In perhaps the most widely trailed budget ever, Rishi Sunak announced his increase in corporation tax as expected but the details were more of a surprise.
The chancellor’s critics had argued now was not the right time to raise taxes but in the runup to the announcement he stressed the need to “level with” people about getting control of the public finances.
Corporation tax will rise but not until 2023 in a sudden jump from 19% to 25% – a much bigger increase than expected to raise about £17bn a year. Sunak said only the biggest companies would pay the extra because businesses with profits of £50,000 or less would keep paying 19%.
The move reverses the policy of George Osborne, Conservative chancellor from 2010 to 2016, who cut corporation tax and argued the policy would bring in more revenue by attracting companies to the UK. Sunak said the UK would still have the lowest corporation tax rate in the G7 group of economies.
Jon Richardson, head of tax policy at PwC, said: “In increasing the rate in one bang in 2023 rather than a gradual rise, he will rip off the plaster more quickly and painfully than might have been expected.” Richardson also said thought the UK’s headline rate would still look good compared with peers the effective corporation tax rate has increased in recent years because of changes to allowances.
The move on corporation tax may not go down well with some of Sunak’s Conservative backbenchers who favour low taxes on business. But he said the increase was fair because businesses had received more than £100bn of government support to get through the crisis. Unprofitable companies will not pay the tax, he added.
Sunak’s other main surprise for companies was a so-called superdeduction. The two-year tax break will allow companies to deduct 130% of investment from their taxable income to encourage spending on plants and infrastructure as the economy emerges from the coronavirus crisis.
Capital Economics said taxes may not need to rise much further than currently scheduled and that Sunak could be in a position to announce some pleasant surprises with an election due by 2024.
“If we are right in expecting GDP to pretty much get back to the level it would have been in 2026 without the pandemic, then the chancellor may find that in a couple of years he’ll be in a position to cancel or reverse some of the proposed tax hikes,” Paul Dale, Capital’s chief UK economist, said.
Sunak also announced eight locations for low-tax freeports within the UK, his pet project. Critics have said the idea will do little to stimulate growth and that they are a means of tax avoidance.
