Britain will raise its corporation tax on the biggest and most profitable companies to 25 percent from 19 percent from 2023, the first hike in nearly half a century, but it will temper the burden with a “super deduction” to spur investment.
Finance minister Rishi Sunak, unveiling his budget in the British parliament on Wednesday, said the tax increases were fair given the vast state support to businesses during the COVID pandemic.
“The government is providing businesses with over 100 billion pounds of support to get through this pandemic so it is fair and necessary to ask them to contribute to our recovery,” Sunak told parliament.
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“Even after this change, the United Kingdom will still have the lowest corporation tax rate in the G7,” Sunak said.
The corporation tax hike -- by far the biggest tax increase announced by Sunak in the budget -- will come in from 2023, when the economy is expected to regain its pre-pandemic size.
The measure is forecast to raise 11.9 billion pounds in the 2023-2024 tax year, rising to 17.2 billion pounds in 2025-26.
Sunak said Britain would encourage businesses to invest their cash reserves with a so-called “super deduction” to reduce their tax bill by 130 percent of the cost.
But the Confederation of British Industry, the lobby group for big British companies, said the hike in corporation tax was sending a worrying signal to investors.
“Moving corporation tax to 25 percent 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,” CBI Director-General Tony Danker said.
Tax on business
The United Kingdom introduced corporation tax at a rate of 40 percent in 1965. It rose to a high of 52 percent in the early 1970s and had been cut ever since -- until today.
In the 1980s, the main rate was cut to 35 percent under Margaret Thatcher, then during the 1990s from 35 percent to 30 percent and eventually to 20 percent.
It was trimmed to 19 percent from 2017 and was supposed to be reduced further to 18 percent and then 17 percent but has been held at 19 percent.
Law firm Clifford Chance said the hike in corporation tax -- which in the United Kingdom is particularly broad and has fewer reliefs -- would make the UK’s effective rate higher than Germany or the United States and on a level with France’s.
“The surprising effect of the rise in corporation tax is that the UK will have one of the highest effective rates in the world, almost level with the French rate, and much higher than the US or German rate,” said Dan Neidle, tax partner at Clifford Chance.
Sunak said small businesses with profits of less than 50,000 pounds a year would be charged only 19 percent, meaning around 70 percent of
businesses would be unaffected.
He also said the government would taper in the tax on profits above 50,000 pounds so that only businesses with profits of 250,000 pounds or more -- around 10 percent of companies -- would be taxed at the full 25 percent rate.
The super deduction, Sunak said, would allow a construction firm to cuts its tax bill by 13 million pounds instead of 2.6 million pounds now if it bought 10 million pounds of new equipment.
“We’ve never tried this before in our country,” Sunak said.
Sunak quoted the Office for Budget Responsibility as saying it would boost investment by 10 percent.
“It makes our tax regime for business investment truly world-leading, lifting us from 30th in the OECD to 1st,” he said. “This will be the biggest business tax cut in modern British history.”
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