Trump tax reforms - what they mean for the UK

It's no surprise Donald Trump's tax plans are generating international interest. The focal point is the cut in the rate of tax on business' profits from 35% to 15%. The repercussions will undoubtedly be felt in the UK. Tax changes by a leading economy often have a ripple effect.

We have seen successive UK governments steadily cut the rate of corporation tax, which will fall to 17% by 2020 exactly because a competitive tax rate helps signal an economy that is 'Open for Business'.

But what happens when every country wants to be open for business? There are concerns about a 'race to the bottom' and particularly the impact this could have on developing countries who rely on profit tax receipts. According to the Oxford University Centre for Business Taxation, since the nineties, the average corporate statutory tax rate in the G20 has declined by 14.35 percentage points, from 41.48% to 27.08%.

That said, whilst we have seen the UK rate come down we have also seen in a succession of Budgets introduce measures to widen the base upon which the tax is calculated. This results in a more complex tax regime. It's not just the tax rate that matters it's also how easy it is to meet the compliance burden that can make a big difference.

Further, corporation tax, paid on the profits of a business. is just one type of tax that businesses bear. While profit taxes have been coming down, other taxes on business have been going up. PwC and WorldBank analysis of tax systems in 190 economies shows more countries are increasing the Total Tax Rate for business than cutting it. Likewise profit taxes and labour related taxes are increasing globally.

Whether this trend continues remains to be seen. The UK currently has the lowest profit tax rate in the G20, but that won't be the case if the US rate comes down to 15%.

In the meantime, the US has sent a signal worldwide that it will be more tax competitive than it has in the past. This could mark a change in the cost to businesses based or operating there - depending on how the rest of Trump's tax reforms play out. Will this trigger further cuts by the UK Government post Brexit, or indeed other countries world wide? Only time will tell.

Stella Amiss

Stella Amiss | Tax Partner
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