UK business leaders warn tax rise could undermine investment push

Chancellor Rishi Sunak sought to boost investment with new incentives in his Budget on Wednesday, but business leaders warned that his plan could be undermined by the first rise in UK corporate tax rates in more than 40 years. 

Stressing that companies would have to do their bit to help repair public finances devastated by the Covid-19 pandemic, Sunak announced an increase in corporation tax from the current 19 per cent to 25 per cent in 2023, when an economic recovery was expected to be well under way. 

The chancellor, who has come under fire from parts of his Conservative party for the well-trailed tax rise plans, sought to fend off critics with a two-year “super deduction” for capital investment, offering 130 per cent relief on purchases of equipment up to 2023. The measure amounted to £25bn giveaway, he said, marking the “biggest business tax cut in modern British history”.

He also announced more generous relief on losses incurred during the pandemic, and additional measures to help small businesses. 

The reintroduction of a small business corporation tax rate with a taper is good to see

Sunak said the tax changes “might not be popular but they are honest”.

Even at 25 per cent, the UK’s rate of corporation tax would still be the lowest headline rate among the group of seven developed economies, Sunak said, and below the G7’s current average of 27 per cent. 

But the rise marks a sharp U-turn on longstanding Tory ambitions to reduce the burden of corporate tax. Over the past 20 years the corporate tax rate has fallen from 30 per cent. 

The announced increase was also at the higher end of expectations and sparked concern among business leaders and Tory donors, who warned that it could hit investment despite the super deduction.

“Moving corporation tax to 25 per cent in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the UK,” said Tony Danker, director-general of the CBI employers group. 

Michael Spencer, the billionaire founder of ICAP and prominent Tory donor, said it was “the wrong thing to do at this point in the cycle”, although he welcomed the decision not to raise capital gains tax.

Alexander Temerko, an energy investor and Tory donor, warned that Sunak’s tax rise would “do more harm than good”, and said the government should instead be cutting corporation tax and VAT in order to help create jobs.

Business leaders and tax experts also questioned whether the new super deduction would be as effective as the chancellor claimed. The measure only applied to plant and equipment investment and would end just as the higher corporation tax rate comes into effect, noted Jon Richardson, head of tax policy at PwC. In addition, it presumed that businesses were generating enough profits to use the allowance.

However, there was recognition from some business leaders that companies would need to pay for the support that helped many of them weather one of the worst downturns in modern history.

“Although disappointing, a [tax] rise . . . is inevitable, and one could argue a necessity,” said Tony Hague, chief executive of Midlands-based PP Control & Automation.

Stephen Phipson, chief executive of Make UK representing UK manufacturers, said the tax increase came at a “challenging time” for the sector given the disruptions caused by Brexit, but admitted it was “a price that needs to be paid”. The super deduction was a welcome initiative that could “turbocharge investment in digital and green technologies”, he added.

The government estimates the tax rise will return an extra £17.2bn by 2025-26. Budget documents showed that total receipts from corporate tax were expected to double from £40.3bn in 2021-22 to £85.3bn for the fiscal year 2025-26.

In a nod to the plight of smaller companies which tend to have tighter cash constraints and could take longer to recover, Sunak said those with profits of less than £50,000 would be taxed at the current 19 per cent. Above that level, there would be a taper that meant that only 10 per cent of UK companies — those making profits of more than £250,000 — would pay the full 25 per cent rate, he said.

“The reintroduction of a small business corporation tax rate with a taper is good to see,” said Mike Cherry, chair of the Federation of Small Businesses. However, he said much would depend on the promise to review the system of business rates, which many companies see as discouraging investment.

The chancellor also sought to ease the pain by allowing companies to apply losses of up to £2m incurred over the next two years against tax previously paid.

Tax experts said this was designed to boost cash resources of companies whose reserves had been severely depleted by the pandemic.

Adam Marshall, director-general of the British Chambers of Commerce, said the measures to boost investment and support small businesses had “blunted” the impact of the chancellor’s “tough decision” to increase corporation tax.