Onshore corporation tax (CT) is levied on the taxable profits of limited companies and other organisations, after taking into account various deductions (for the costs of running the business) and allowances (for example capital allowances for investment spending). The headline rate of onshore CT in 2016-17 is 20 per cent. It is set to fall to 17 per cent by 2020-21.

Onshore CT represents a significant source of revenue for government. In our latest forecast, we expect it to raise £53.6 billion in 2016-17. That would represent 7.4 per cent of all receipts and is equivalent to £1,900 per household and 2.7 per cent of national income.

A separate corporation tax regime is in place for offshore firms operating in the oil and gas sector.

  • Recent trends

  • Latest forecast

    Our latest fiscal forecast was published in March 2017. Onshore CT receipts are set to fall by 0.3 per cent of GDP between 2017-18 and 2021-22. That is more than explained by a fall in the effective tax rate – as the main corporation tax rate will be cut from 20 per cent in 2016-17 to 17 per cent by 2020-21, growth in investment increases the use of capital allowances and the financial sector sets past losses against future liabilities. The tax base also contributes negatively because we expect financial company profits to grow more slowly than the whole economy in the near term (due to post-referendum uncertainty, the effect of litigation provisions and pressures from regulation).

    More detail on our latest forecast and how it was revised relative to our previous forecast in November was provided in paragraphs 4.54 to 4.58 of our March 2017 EFO.

    Expand to read the extract from our March 2017 EFO

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  • Latest monthly data

    Onshore CT receipts are recorded in the public finances using a methodology that time-shifts cash payments backwards to align them more closely in time with the economic activity that created the CT liabilities. This produces a relatively smooth profile for measured receipts through the year, but also means that recent months’ data rely heavily on forecasts pending cash CT payments that relate to activity in those months. We would expect this to result in significant revisions to monthly data over time as forecasts are replaced with outturns.

    The need to use forecasts in the time-shifting methodology relates to the lags in CT payments, which are relatively long for smaller companies. The majority of onshore CT cash payments are received in the months of July, October, January and April. This is because larger companies – those with taxable profits of over £1.5 million – are required to pay in quarterly instalments, usually corresponding to these months. Smaller companies pay CT in arrears (9 months and a day after the end of their accounting period), with higher payments by such companies in September/October and December/January.

    Our March 2017 forecast is for onshore CT receipts by the end of 2016-17 to be £7.6 billion (16.9 per cent) higher than the previous year. So far in 2016-17, receipts are up 17.9 per cent on the same period in 2015-16.

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of onshore CT receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are then used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two or three rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    The onshore CT model breaks receipts down into three sectors: industrial and commercial companies, life insurance companies, and financial sector companies (excluding life insurance). The model starts by aggregating the items included in the CT liability calculation for each of these sectors. This means grossing up data on the income side (e.g. profits, capital gains, foreign income) and then subtracting any deductions (e.g. capital allowances, group relief, trading losses carried forward). These individual income and deductions lines are then projected forward using the appropriate OBR economic determinants and/or econometric equations.

    The model then generates forecasts on a cash basis (when the tax is paid). To generate this cash-basis forecast, various timing adjustments are made (based on historical trends) to convert the liabilities forecast into cash. In particular, larger companies pay CT in Quarterly Instalment Payments (QIPs). Separate timing adjustments are made for QIPs and non-QIPs payers due to different lags between liability and payment. Future changes to the tax system (announced as Budget measures) and other ‘off-model’ factors (such as the effect of increasing incorporations) are also included in the forecast.

    Finally, the model converts the cash-basis forecast to the National Accounts time-shifted basis. Although this time-shifting approximates to the liabilities forecast, the results are not identical. The conversion requires two steps. First, based on previous patterns of payments over the financial year, a monthly profile for cash receipts is generated consistent with the financial year cash forecasts. Second, the monthly cash figures are shifted back to the appropriate months in accordance with the ONS methodology.

    Main forecast determinants

    The main determinants of our onshore CT forecast are those related to the tax base and those used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on onshore CT receipts.

