The UK Chancellor, Jeremy Hunt, has confirmed that the rate of corporation tax, which companies pay on their profits, will be increasing from 19% to 25% starting from next month. This tax hike, originally proposed by former Chancellor Rishi Sunak in 2021, has been a topic of intense political debate. In addition to the increase in tax, Hunt has also announced a new scheme that allows businesses to deduct every pound invested in IT equipment, plants, or machinery from their taxable profits.
Spring Budget
The announcement made by Jeremy Hunt during the Spring Budget confirmed that the UK will still have the lowest headline rate of corporation tax among the G7 nations, even after the increase in April. It is important to note that the higher rate of 25% will apply only to companies with profits over £250,000, with only 10% of businesses falling into this category. Hunt anticipates that the new “full capital expensing” policy will effectively reduce the burden of corporation tax on businesses, as they will be allowed to deduct their investment spending from their profits, resulting in lower tax payments.
The “full capital expensing” policy is set to be implemented for an initial period of three years. However, the government hopes to make it a permanent fixture as soon as it is deemed responsible to do so. Independent analysis carried out by the Office for Budget Responsibility (OBR) supports the notion that this temporary measure will incentivize businesses to bring forward planned investments. At its peak, this scheme could potentially increase business investment by around 3%, although this is lower than the projected 5% rise under the previous super-deduction scheme which is being replaced.
The rationale behind the corporation tax increase is to recoup some of the public funds that were used to support businesses during the Covid-19 pandemic. The initial announcement of the tax hike was made by Rishi Sunak, then-Chancellor under Prime Minister Boris Johnson, two years ago. However, the policy has seen a series of changes, including being axed and then subsequently reinstated due to divided opinion within the Conservative Party.
Liz Truss, the former Prime Minister, had initially planned to keep corporation tax at 19% as a crucial element of her low-tax leadership strategy. However, in a surprising turn of events, she later re-adopted the 25% rate to regain support from investors and members of her own party. It is worth noting that some Conservative MPs, including Boris Johnson himself, publicly oppose the tax increase despite previously approving it during his time as Prime Minister.
Summary
The corporation tax hike from 19% to 25% that will take effect from April has been confirmed by Chancellor Jeremy Hunt. Although businesses with profits over £250,000 will face a higher tax rate, the majority of companies will not be affected. Hunt has introduced the “full capital expensing” policy, which allows businesses to deduct their investments in IT equipment, plants, or machinery from their taxable profits. This scheme is intended to alleviate the burden of corporation tax. Independent analysis suggests that this temporary measure will incentivize businesses to bring forward planned investments, potentially resulting in a 3% increase in business investment.
The policy is set to be in place for three years initially, with hopes of making it permanent in the future. The decision to increase corporation tax has been met with divided opinions within the Conservative Party, with some MPs opposing the rise. However, Hunt argues that it is necessary to offset the public funds used to support businesses during the pandemic and maintain the UK’s competitiveness in international tax rankings.