Is raising corporation tax the answer to the UK’s deficit?

Economy & Politics

Reports from earlier this week have suggested that the Chancellor, Rishi Sunak, is considering raising Corporation Tax in his March budget, despite many businesses struggling with the effects of the COVID-19 pandemic.

The Chancellor’s tax-raising options have been limited due to the Conservative manifesto pledges from the 2019 election, where Boris Johnson announced a tax lock on income tax, national insurance and VAT.

Chris Denning, Head of Corporate and International Tax at MHA MacIntyre Hudson says the move, if it goes ahead, will not help the UK make the most of its post-Brexit position and believes a reduction to 17% might be a better approach:

Chris explained: “The Chancellor is in a difficult position but a higher rate of corporation tax is not the answer to shrinking the country’s deficit.  He would be better served by reducing the rate of taxes to corporate income to the originally planned 17%, thus enhancing our fiscal competiveness as we establish our position post-Brexit. If he still feels compelled to increase the Corporation Tax rate though, this should be accompanied by increased capital allowances and a widening of reliefs such as R&D tax credits and Patent Box relief in order to give businesses the incentive to invest.

“Corporation Tax revenues are only 8% to 9% of the UK’s total tax intake. As such, this revenue would have to increase significantly in order to make any meaningful short-term impact. Unless the government is looking at a radical change in the proportion of tax revenues derived from Corporation Tax, then simply playing around with the rate would seem a relatively pointless exercise.

“It also goes against the logic of the UK’s post-Brexit position. The UK government has been trumpeting the tax benefits for businesses of locating in the UK since the referendum result. Having one of the lowest corporation tax rates in the G7 and G20 has been one of the principal selling factors. Given that we have now left the EU, the UK should be consolidating and enhancing its fiscal competiveness in order to stay first on the list of locations when non-UK businesses are considering expanding. This is what will lead to a stronger tax base in the long run.”

David Hough, a partner at advisory firm Blick Rothenberg said of a potential rise in Corporation Tax last year: “Increasing the rate of Corporation Tax, and ensuring all appropriate profits are captured would raise additional revenues which can be used to both balance the books following the pandemic, allow a reform of business rates and provide funding for regeneration projects. A tax on profits also protects businesses that have been adversely impacted by the pandemic. Ultimately, we need to decide what form of high street or smart cities we want in when this situation is eventually past us. The shift to online sales is here to stay due to a combination of convenience, ease of comparison, and price so before taxing the online sellers to fund infrastructure on projects, that might not fit our new normal. We should look at how we invest in technology to help other companies take advantage of new ways of working.”

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