12 July 2022
It was announced in the Budget of 2016 that the main rate of corporation tax was to be reduced to 17% with effect from 1 April 2020. Fast forward 4 years, and the world was gripped by a global pandemic which had far reaching economic consequences, with many UK taxpayers requiring significant government support. Even before the pandemic, it was announced that the rate would be held at 19% with additional revenue raised being spent on the NHS. A year later, an increase in the rate was expected, but there weren’t many that anticipated an increase by over a third to 25% with effect from 1 April 2023.
As a revenue raiser, the rate of corporation tax is a blunt tool. If it increases too much above that applied by other countries with relatively similar legal systems, infrastructure, and perhaps more appealing incentives that reduce the overall tax base, it can have a disproportionate impact on attracting foreign investment which has wider reaching implications for other tax revenues such as VAT and employment taxes. The UK also has Brexit to contend with, whereas EU countries do not.
With the global minimum tax rate of 15% being signed up to by nearly 140 countries in the Summer of 2021, and with no other major economies raising their tax rate to such a degree in response to the pandemic, perhaps persevering with the proposed increase could be deemed unnecessary. When you consider that less than 5% of the total tax revenues in the UK are derived from corporation tax, it starts to look unappealing.
Regardless of which candidate is appointed as the country’s leader later this year, and which tax rate they go for, we should spare a thought for finance teams across the country. With each new enacted rate, including the 17% rate and others that never actually came into effect, those teams have to carry out extensive and often complex calculations to revalue the tax liabilities and assets that will crystalise in future periods that are required to be included in their companies’ balance sheets.
Add in a thought for those businesses that incurred significant tax losses due to the pandemic in 2020, that are now trying to decide whether to carry them back to offset tax liabilities in 2019 and gain a repayment or carry them forward to a later period when the tax rate is, or at least was, expected to increase and thus make them over a third more valuable.
It should be noted that these are numbers that impact net asset values. Companies with strong balance sheets make different decisions regarding investment and staff reward to those with weaker balance sheets. The calculations also impact amounts available to be paid out to shareholders as dividends. Despite their largely estimated nature, they can have a real impact on stakeholders.
Is the main rate of corporation tax really a tool on which leadership battles should be won or lost? Whichever candidate is successful, indeed, whichever party is in power, a period of stability in this regard would be welcome.