Jeremy Hunt and Rishi Sunak’s corporation tax hike is poised to squeeze the UK economy by mothballing investment, new figures out today show.
Nearly half of all mid-sized companies intend to shelve big spending projects due to the Chancellor and Prime Minister snatching a greater share of company profits, according to consultancy BDO.
Last month, the rate of corporation tax jumped to 25 per cent from 19 per cent, reversing years of cuts to headline rate of the profits tax. It’s still low compared to other OECD nations.
BDO said of the 500 medium sized companies it surveyed, almost a third (31 per cent) warned the uplift in corporation tax had prompted them to mull leaving the UK.
Corporation tax is a levy on profits above £250,000. Economists have warned raising it weakens incentives for firms to invest in resources that enable them to create more goods and services as doing so takes away a larger share of the return yielded from such spending.
Britain, like most other rich countries, has been grappling with an economic slowdown since the 2008 financial crisis, mainly due to sluggish productivity growth.
Experts think boosting investment is key to raising productivity as it gives workers better tools to generate products. Business investment has tanked since the 2016 Brexit vote, dealing a blow to the UK’s economic potential.
In order to soften the six percentage point tax rise, the Chancellor gave businesses an effective tax cut by allowing them to deduct the whole cost of certain investments from their corporation tax liabilities.
The move is intended to steer firms toward investing by offering them tax cuts conditional on them boosting capital spending. It will last until April 2026 and replaces the 130 per cent super-deduction.
Over two thirds of mid-market firms plan to step up investment to benefit from the tax relief, BDO said.
“The headline corporation tax rate will dampen current business investment plans although the positive reaction to the new ‘full expensing’ capital allowances regime suggests this may only be a short-term effect. It has also highlighted a high degree of concern about the international competitiveness of the UK’s corporate tax regime,” Paul Falvey, tax partner at BDO, said.
Hunt at the budget last March expanded free childcare for children aged nine months to five years to most working parents in a huge expansion of the welfare state, which BDO will make it a lot easier for companies to hire new staff.
A Treasury spokesperson told City A.M.: “Our corporation tax rate is the lowest in the G7 and businesses with profits below £250,000 have been protected from the full rate rise – with 70% of UK companies seeing no increase at all.”
“Growing the economy is one our top priorities, which is why we’ve introduced significant incentives for business investment through measures such as radical full expensing – in itself equivalent to an effective corporation tax cut of £9bn per year.”