Chancellor Rishi Sunak will use the election of Joe Biden as partial cover for a big Budget increase in corporation tax rates, arguing that the US president is also planning a hike in business taxes.
UK government officials note that Biden — and more recently US treasury secretary Janet Yellen — have proposed an increase in corporate tax rates from 21 per cent to 28 per cent.
Sunak is also expected to announce a sharp rise in Britain’s corporation tax rate, currently 19 per cent, over the parliament as he tries to restore order to the country’s public finances.
Officials working on the Budget say Sunak wants to keep Britain’s business taxes “competitive” with other G7 countries; that formulation could allow rates to rise to 25p or higher.
The proposed rise in the headline corporate tax rate in the US would give Sunak greater scope to increase the UK rate. Biden explained his policy on the basis of budgetary prudence and fiscal equity.
British officials say a notional headline rate of 25 per cent would still be among the lowest in the G7 group, although such an increase would trigger a backlash from some Conservative MPs. The Treasury declined to comment.
Business groups have expected smaller rises — perhaps to 23p — and one former Tory cabinet minister claimed the government was putting up “straw men” and that a smaller increase was likely.
“The idea of 25p is a bad idea and would not fly with the Tory backbenches,” the ex-minister said. “A more modest increase is probably inevitable and probably manageable.”
George Osborne, former chancellor, wanted to cut corporation tax to less than 15 per cent as a post-Brexit signal to the world that the country wanted to be a magnet for investment.
But Sunak needs extra tax revenue — each percentage point increase in corporation tax raises £3.3bn — and is sceptical about the amount of extra inward investment generated by the UK’s low rates.
Michael Heseltine, former president of the Board of Trade, told the Financial Times: “The chancellor faces a large budget deficit and he has to tackle it. Of all the options available, increasing corporation tax by relatively small percentages seems to me one of the least unattractive.”
Business leaders have been largely relaxed about the prospect of the government raising corporation tax, with several executives saying that this would at least mean that they were making a profit and spare those that were still struggling in the pandemic.
One said: “Corporation tax is pretty safe political ground. There is not too much outrage. At least with a tax on profit, the point is there is profit to be taxed. It’s not hitting us on the way in.”
But bosses also cautioned that it would depend on how high the tax rises went. One business leader said: “It would raise the question over our international competitiveness and about attracting inward investment, which the government seems very keen on.”
Stuart Adam of the Institute for Fiscal Studies said that while Britain had a low headline rate of corporation tax it was “middling” in international league tables when all corporate tax revenues were calculated as a share of national income.
Adam said corporation tax revenue “overwhelmingly comes from a number of very big and profitable companies”. Sunak’s Budget, by contrast, is expected to focus help on smaller, innovative companies — many of which make no profits.