Weigh the weight of the corporate tax hike

It’s that time of year when budget rumors start to appear in the press. As usual at this point, it’s impossible to tell what the real possibilities are, and what distractions the Treasury has promulgated to evoke relief when they prove unfounded.

Raising corporate taxes is one of the ideas you will have seen circulating.

In the Finance Bill 2020, Chancellor Rishi Sunak removed the reduction in the corporate tax rate from 19 to 17%, which was legislated by then-Chancellor George Osborne in the Finance Bill 2016.

The U-turn had been spelled out in the Conservatives’ 2019 election manifesto, so the change only implemented what had already been promised.

A review of the costs document that accompanied the manifesto revealed that the additional 2% on corporation tax would produce the lion’s share of the projected additional revenue – £5.2bn out of £5.8bn in 2021/22.

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It is not difficult to understand that the pandemic has significantly reduced expectations for corporate tax inflows. Evidence of closed businesses and reduced transactions is all around us. In March 2020, the Office for Budget Responsibility forecast onshore corporate tax revenue of £57.2 billion in 2020/21, £58.7 billion in 2021/22 and £61.4 billion sterling in 2022/23. By the time of the November spending review, he had revised those figures to £43.2bn, £48.5bn and £56.4bn respectively.

Nevertheless, corporation tax remains the fourth largest source of revenue for the Treasury, after income tax, national insurance and VAT.

This top three is subject to a manifesto pledging not to increase prices. They also each put significantly more into the Treasury coffers – £188.2bn, £140.8bn and £116.3bn respectively, based on OBR’s November projections for 2020/21.

HM Revenue and Customs’ tax ready calculator published last May estimated that a 1% rise in corporation tax in 2020/21 would have meant an additional £2.4billion in revenue over the course of this year, rising to £3.1bn in 2021/22 and £3.4bn. billion in 2022/23. These figures do not take into account the fallout from the pandemic, but suggest that every 1% increase from April 2021 could bring in around £3bn more by 2023/24.

Tony Wickenden: how the UK competes on corporation tax From a political point of view, corporation tax has the advantage of not directly affecting the electorate. The general British public is largely in favor of tax increases, as long as these increases do not affect them personally.

Of course, corporation tax hits some people directly, especially those who choose to work through their own private business. Unfortunately for them, the Chancellor has already shown limited interest in this sector: evidenced by the way many dividend-dependent business leaders have been allowed to fall between the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme.

Some have warned against increasing corporation tax, saying the UK needs to be able to attract and retain business, especially after Brexit. However, the country has a low corporate tax rate compared to other major economies.

The Organization for Economic Co-operation and Development average for 2020 (including local taxes) is just over 23%, but is skewed by many smaller economies with ultra-low rates – e.g. Hungary with 9% and Ireland with 12.5%. percent. Larger countries tend to have higher rates – Germany with 29.9% and France with 32%, for example.

However, the rates represent only part of the composition of corporation tax. Another important element is the investment allowances, where for large companies the UK ranks towards the bottom of the OECD tables. The Chancellor could choose to combine improved capital cost allowances (the annual investment allowance has already been set at £1m for another year) with increased corporate tax rates as part of a package to encourage growth and tax profits only.

One could argue that the Chancellor has been somewhat boxed in by manifesto promises made in the pre-pandemic era that don’t seem to lend themselves to the standard question, pandemic-justified government U-turn. Raising corporate taxes seems like an attractive option, but would only be part of a long-term financing solution. This could also incorporate reform of capital taxation and property taxes – including council tax.

However, the Chancellor will heed the warning from the Institute of Fiscal Studies, the OECD and the International Monetary Fund to focus first on economic recovery, to resist any change (including tax changes) which could damage it and, only once the recovery is underway, embark on any recovery in public finances.

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So while a rise in corporation tax has the apparent benefit of larger scale public support and may not affect the attractiveness (or not) of the UK as a place to trade , the potential negative impact on the economy and employment cannot be ignored.

The smart money seems to be that no major tax changes are announced in this budget, but we are already hearing ‘from sources close to the Chancellor’ that we can expect a new budget in October.

After all, even though it would be the second in a year, these are unusual times. We may know a bit more about the economy and a hoped-for recovery by then and an October budget would only restore the recently established “normal cycle”. Let’s see.

Tony Wickenden is Co-Chief Executive of Technical Connection (a St James’s Place Wealth Management group company). You can find him tweeting @tecconn