Recent press reports have speculated that the Chancellor, Rishi Sunak, is set to increase the main rate of UK corporation tax rate (currently 19%), with some reports predicting a sharp rise to 25%.
This may be surprising, given that in the Finance Act 2020 the government legislated to keep the corporation tax rate at 19% for the 2020-21 and 2021-22 tax years. For some years now the Conservative government has pursued a policy of successive corporation tax rates cuts and prior to the Covid-19 pandemic, had planned to reduce the main rate 17% from April 2021.
A substantial increase is likely to be unpopular with UK businesses, with some struggling to stay solvent (let alone profitable) during the ongoing pandemic. However, the political and economic landscape has shifted substantially since Budget 2020. The Chancellor now has to consider how the government might look to plug the spending gap, with a potential budget deficit of £394bn.
Boris Johnson has previously indicated that there will be no return to austerity, which leaves revenue-raising measures on the table. Fettered by the triple lock pledge not to raise income tax, NICs or VAT, the Chancellor's options are limited. We have speculated on how Rishi Sunak might raise revenue (see this briefing) but one of the front runners is an increase to the main rate of corporation tax, with each 1% increase estimated to raise an additional £3.4 billion.
However, the need to raise revenues has to be balanced with the desire to safeguard the green shoots of economic recovery and ensure - particularly post-Brexit - that the UK remains an attractive location for business. A sharp rise in the UK corporation tax rate might upset that balance and damage the UK's competitiveness.
However, there are some important points to bear in mind:
- The UK currently has the lowest corporate tax rate in the G7 and one of the lowest rates in the G20 – even an increase to 25% would leave the UK with one of the lowest rates in the G7. It is also rumoured that the Biden Administration may increase the US federal tax rate from 21% to 28%; if so, a rise in the UK corporation tax rate would not leave the UK out of step with other major economies.
- The availability of reliefs means that whilst the headline tax rate may increase, the effective tax rate may not. Reliefs (such as capital allowances and R&D reliefs) decrease the amount of a company's profits subject to corporation tax, reducing the effective tax rate. There are press reports that the Chancellor might look to introduce new reliefs or make existing reliefs more generous. This could allow additional revenue to be collected from businesses which have thrived during the pandemic (such as some digital retailers) whilst protecting those businesses who have struggled from the impact of a corporation tax rate increase.
- The UK has a fairly generous regime allowing for losses suffered in one year to shelter profits from tax in current, prior or subsequent years across a corporate group (although there are now limits on the amount of losses that can be utilised in future years). Trading losses accumulated during the pandemic might therefore prove to be a useful shield against increased corporation tax.
- The UK's broad dividend exemption means that usually, no corporation tax is payable on the receipt of dividends by UK companies. Gains on the disposal of shares which meet the conditions of the UK's substantial shareholding exemption are also exempt from corporation tax.
- The government is consulting on a new tax privileged asset holding company regime which, if implemented, should enhance the competitiveness of the UK.
Given these points, it will be interesting to see whether the perception of the UK as a competitive business jurisdiction will be affected by any corporation tax rise. It will also be interesting to see whether any rate increase takes effect from April 2021 or whether the government sticks with the Budget 2020 commitment to a 19% rate for the forthcoming tax year and legislates for an increased rate from April 2022.