Earlier today, Chancellor Rishi Sunak gave his Spring Budget announcement to the House of Commons, and one of the headline plans for the Conservative government was regarding the future of Corporation Tax.
Sunak stated that in 2023 the rate of corporation tax, paid on company profits, will increase to 25%. He did insist that this is still the lowest corporation tax rate in the G7. This will only affect the UK’s largest companies.
He also introduced the Small Profits Rate to ensure only businesses with profits of over £250,000 will be taxed this rate.
But what does this mean for the UK economy? Business Leader spoke to some industry experts to get their views.
Rise in corporation tax the ‘stand-out’ measure
Commenting on today’s Budget, HURST tax partner Adrian Young said: “The Chancellor set out his approach to dealing with the ‘acute damage’ caused by the Covid-19 pandemic. The government would, he said, do whatever it takes to protect livelihoods and jobs, fix the public finances and build the economy for the future.
“As we are accustomed to hearing, levels of government borrowing and spending are almost without precedent, with total fiscal support of £400bn being provided over the next two years. This puts huge pressure on the public purse, and Mr Sunak announced some specific measures to start bridging the gap.
“The increase in corporation tax in 2023 from 19 per cent to 25 per cent is a stand-out measure, but it has been significantly softened for most businesses with a “small profits rate” of 19 per cent for companies with profits below £50,000. In addition, for business profits between £50,000 and £250,000, the rate is tapered, meaning only the larger and more profitable companies will be subject to the full 25 per cent rate.
What about the rest of the announcement today?
Young continued: “Another revenue-raising measure announced was the freezing of income tax allowances. This enables the Chancellor to hold true to the government’s stated intention of not increasing personal tax rates, although this will still ultimately mean more income tax to pay over time.
“Other areas of interest for businesses included a 130 per cent “super-deduction” for expenditure on qualifying plant and machinery, and a new three-year loss carry-back option to crystallise tax refunds for businesses struggling under Covid-19.
“Turning to support measures, the new Restart Grants Scheme and Recovery Loan Scheme, combined with the continuing business rate freeze, should help ease businesses back into the saddle once restrictions lift, and the well-publicised six-month extensions to the furlough and self-employed schemes will help further.
“Finally, the increase in the National Minimum Wage to £8.91 per hour from April will be welcomed although, as always, employers will want to consider the cost impact of this measure carefully.”
‘Simply robbing Peter to pay Paul’
Chancellor Sunak’s promised £65bn spend, at the expense of a new 25% corporation tax, is simply robbing Peter to pay Paul. It’s not enough to save many SME retailers and manufacturers, cautions the home delivery firm ParcelHero
ParcelHero’s Head of Consumer Research, David Jinks MILT, says that record £270bn borrowing needed to pay for the impact of Covid-19 has shackled the Chancellor’s hands. The £65bn additional spend revealed in the Budget is balanced by a new 25% corporate tax rate and won’t be enough to save many smaller businesses.
He said: “It was all-too obvious that, despite the £65bn the Chancellor claims to be spending, there was not enough cash to splash to save many businesses. Today’s Budget was a start, but much more needs to be done now to save independent local retailers and small manufacturers struggling with the double jeopardy of Brexit and Covid. High Street restaurants and pubs are now drinking in the last-chance saloon bar.
“Looking at the measures Sunak has introduced, there are undoubtedly some strong initiatives, such as the extension of the furlough scheme to September that could save thousands of jobs. On the other hand, there will be new employer contributions to the scheme. In addition, the rapid phasing-out of full business rates relief will be grim news for many retailers.”
“The rise in corporation tax, from its current level of 19% to a higher-than-expected 25% from April 2023 will help plug the hole in the nation’s finances. However, is now really the time to start rebuilding the UK’s coffers at the expense of business? No matter how delayed, manufacturers and retailers are already struggling under the burden of Covid.
‘The new rate won’t apply to businesses with profits of less than £50k and only businesses with profits of over £250,000 will pay the full tax. Nonetheless, the Government has, on the one hand, introduced measures to help businesses but, on the other hand, raised their tax burden. It’s simply robbing Peter to pay Paul.
“The increased corporation tax will also do nothing to encourage European companies looking to create UK arms to maintain a relationship with Britain post-Brexit.”
Further reaction to increase in Corporation Tax
Mark Heppell, Partner at JMW Solicitors, said: “I’m not surprised by the increase in Corporation Tax (from 2023) and it makes sense to me that the most profitable businesses will be called upon to contribute in a greater proportion. Hopefully the freezing of the rate below £50k profit and tapering to £250k profit will give some comfort to SMEs, but it will mean that, for most, there is more to pay.”
Luke Hamm, CEO of GovGrant, comments: “The increase in Corporate Tax rate was obvious and understandable, but it is fantastic to hear a focus on investment lead recovery. The super deduction of 130% makes sense in term of tangible assets, but will it do enough in terms of ongoing investment in R&D? It tends to be operational expense, so that remains to be seen.”
Steven Mason, insolvency practitioner and senior manager at Inquesta, said: “While the headline rate of corporation tax will go up from 19% to 25%, this will not be until 2023, with exemptions built in for smaller businesses making profits of less than £250,000. In all, it appears a reasonable move, with the Chancellor vowing that only 10% of companies will be paying the new top rate. By not putting up taxes too early, the Chancellor has given businesses some breathing space to allow a return to normal trading before the new regulations come in.”
Radeep Mathew, Head of Consulting at innovation funding specialists Leyton, said: “In his speech today, the Chancellor signalled a return to the more complex Corporation Tax regimes of old, with an approach that seeks to tax the larger companies that have generally fared well throughout the Covid restrictions over the last year while tapering the rate to provide additional relief to smaller businesses. The top-line increase in corporation tax from 19% to 25% is a significant jump given the need for business-driven economic growth over the coming years and will certainly have an impact on the outlook for larger businesses all over the UK. Nevertheless, the UK will continue to have one of the lowest rates of the G7 countries, and it is especially welcome to see that smaller businesses, which form the backbone of the UK economy, will continue to pay the current rate of 19%.”
Richard Godmon, tax partner at accountancy firm, Menzies LLP, said: “The Chancellor’s ‘super deduction’ is a record-breaking opportunity for businesses to reduce their corporation tax liability by 130 percent of the value of any investment they are making in the next two years on qualifying plant and machinery. This equates to a significant cash windfall for businesses and will help to bolster cash flow at a critical time.
“However, the Chancellor has also warned that tax hikes for businesses are on the way, with a rise in the rate of Corporation Tax to 25% on profits over £250,000 from April 2023. While the rise in Corporation Tax won’t be welcome, it has been designed in a sensitive way to hit those businesses that have generated the most profits, as oppose to those that have not. The tapering mechanism will ensure businesses with fewer profits will pay less tax and small businesses with profits of £50,000 or less will not be affected by the tax hike – the rate payable on their profits will stick at the current rate of 19%.”
Kinaxia Logistics Chief Executive Simon Hobbs said: “The huge increase in corporation tax is a blow. The Chancellor recognised that it would be mid-2022 before our UK economy recovers to 2019 levels, so this increase will hit just as businesses are seeing and starting to benefit from the recovery. While we recognise we need to help the government repay the debt incurred during the pandemic, one year’s delay or a more gradual phasing would have been more helpful.”