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Is there a case for increasing the Corporation Tax rate?

Rishi Sunak is reportedly considering increasing the rate of Corporation Tax in the March Budget. In this article, Neil Insull (Corporate Tax Partner) offers his thoughts on the proposal and a five-point corporate tax plan for exiting the pandemic.

Rishi Sunak has indicated that he may increase the Corporation Tax rate from 19% to 23% in his Budget on 3 March

An increase of 4% in the Corporation Tax rate would raise around £12b a year. Not an inconsequential sum. In fact, far more lucrative for the Exchequer than abolishing Entrepreneurs’ Relief, which costs around £2bn annually.

So why would the Chancellor want to target companies? And why would the Government abandon one of the cornerstones of Tory policy – supporting business and enterprise and reducing their fiscal burden? Since 2012, Corporation Tax receipts have risen by 33% despite the rate of Corporation Tax falling by 5% in that time.

The answer of course is that (yes, I’ll say it) we live in unprecedented times. The pandemic has swept away all projections of economic growth, employment, and levels of Government intervention through borrowing and tax raising. It seems that not only the country, but the world too, is still having to feel its way – almost day-to-day – in an uncertain and unchartered economic order. In my view, the Government has no option but to ‘start again’; to seek a new path that not only has to close the gap between spending and borrowing, but  also gives the greatest opportunity for growth and wealth creation.

One of Mr. Sunak’s biggest problems is the promise made in the 2019 Conservative Manifesto not to increase Income Tax, VAT and National Insurance. A vote winner back then, but a nightmare for The Chancellor now. However, with no promises to companies (who don’t vote of course), an increase in Corporation Tax would appear to be fair game in 2021.

Arguably, the Corporation Tax rate has already increased under this Government when a promised rate of 17% was dropped in 2020 and the rate remained at 19%. That policy shift was forecast to save over £6bn a year, a tidy sum without the negative headlines. So why shouldn’t Mr. Sunak just do it again, and go big this time? Not just increase it by 4%, but how about 6%, or even 8%?

Well, I’ll tell you why not

According to the most recent figures published by The Treasury in September 2020, there are approximately 1.5m companies in the UK who pay Corporation Tax. A million of those companies had a tax liability of less than £10,000 and, in total, contributed no more than about 6% of the total Corporation Tax receipts. That equated to about £3bn.

In the same year, there were 4,500 companies with tax liabilities in excess of £1m, who contributed about 55% of the total tax receipts.

These numbers confirm what we already know. Most of the Government’s tax receipts are concentrated in a few thousand companies. But the vast majority of UK companies, individually, add relatively small sums to the total. This is a taste of reality and a reminder that we are an island of small businesses; the proverbial ‘nation of shopkeepers’.

Without doubt, it is these smaller businesses and the early-stage and entrepreneurial companies that are the most fragile at this time, with almost no reserves to fall back on, who have borne the brunt of the financial impact of the pandemic. This is not to say the Government has neglected them; far from it. UK business has of course benefited from substantial support in the form of grants, a rates holiday, loans, and cash for furloughed employees. It may not be perfect but the Government should in the main be applauded in their efforts to keep most businesses alive.

There will be many who will say that all companies – regardless of size – have a duty to ‘pay-back’ for this support. Although I am sympathetic to that view, it is critical that the timing of any tax rises has to be right, and properly targeted. But right now, in the middle of lockdown, is not the time to make smaller businesses, damaged financially and saddled with considerable levels of debt, fear the footsteps of the taxman when cash – in its scarcity – should instead be driven towards investment and securing employment.

So, what should our Chancellor do?

Here is my five-point plan for Corporation Tax:

  1. Re-introduce a small companies rate of Corporation Tax. Ideally, that rate should be as low as possible, and the threshold as high as possible. Perhaps, for now, the rate for small companies must remain at 19%, but let’s set the threshold sufficiently high so that only the very largest of UK PLCs pay at new higher rates.
  2. Enhance and simplify existing tax incentives for small companies, such as Research & Development (R&D) tax relief and the Annual Investment Allowance (AIA). Demonstrate to entrepreneurs a fiscal environment which rewards innovation and growth by cushioning and deferring tax bills. In 2019, the R&D Small and Medium-Sized Enterprise (SME) scheme cost the Exchequer about £3bn. But this is £3bn which has also been reinvested by companies that are hungry for growth and have a desire to generate significant profits in the future. The Government itself needs to innovate and look to transform tax reliefs and reinvigorate business confidence.
  3. Unbuckle restrictions on the use of tax losses. Changes to the tax law in 2017, which increased the opportunity to relieve carried forward losses, were welcome. But the rules are complicated and can unexpectedly deny relief. These rules should be simplified, and the carry back rules extended to three years. Losses being made during this pandemic are, by any measure, wholly exceptional. They are certainly not being made through the normal course of events and so require special attention.
  4. Extend the corporate tax base. The digitalisation of the global economy is forcing governments to reassess whether tax rules are fit for purpose and to redefine and expand their taxing rights to be more aligned with value creation. The UK Government have been quick to react and have introduced the Digital Services Tax. This hits the very largest of the online platforms and, although it may only be a stop-gap before the Organisation for Economic Co-operation and Development (OECD) reaches consensus itself on how to deal with the global digital economy, the direction of travel has clearly been set. This policy is, in my view, the right one. No longer can we rely on tax legislation written when computers were the size of small buildings. And if the rules are fair and consistent, then we should embrace the new norm, and action the transition quickly.
  5. Start a revolution:Reform of the tax system is long overdue. While attempts have been made to bring parts of the corporate tax code into the modern world, they sit uncomfortably alongside the ancient decrees of Income Tax and Capital Gains Tax. Business owners, in particular, are faced with a myriad of tax rates, conflicts between the codes, and a resulting mesh of anti-avoidance rules hindering decision making and creating unintended tax costs. Surely now is the time for Rishi Sunak – post-Brexit, with the economy on its knees, and more importantly when his own popularity rating is higher than any previous Chancellor in living memory – to shake the tree and start a fundamental reform of our tax system and move it into the 21st Century.

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