The Budget rumour mill
With the Budget now just six weeks away, rumours are emerging as to what it may hold.
It is the time of year for Budget rumours to start appearing in the press. As usual, at this stage it is impossible to tell which are the genuine possibilities. One ‘idea’ which is making the headlines at present is an increase in corporation tax.
The Chancellor has been somewhat painted into a corner by manifesto pledges made in the pre-pandemic era which appear not to be amenable to the standard issue, pandemic-justified Government U-turn. Corporation tax rises look to be an attractive option, but would only be part of any long term financing solution.
Mr Sunak already has form on corporation tax. Section 5 of his first Finance Act as Chancellor (Finance Act 2020) scrapped the reduction in the rate of corporation tax from 19% to 17% which had been legislated for in the Finance Act 2016 by George Osborne. To be fair, the U-turn was set out in the Conservative’s 2019 election manifesto, albeit only obliquely. Boris Johnson revealed the decision to reverse the planned cut to the CBI conference in mid-November 2019 so that by the time the Conservative manifesto was published at the end of that month, all it said was ‘…by cutting corporation tax from 28 per cent to 19 per cent, we have encouraged more businesses to invest and grow in the UK’. A look at the costings document that accompanied the manifesto revealed the extra 2% on corporation tax to be producing the lion’s share of anticipated extra revenue – £5,200m out of £5,780m in 2021/22.
The pandemic has cut expectations of corporation tax inflow significantly. Back in March 2020, the Office for Budget Responsibility (OBR) projected onshore corporation tax receipts of £57.2bn in 2020/21, £58.7bn in 2021/22 and £61.4bn in 2022/23. By the time of the November Spending Review, it had revised those figures to £43.2bn, £48.5bn and £56.4bn respectively. Nevertheless, corporation tax remains the fourth largest source of revenue for the Treasury, after income tax, National Insurance and VAT. That leading trio are all subject to the manifesto pledge not to increase rates. The three also each put considerably more into the Exchequer’s coffers: £188.2bn, £140.8bn and £116.3bn respectively, based on the OBR’s November projections for 2020/21.
The HMRC tax ready reckoner, published last May estimated that a 1% increase in corporation tax in 2020/21 would have meant an extra £2.4bn of receipts during that year, rising to £3.1bn in 2021/22 and £3.4bn in 2022/23. Those figures take no account of the pandemic fallout but suggest that each 1% increase from April 2021might yield around £3bn extra by 2023/24.
Corporation tax has the benefit of generally not directly affecting the electorate. The Great British public is generally in favour of tax increases, as long as the rises do not apply to them personally. In practice, corporation tax would hit some individuals directly – those who choose to work through their own private companies. The Chancellor has already shown limited interest in this sector, witness the way many company directors reliant on dividends have been allowed to fall between the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme.
The UK has a low rate of corporation tax in comparison with other major economies. The OECD average for 2020 (including local taxes) is just over 23%, but this is distorted by many smaller economies with ultra-low rates (e.g. Hungary with 9% and Ireland with 12.5%). Larger countries tend to have higher rates – Germany has a 29.9% rate and France 32.02%, for example. At the last election, the Labour Party proposed raising the main corporation tax rate to 26% by 2022 (and introducing a small companies’ rate of 21%). It noted that such increases would still “…leave corporation tax rates for all firms lower than they were when the previous Labour government left office in 2010”.
Rates are only one part of the corporate tax mix, however. One other important element is investment allowances, where for large businesses the UK ranks down towards the bottom of the OECD tables. Mr Sunak could choose to combine improved capital allowances (the annual investment allowance has already been pegged at £1m for another year) with increased corporation tax rates as a package to encourage growth and tax only profits.
Budget Day is 3rd March and updates will be on the gov.uk website.