07 February 2024
Shadow chancellor, Rachel Reeves, recently announced that if the Labour party are elected at the upcoming general election, they would cap the headline rate of corporation tax at the current rate of 25% for the next parliament term. As a pledge intended to offer UK businesses stability and certainty in respect of their investment decisions, the announcement may be welcome news to business owners across the UK. However, the proposed policy has been subject to criticism from both left-wing campaigners and the opposing party, with Conservative minister Kemi Badenoch suggesting the Labour party may increase taxes on businesses and working people in due course. We look at the Labour party’s history on corporation tax and whether this suggests a different approach.
UK corporation tax was initially introduced by the Labour party in 1965, at a headline rate of 40%. This replaced the old tax system whereby company profits were subject to income tax and an additional profits tax. The headline corporation tax rate peaked at 52% in 1973 but this has been followed by an extended decline until the rate bottomed out in 2017 at 19%.
Since its initial introduction, the headline corporation tax rate has never been increased by a Labour government. Instead, Labour governments have reduced the main rate three times. These reductions were between 1998 and 2008, when the main rate dropped from 33% to 28%. These reductions were in line with Tony Blair’s pledge to review the corporate tax regime to promote greater long-term investment. The fluctuations in the main rate have instead been predominantly at the hands of Conservative governments, with this seemingly being a well-trodden path for the Conservatives to stimulate economic growth.
Whilst the Labour party have not regularly altered the main rate of corporation tax, they have adjusted the small profits rate and thresholds (broadly, a lower corporation tax rate for companies with smaller levels of taxable profits). Throughout the same period from 1998 to 2008, the small profits rate reduced from 21% to 19% and back to 21%, with the Labour party targeting their support for smaller businesses.
An important point to note is that even with the changes in the main and small profits rates between 2005/06 and 2008/09, the receipts from UK corporation tax were broadly consistent at around £45bn, likely due to other changes to the corporation tax regime, such as capital allowances being increased or reduced.
With this history in mind, if a Labour government is elected this year, some may argue that it should not really be a surprise to see Labour hold their pledge to maintain the 25% main rate of corporation tax for the duration of the next parliament. Interestingly, the recent announcement did not give the same assurance for the small profits rate or thresholds. Will history repeat itself and we see a recurrence of Labour’s policy during the early 2000s? Or will Starmer’s Labour government look to break the mould? In any event, history suggests that any changes in the main rate of corporation tax are unlikely to have a significant impact on overall tax revenues and so business owners may not want to get too excited.