The Only Way is Up: UK Chancellor announces corporate tax rise to cover public spending

March 19, 2021

3 min read

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What's going on here?

The UK Chancellor, Rishi Sunak, has announced an increase in corporation tax (a tax levied on a company’s profits) from 19% to 25% as part of the government Budget for 2021 following record government spending and borrowing during the coronavirus pandemic. 

What does this mean?

Chancellor Sunak delivered his yearly Budget on Wednesday 3 March which included a forecast for the UK economy, plans on adjusting tax rates as well as big decisions on what the government will spend its money on. The Budget includes plans to increase the “headline” corporation tax from the current rate of 19% to 25% in April 2023. Government officials working on the Budget said that the Chancellor is keen to keep tax rates “competitive” compared to other G7 countries (Canada, France, Germany, Italy, Japan and the United States) to incentivise businesses to continue setting up shop in the UK. As it stands, the UK has the lowest rate among the G7 but Dan Niedle, tax partner at Clifford Chance, noted that the UK will have “one of the highest…rates in the world” after the increase. Paul Johnson, director of the Institute for Fiscal Studies also described the move as “risky”. The Budget must pass through the Houses of Parliament in the form of a Finance Bill to become law. Usually, it encounters little resistance, especially as tradition dictates that the House of Lords do not normally amend or vote down financial legislation.

What's the big picture effect?

It is no surprise that a sharp increase in taxation is on the Chancellor’s agenda. The UK is facing the deepest economic recession since 1709 and the government’s budget deficit (where expenses exceed revenue) is reaching peacetime records. The Chancellor said it was his “sacred” duty to reduce the deficit but “tough choices” must be made. Financial figures for the past year have been described as “eye-watering” with government borrowing for this financial year reaching £271bn which is £222bn more than last year. Moreover, the UK’s national debt has now reached a staggering £2.13tn which accounts for about 99% of the UK’s gross domestic product (GDP). In the last year alone, the government has  already committed £300bn to economic recovery. 

The Chancellor aims to justify the increase in corporation tax on the back of plans being made by the US President, Joe Biden, to increase the US rate from 21% to 28%. Former Chairman at the Office for Budget Responsibility, Robert Chote, said that this provides “a bit more space both economically and politically” for the Chancellor to follow through on this policy. As the tax only targets a company’s profits, “it’s not hitting [companies] on the way in” and so isn’t as controversial.  Companies with under £250,000 profits will escape paying the full amount. 

However, the rise is at the top of business leaders’ expectations leading to some concern about the UK’s potential to attract future investment. In addressing this, the Chancellor announced a £25bn “super deduction” tax break for companies that want to invest in Britain before April 2023. The jump in rate from 19% to 25% is expected to raise £17bn per year which, in the grand scheme of things, is a drop in the ocean. Therefore, this is just a small step on the road to economic recovery. For now, the Chancellor is facing the difficult task of balancing economic revival with the need to refill the government’s coffers. How successful this balancing act will be largely depends on the global vaccination program and geopolitical trends. 

Report written by Dan Furniss

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