George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Robots could increase UK corporation tax rate to 25 per cent

During my school years in the 1960s and early 1970s, computers and robots were held out as the gateway to an age of leisure. With robots undertaking everything from household chores to factory work, humans would be free to enjoy themselves. Inevitably, such a naïve vision was never to be realised. While computerisation and robotics have had a huge impact on all aspects of human life, for most people they have failed to deliver an age of leisure.

Now, however, the rise of AI seems set to fundamentally change the world of work. A recent report by Future Advocacy predicts that, depending where you live, between 22 per cent and 39 per cent of jobs are at risk of automation.

While we remain of the view that robots should not be taxed as if they were human beings, AI presents a fundamental challenge to the tax base:

  1. If people cannot be retrained, jobs will be lost. PAYE income tax and NIC receipts – both employees’ and employers’ - will decline. Payments of universal credit will increase. In other words, the Exchequer will suffer a double whammy: tax receipts will go down while payments increase.
  2. At the same time, corporate profits will increase. Corporation tax receipts will therefore also go up. However, with corporation tax currently running at only 19 percent, this will not make up the shortfall in income tax and NIC.

The logical solution to the Exchequer's problem is to introduce a compensating increase to corporation tax rates. But by how much?

Stick with me while I take you through some numbers.

First, corporation tax. The rate is currently set at 19 percent, scheduled to drop to 17 percent on 1 April 2020. For the year ended 31 March 2017, corporation tax receipts totalled £49.5bn (source – HMRC).

Next, PAYE income tax and NIC. For the tax year 2016/17, income tax totalling £149.7bn was collected through the PAYE system. For the same period, national insurance contributions on the employed, employers and the self-employed totalled £124.9bn (source – HMRC).

At this point, the figures become a little rough-and-ready because of the uncertainty of the impact of AI, the way it will affect different industries and different income groups, and of course the impact on the self-employed.

So let’s assume that PAYE income tax and NIC will reduce by 10 per cent, say £27.5bn. That's much less than the level of at-risk jobs identified in the Future Advocacy report.

There's an argument that, if corporations boost their profits through AI and robotics while simultaneously cutting jobs, PAYE income tax and NIC, then corporation tax rates should rise to make good the shortfall to the Treasury.

A total profits increase from AI of around £65 billion (approximately 10% of UK payroll; source - ONS) could increase the corporation tax yield by £12.3 billion. That’s still a shortfall of £27.5 - £12.3 = £15.2 billion.

Based on these figures, if the rise of AI produced job losses of 10 per cent, then the corporation tax rate would have to increase to 25 per cent.

Job losses don't only result in reduced tax revenues, they lead to increased universal credit expenditure. Taxes would have to rise again to provide funding for that unless growth driven by AI and robotics made good the shortfall.

Because different business sectors will be able to make use of AI and robotics to different extents, a simple increase in the headline rate of corporation tax might seem like rough justice. But it’s a type of justice.


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