A number of reports have indicated that the Chancellor wants to raise taxes in the upcoming Budget to deal with the mounting costs of Covid-19.
Among the suggestions rumoured is a rise in corporation tax from 19% to as high as 23%, which would raise almost £14bn a year for the Treasury, while only affecting those businesses who have received profits during the difficulties of the last year.
The Chancellor has disclosed that he thinks a corporation tax rate of up to 23% is reasonable given that the OECD’s average rate for developed nations is 23.5%.
The questions then for many businesses, who are still yet to recover from the impact of Covid-19, is whether a corporation tax rate rise is on the horizon?
We are still very much in the depths of the national lockdown, with many businesses having taken out additional borrowings under CBILS and the Bounce Back Loan Scheme.
Any increase in the corporation tax rate is going to be a difficult sell at present, especially when businesses are still reeling from the combined pressures of the pandemic and Brexit.
When announcing the Budget date last year, the Chancellor insisted that his speech would focus on measures to protect jobs and businesses. A sudden hike in corporation tax would seem to go against this pledge.
Of course, the counter argument is that such a tax would only affect profitable businesses. Unfortunately, such an argument misses the point that many companies will need time to recover from recent economic shocks and may be saddled with new debt, despite reporting a profit.
In fact, many economists have said that the actual impact of the current pandemic will not truly be felt until the country is in recovery and the current levels of government support are reduced or removed entirely.
Raising rates by up to 4%, as has been suggested, could entirely scupper the recovery of some businesses and for those with greater profits, it will reduce their ability to invest in new equipment, infrastructure and people, at a time when they are likely to need it the most.
Additional corporation tax bills will also reduce a company’s ability to pay dividends. For many businesses, this will reduce their ability to seek outside investment from shareholders, who may be less willing to invest their money into a business with a lower chance of returning dividend payments.
The Chancellor must also consider, that for many owner-managed businesses, government support for company directors has been scant.
Typically, owner-managers have extracted a low salary under PAYE and higher dividends, to ensure that their remuneration was tax efficient. Unfortunately, this meant that they were unable to take advantage of furlough payments in any meaningful way, and their personal income has been put under a lot of pressure.
The Chancellor has been under pressure from various groups of MPs, including the powerful cross-party Public Accounts Committee, to clarify how he intends to help the significant group of individuals who have effectively been excluded from government support to date.
Any increase in corporation tax is likely to be poorly received by SME businesses, who may have returned to profit but are in a pretty fragile state.
Following Brexit, the UK also has an opportunity to ensure that its economy, labour market and tax system, is attractive for external investment and job creation on the world stage.
Low corporate tax rates are one means of attracting inward investment, and a sudden increase in corporation tax is likely to do little to settle post-Brexit nerves among the international business community.
Whilst pandemic support measures undoubtedly need to be paid for, we are still some way from emerging from the economic shock caused by the pandemic. If a corporation tax increase is needed, many have speculated that it would be far better delayed until an economic recovery is well underway.
A rise in corporation tax is just one of a number of speculative measures that the Chancellor is believed to be considering at this time.
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