In March tax is often top of the policymaking and individual agenda as filing deadlines and budget statements draw near. The UK government is scheduled on 15 March to deliver its budget to parliament, where a decision to push up corporation tax will be under close scrutiny.
With tax front of mind at this time of year around the world, we turn to corporation tax, which in the UK is due to rise to 25 per cent from 19 per cent. More than a year ago, US President Joe Biden, along with other Group of 20 major industrialised nations, agreed to set a “floor” of at least 15 per cent corporate tax rates – bad news for low-tax jurisdictions such as Ireland and Malta. Critics can argue that creating a sort of global pact not to lower taxes beyond a certain point is a sort of “cartel” and undermines political sovereignty.
It’s an ironic move given that a reason for the UK leaving the European Union, for example, was to “take back control.” Anyway, domestic fiscal strains, made far worse by the lockdowns to deal with Covid-19, means that finance ministers are trying to raise money where they can. The move raises a debate over whether the disincentive of higher rates outweighs the revenue gain. After last September’s market turmoil amid the short-lived Liz Truss administration, it is easy to see how a new administration wanted to calm things down. The arguments continue: Big Pharma business AstraZeneca reportedly chose to locate to a new major production facility in Ireland rather than the UK – a blow to a country that likes to make much of its prowess in this sector.
To examine all this is Des Hanna, who is international tax director at Andersen LLP. He has over 20 years of experience advising on UK and international tax. Hanna has worked in practice, industry, banking and spent seven years in HMRC’s head office working on contentious cross-border cases involving many areas of domestic UK international tax legislation. The editorial team is pleased to share these views; the usual disclaimers apply. To comment and respond, email firstname.lastname@example.org
A hotly-debated tax policy in the UK at the moment is whether the Corporation Tax rate, which is currently 19 per cent, will rise to 25 per cent on 1 April 2023.
If you cast your mind back to last year, Rishi Sunak (when he was the Chancellor of the Exchequer), decided to raise CT from an historic low of 19 per cent to 25 per cent in order to pay back the huge borrowing that the UK had undertaken in order to fund the government’s response to the Covid-19 pandemic.
At the time of Sunak's announcement, very few businesses (understandably) were in favour of the rise, as it seemed counterintuitive at a time when growth was going into reverse and the UK was staring down the barrel of a recession, surely CT should be left alone. Not surprisingly, some businesses were even calling for a temporary cut to CT to stimulate growth, so that the country could get back on its feet.
A new prime minister
When Liz Truss was elected the new leader of the Conservative Party and therefore new prime minister, her first brief for Kwasi Kwarteng was to enact a whole raft of tax cutting policies in order to get the UK into the position of the fastest growing economy in the G7. Kwarteng happily stepped up to his brief; one of the main policies was to reverse the rise in CT, but unfortunately for him he forgot one key component of any tax cutting policy: how were the tax cuts going to be funded? He didn't seem to have an answer for this, but the markets did:
-- The pound collapsed against the dollar;
-- Pension funds nearly collapsed, resulting in a bail out from the Bank of England;
-- Government borrowing increased; and
-- Soaring mortgage costs.
Kwarteng was sacked, and Jeremy Hunt was appointed the new Chancellor of the Exchequer.
A safe pair of hands
As soon as Hunt entered the Treasury, he reversed all of Kwarteng's tax cuts (citing the urgency to balance the books) and once again the CT rate was going back to 25 per cent.
The next budget happens on 15 March 2023 and Hunt is under increasing pressure to once again reverse the planned CT rise leaving it at 19 per cent. He has a very difficult balancing act both politically and economically.
-- If he reduces CT his political opponents will argue that the borrowing will once again have to be paid by those who can least afford it.
-- If, as planned, he raises CT business will argue that the UK is no longer a competitive jurisdiction and may take their business elsewhere (anecdotally, Ireland whose CT rate for trading companies is 12.5 per cent is already welcoming business from the UK with open arms).
The General Election will probably take place in December 2024 and from a tactical perspective Hunt may be postponing any tax cuts until just before people take to the polls, so it is at the forefront of the electorate’s mind before they vote.
What should the Chancellor do?
Our view is that the CT rate should be unchanged at 19 per cent. Ultimately, increasing business taxes in the short term may increase tax revenues, but in the long term the damage that it will create will ultimately lead to far less in CT revenues and will damage the UK's reputation as a (moderately) low tax sophisticated jurisdiction to locate business or holding companies.
-- The UK relies on inward investment from overseas and indeed for the last 15 years (since the foreign profits review), the UK has been widely regarded from a tax and political point of view to be one of the best holding company regimes in the world; increasing the CT rate to 25 per cent would damage this standing.
-- UK companies are already considering changing their supply chains or migrating to other low tax European jurisdictions to reduce their tax cost.
-- UK companies will postpone any future investment as tax rises will mean that there will be less money to invest in the business.
It has also been reported in the press that some MPs are of the opinion that the UK should not remain a signatory to the assurances it has made under the OECD’s work on Pillar Two (a minimum tax rate of 15 per cent). One minister commented that it doesn't make sense, having voted to leave the EU while being bound by the European-influenced OECD.
In response to this, our view is that the UK is a leading representative in the OECD; a well-respected organisation which has been involved in the evolution of some critical economic and tax initiatives which have no doubt benefited the world economy as a whole. It would therefore make no sense politically (where the UK has been so influential) to go against this body and thus damage its reputation for the future.
The UK is aiming to implement Pillar 2 by December 2023.