Lower Corporation Tax will boost earnings, but these new local taxes could deter investment.
Yesterday was a very special April's Fools Day for British businesses.
Lower tax means higher earnings
From 1 April 2012, the main rate of Corporation Tax fell from 26% to 24%, further easing the tax burden on UK firms. Of course, lower corporate taxes translate into higher after-tax profits, as this table below shows:
|Financial year*||Tax rate||Earnings uplift|
* Beginning 1 April
As you can see, yesterday's cut in Corporation Tax from 26% to 24% will lift earnings per share (EPS) by 2.7% in 2012/13, on top of a near-2.8% lift to EPS in 2011/12. In both of the following two financial years, EPS will rise by 1.3%, thanks to two more cuts to Corporation Tax.
As a result of this year's tax cut, the Corporation Tax burden on British businesses will fall by more than £1 billion. This tax saving could be used to invest for growth, repay debt, or increase dividend payments to shareholders.
Two new local taxes
Alas, while central government is cutting corporate taxes, local government is raising them. These two local levies also started this weekend:
1. Nottingham's parking tax
From Sunday, Nottingham City Council has introduced a Workplace Parking Levy (WPL) on businesses with 11 or more parking spaces for employees.
From 1 April, these firms have to pay a local levy of £288 plus VAT (£345.60) per space. Each year, this levy will rise in line with the Retail Prices Index (RPI) measure of inflation. Assuming RPI of 3%, the WPL will increase to a VAT-inclusive £400.80 from April 2013, £436.80 from April 2014 and £457.20 from April 2015.
Thus, large employers in the area -- such as FTSE 100 firm Experian (LSE: EXPN) and high-street stalwart Alliance Boots -- could face sizeable yearly bills for providing parking spaces to their workers. For example, a firm with 100 parking spaces would pay £34,560 in 2012/13, rising to £45,720 for 2015/16.
Nottingham's councillors expect their levy to raise £8 million in its first year and £14 million a year on average over its 23-year life. In other words, this local tax will cost Nottingham-based businesses a total of £322 million -- money which the city intends to invest in improvements to public transport.
I suspect that councillors in nearby towns and cities are rubbing their hands with glee at this announcement. By making Nottingham a less attractive site to locate and grow businesses, nearby Derby should be the biggest beneficiary from any subsequent business 'brain drain' out of Nottingham.
2. Northern Ireland's 'Tesco tax'
Across the Irish Sea, another local tax arrived on Sunday. From 1 April, business rates in Northern Ireland will rise for large retail premises with rateable values exceeding £500,000. The proceeds will be used to reduce rates for smaller businesses and to provide 50% rate relief on long-term empty retail outlets.
While this is good news for smaller retailers in the Six Counties, the biggest operators will face higher business rates. Hence, this has been dubbed the 'Tesco tax', as it affects only 76 stores in Northern Ireland, including several owned by supermarket giant Tesco (LSE: TSCO). On average, the extra bill for large shops will be £66,000 a year.
Again, this local levy is likely to discourage the biggest British and Irish retailers from investing in Northern Ireland. Also, leading retailers have warned that it could cost jobs, as shops relocate across the border to Ireland, or scale back their expansion plans.
British businesses are better off
In summary, despite these two new local taxes, British businesses will be much better off overall in the immediate future, thanks to three cuts to Corporation Tax between 2012 and 2014. Even so, local authorities should think twice about introducing additional taxes, as these could drive away much-needed business investment!
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