    Main forecast judgements

    The most important judgements in our onshore corporation tax forecast are related to the economy forecast that underpins it – most important of all being the outlook for company profits and investment growth. Alongside those, we need to make a number of other forecast judgements. These include:

    • The use of trading losses – Losses generated by companies can be used to offset against tax liabilities. The total stock of losses that is available to be used, and the extent to which they are used to offset against tax liabilities, is an important forecast judgement – particularly so for the financial sector, which still carries a large stock of losses related to the financial crisis;
    • Incorporations – Our PAYESANICs and CT forecasts are affected by our assumption that incorporations will continue their rising trend. Employment income is taxed more heavily than profits and dividends, so when formerly employed or self-employed individuals incorporate, their tax bills generally fall. While this reduces income tax and NICs receipts, it boosts CT revenue (See Box 4.1 of our November 2016 EFO for more detail);
    • Assumptions on payment timings – Our forecast model uses assumptions on profits, investment and allowances to generate a projection for the amount of tax that is liable. But actual payments of tax by companies are adjusted to reflect previous changes in circumstance as well as anticipating future changes in profits or investment. We base our payment timing assumptions on historical trends. The new time-shifted accounting treatment for corporation tax receipts is less sensitive – although not completely insensitive – to changes in payment timings as cash receipts are spread over earlier months.

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  • Previous forecasts

    We revised down our forecasts for onshore CT receipts repeatedly between June 2010 and March 2013. That reflected weak profits growth over that period and our underestimation of losses being carried forward by firms (notably in the financial sector) that can be used to offset future liabilities. It also reflected subsequent policy measures that meant the main rate of corporation tax was reduced further and faster than the plans set out by the Government in June 2010.

    Receipts have since rebounded more strongly than expected leading us to revise our forecasts up. This initially reflected a pick-up in profits, particularly in the industrial and commercial sectors, and corrections to how the effects of some policy measures were factored into the forecast. This underlying momentum has persisted in recent years.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 131 policy measures affecting our forecast for onshore CT. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    The change of methodology for recording CT receipts in the official data will affect the years in which policy changes affect measured receipts. For example, cutting the main rate of CT affects cash receipts with a lag in accordance with the timing of payments by larger and smaller companies. On the new time-shifted methodology, the effect of a rate cut is concentrated much more in the year in which it takes effect. Table A.4 in Annex A of our March 2017 EFO set out the differences for the bigger policy measures that were recosted on the new methodology in that forecast.

    Key onshore CT policy changes announced since 2010 have included:

    • Successive reductions in the headline rate of onshore corporation tax. Between 2010-11 and 2016-17, the standard rate of corporation tax has been reduced from 28 per cent to 20 per cent. The Government has announced that it will cut the rate further, with it reaching 17 per cent in 2020-21;
    • Changes to the annual investment allowance (AIA). The AIA is a 100 per cent capital allowance for most capital expenditure up to a limit. Expenditure above the limit is subject to the usual capital allowances rules. In 2010-11 the AIA stood at £100,000 a year. This has subsequently varied between £25,000 (in 2012) to a temporary level of £500,000 (between April 2014 and December 2015). At the Summer Budget 2015, the AIA was changed to a permanent level of £200,000;
    • Bank loss restrictions. These measures restrict banks’ ability to set their accumulated losses off against their taxable profits, boosting corporation tax revenues. The measure was introduced at Autumn Statement 2014 and was extended at Budget 2016;
    • Restricting interest relief. Budget 2016 announced a restriction on the deductibility of corporate interest expenses from April 2017; and
    • Anti-avoidance and compliance measures. These include measures to close loopholes, reduce evasion (such as the Budget 2016 measure on offshore property developers), increases in HMRC resources to improve compliance and the accelerated payments scheme for disputed tax to be paid upfront.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2016 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings.

    These ready reckoners are done on a cash receipts basis where the effects of determinant changes reflect the lagged timing of cash payments. On a time-shifted accruals basis, the effects on receipts will be much closer to the timing of a change. We are planning on updating these ready reckoners to a time-shifted accruals basis in the near future. The table below shows that:

    • holding deductions constant, corporation tax liabilities are geared to changes in income. For some companies, stronger-than-expected profits would bring forward the point at which they would again be liable to pay corporation tax, rather than immediately raising their payments. This is particularly the case for some financial companies, so our central forecast is currently less sensitive to changes in financial company profits than it would have been in the past;
    • higher nominal business investment would directly reduce corporation tax payments as capital allowances rise; and
    • higher equity prices would boost corporation tax receipts as the return on financial investments is also a key determinant of the life assurance sector’s corporation tax liabilities.

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