Press Room
Corporation Tax should remain at 19 per cent – Des Hanna
International Tax Director, Des Hanna, discusses the planned rise in Corporation Tax from 19 to 25 per cent and why the rate should remain unchanged, in WealthBriefing.
Des’s article was published in WealthBriefing, 7 March 2023, and can be found here.
Should the Corporation Tax rate rise be postponed?
A hotly debated tax policy issue in the UK at the moment is whether the Corporation Tax (CT) rate, which is currently 19%, will rise to 25% on 1 April 2023.
If you cast your mind back to last year, Rishi Sunak (when he was the then Chancellor of the Exchequer), decided to raise CT from an historic low of 19% to 25% in order to pay back the huge borrowing that the UK had undertaken in order to fund the Government’s response to the COVID-19 pandemic.
At the time of Sunak’s announcement, very few businesses (understandably) were in favour of the rise, as it seemed counterintuitive; at a time when growth was going into reverse and the UK was staring down the barrel of a recession, surely CT should be left alone. Not surprisingly, some businesses were even calling for a temporary cut to CT to stimulate growth, so that the country could get back on its feet.
A new Prime Minister
When Liz Truss was elected the new leader of the Conservative Party and therefore new prime minister, her first brief for Kwasi Kwarteng was to enact a whole raft of tax cutting policies in order to get the UK into the position of the fastest growing economy in the G7. Mr Kwarteng happily stepped up to his brief; one of the main policies was to reverse the rise in CT, but unfortunately for him he forgot one key component of any tax cutting policy: how were the tax cuts going to be funded? He didn’t seem to have an answer for this, but the markets did…:
- The pound collapsed against the dollar
- Pension funds nearly collapsed, resulting in a bail out from the Bank of England
- Government borrowing increased
- Soaring mortgage costs
Mr Kwarteng was sacked, and Jeremy Hunt was appointed the new Chancellor of the Exchequer.
A Safe Pair of Hands
As soon as Jeremy Hunt entered the Treasury, he reversed all of Kwarteng’s tax cuts (citing the urgency to balance the books) and once again the CT rate was going back to 25%.
The next budget happens on 15 March 2023 and Jeremy Hunt is under increasing pressure to once again reverse the planned CT rise leaving it at 19%. He has a very difficult balancing act both politically and economically.
- If he reduces CT his political opponents will argue that the borrowing will once again have to be paid by those that can least afford it.
- If, as planned, he raises CT business will argue that the UK is no longer a competitive jurisdiction and may take their business elsewhere (anecdotally, Ireland whose CT rate for trading companies is 12.5% is already welcoming business from the UK with open arms).
The General Election will probably take place in December 2024 and from a tactical perspective Mr Hunt may be postponing any tax cuts until just before people take to the polls, so it is at the forefront of the electorate’s mind before they vote.
What should the Chancellor do?
Our view is that the CT rate should be unchanged at 19%. Ultimately, increasing business taxes in the short term may increase tax revenues, but in the long term the damage that it will create will ultimately lead to far less in CT revenues and will damage the UK’s reputation as a (moderately) low tax sophisticated jurisdiction to locate business or holding companies.
- The UK relies on inward investment from overseas and indeed for the last 15 years (since the Foreign Profits review), the UK has been widely regarded from a tax and political point of view to be one of the best Holding Company regimes in the world; increasing the CT rate to 25% would damage this standing.
- UK companies are already looking to change their Supply Chains or migrate to other low tax European jurisdictions to reduce their tax cost.
- UK companies will postpone any future investment as tax rises will mean that there will be less money to invest in the business.
Pillar 2
It has also been reported in the press that some MPs are of the opinion that the UK should not remain a signatory to the assurances it has made under the OECD’s work on Pillar Two (a minimum tax rate of 15%). One minister commented that it doesn’t make sense, having voted to leave the EU while being bound by the European-influenced OECD.
In response to this, our view is that the UK is a leading representative in the OECD; a well-respected organisation which has been involved in the evolution of some critical economic and tax initiatives which have no doubt benefitted the world economy as a whole. It would therefore make no sense politically (where the UK has been so influential) to go against this body and thus damage its reputation for the future.
The UK is aiming to implement Pillar 2 by December 2023.
