Chancellor Rishi Sunak announced in the Budget that corporation tax will rise to 25 percent in April 2023 as he seeks to plug the hole in the UK’s finances left by the pandemic.
The impact of lockdown restrictions to prevent the spread of the virus has seen the UK suffer the biggest slump in economic output in 300 years, with GDP down 9.9 percent in 2020.
As a result, Sunak was keen to emphasise fiscal responsibility to the House of Commons.
“It would be irresponsible to allow our future borrowing and debt to go unchecked. Once we are on the way to recovery, we need to begin fixing the public finances,” the Chancellor said.
There were rumours circulating in the run-up to the Budget that corporation tax would be one of the areas Sunak planned to hit, but Deloitte’s international tax partner, Zubin Patel says the six percentage point rise is still higher than expected.
“It was of course widely trowelled that there would be a rise in corporation tax. It is something of a surprise that the rate is going up so significantly,” he says.
“I can’t recall a rise of six percentage points and an overnight increase – which is probably the biggest surprise, rather than a stepped increase over the next two or three years.”
Chris Sanger, EY’s head of tax policy agreed with Patel, saying in a statement that the government went further than many had expected. Overall, it was a “tough day” for larger businesses but there was some respite for smaller firms, he said.
“The Chancellor has slightly tempered this for some by retaining the reduced rate of 19 percent for those with small profits of up to £50,000, and then tapering the relief up to £250,000. However, even in this area, the Chancellor seems to be focusing on small rather than small and medium sized businesses, as the previous system of reduce rate that existed until 2015 applied to business with profits of up to £1,500,000 per annum.”
Patel says the move is a stark departure from previous Conservative governments, with former chancellor George Osborne initially reducing corporation tax to 19 percent a decade ago. Sanger said the Chancellor had given up having the lowest rate in the G20 “in favour of the far less competitive challenge of the best in the G7”.
Institute for Fiscal Studies (IFS) director, Paul Johnson said in a statement that the rate rise amounted to a major shift in policy.
“Make no mistake, this proposed increase in the main rate of corporation tax is a big reversal of decades of policy direction and a significant risk. For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high,” he said.
Fears for SMEs
There are concerns over the impact the tax hike will have on SMEs, particularly after such a brutal 2020 for many. Toby Ryland, corporate tax partner at HW Fisher said in a statement that the 25 percent rate would have a “detrimental” impact on SMEs and become a further unwelcome hit to their bottom line.
He added that a better alternative would have been to have a more robust tiered corporation tax system, as the current tiers make little difference to most SMEs.
“Despite a tiered system, the lowest band is so small that for anyone other than the smallest companies are going to face significant tax rises,” Ryland said.
However, Deloitte’s Patel says a more complex tax system was not without its own problems.
“It introduces an awful lot of complexity. It introduces issues where companies and groups are at the margins of these rates. That is why they have been cautious about trying to introduce a tiered system,” Patel says.
Before April 1, 2023, corporation tax will remain at the current 19 percent level.