24/02/23

UK: Rise in corporation tax ‘highly likely’ despite ‘rebellion building behind it’.

As published on accountancyage.com, Thursday 23 February, 2023.

A rise in corporation tax (CT) is expected to occur on April 1 even after £30bn less borrowing in the year to date than was predicted, according to Nicola Campbell, partner at Azets.

The main rate of CT is rising from 19% to 25% from April 1. Senior conservative MP David Jones wrote in a letter that the rise in CT will see the UK lose out on “potential new jobs and higher national output” while Rishi Sunak’s hopes of seeing Britain become a leading “science superpower will be undermined.”

These calls were strengthened after an ONS announcement showed that the UK’s public finances were in surplus last month.

Campbell still believes the 6% rise in corporation tax will still go ahead as planned despite the “rebellion building behind it.”

“One alternative may be to increase the thresholds at which the higher tax bands take effect, easing the burden on businesses at the smaller end of the scale or alternatively retain super deductions on capital spending,” she adds.

The increase means businesses across the UK will be paying an additional £18bn per annum by 2025/26.

Campbell is concerned the significant increase in conjunction with rising interest rates and inflationary pressures will “restrict inward investment opportunities and in turn growth” in the UK.

Corporate tax partner at RSM, Hannah Lloyd shares this view, adding: “it seems inevitable that businesses that are already struggling to remain or become profitable amid rising interest rates, high energy prices and staff cost pressures, will need to cut down on investing for growth in favour of paying their taxes.”

“When businesses don’t invest, productivity and growth stalls,” she notes.

Amidst continuing upward pressure on energy prices, Campbell’s “greatest worry” is the effect this will have on owner-managed businesses who are unable to invest in the growth of their firm as they require the profits to pay their household bills.

Lloyd believes the current financial climate will mean businesses face the “bleak” choice of “borrowing funds at relatively high interest rates or spending longer at current capacity to finance the outlay from post-tax profits.”

Campbell says when a large increase to CT occurs, it is vital that UK SMEs actively manage their Corporation Tax liabilities.

“Cash and liquidity are critical for every business so we would encourage owners and directors to take full advantage of available tax reliefs,” such as R&D relief, she adds.

As part of David Jones’ letter which was arranged by the Centre for Brexit Policy, it says AstraZeneca’s decision to invest 320m in the Republic of Ireland instead of England was a “dispiriting blow to the UK economy.”

Sir Pascal Soriot, AstraZeneca’s chief executive said the decision not to invest in England was due to its “discouraging” tax rates.

Lloyd echoes this sentiment and says high CT deters foreign investment and while there are benefits that outweigh having higher rates it is only “to an extent”.

“But when comparing a 12.5% tax rate and membership with the EU to a 25% rate and no such membership, Ireland’s comparative allure is hard to ignore,” she admits.

The chancellor, Jeremy Hunt will announce his spring budget on March 15.