuts in corporation tax, repeating the approach he took at the Emergency Budget.

"By increasing the burden faced most by banks headquartered in the UK, the Chancellor continues to increase the incentives for banks to migrate."