Corporation tax – time to consider cutting the rate?

Companies, of course, cannot vote, and with an election likely in the second half of this year most of the Chancellor’s firepower will surely be directed towards the voting public. However, there are good reasons to hope that the Chancellor might consider cutting the rate of corporation tax.

Corporation tax paid in the UK is at an all-time high and is expected to increase further as the benefit of the capital allowances super-deduction fades into history. Whilst the Autumn Statement contained some positive news for companies with the announcement of permanent expensing of capital expenditure, it should be remembered that this represents a timing benefit only.

This means that it should delay the payment of corporation tax but not affect the amount of tax that will ultimately be paid. One factor that will impact the ultimate amount of corporation tax paid is the headline rate of tax, and on this measure the UK’s position has recently changed dramatically and is starting to look expensive.

Statistics for the last five years show that the average corporate tax rate across the OECD has hovered around 23.5-24%. For four of those years the UK’s rate was substantially below average at 19% representing a clear competitive advantage, but with the increase in the main rate of corporation tax to 25% this advantage has disappeared.

In the Autumn Statement, the Chancellor observed that the UK’s corporation tax rate was still below headline rates in the other G7 countries. This is true, but over time we may see the uplifted rate acting as a brake on UK corporate activity.

Of course, there is also a danger that the UK starts to look unattractive to international investors. Recent news suggest that some international investors are struggling to make profits in the UK, and the latest published statistics show that foreign direct investment (FDI) into the UK has declined for five years running.

Similarly, the International Tax Competitiveness report published annually by the Tax Foundation shows that the UK has slipped down the corporate tax rankings from 10th place in 2022 to 28th in 2023. It would be reaching too far to attribute all of this to our corporation tax rate but the recent increase is unlikely to have helped.

The Harrington Review published in November 2023 made six recommendations for boosting FDI all of which were accepted by the Chancellor in the Autumn Statement. However, notably, recommendations about specific tax rate changes were outside the scope of that review, so this may be an area that has not yet been fully explored.

The increase in the main rate of corporation tax to 25% announced in March 2021 was the first increase in the main rate since 1973, and the scale of the jump caught many by surprise at the time. The evidence suggests that it may now be squeezing corporate profits and deterring international investment, so an easing of the rate in Spring Budget would be welcome relief for UK corporates and may help the UK to retain its international mojo.