The UK economy is about to undergo a significant change in the coming months, as the main rate of corporation tax is set to increase from 19 per cent to 25 per cent from April 2023. While this move is expected to generate around £18bn a year for the Treasury, it will also mean that UK companies will have to pay an extra £9bn in taxes annually. This comes at a time when most firms are already facing reduced government subsidies on their energy bills, with many predicting that this will cause significant harm to the economy.

What are the new changes?

Under the new tax regime, the current 19% rate will still apply if a company’s profits are £50,000 or less, but the company will pay more tax on profits above this level. The full 25% rate applies to companies with annual profits of £250,000 or more. However, the lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. For example, where there are two associated companies, the thresholds are reduced to £25,000 and £125,000.

However, Jeremy Hunt, the Chancellor of the Exchequer also announced a 100 per cent tax break^[i] on capital spending, a new scheme that allows businesses to deduct every pound invested in IT equipment, plants, or machinery in full from taxable profits. The policy is designed to encourage business investment and will be in place for three years initially, with the government hoping to make it permanent as soon as possible. The policy will lead to a 3% increase in business investment a year and will offset the tax hike, allowing only 10% of businesses to pay the full rate. Hunt argued that the UK will still have the lowest headline rate of corporation tax in the G7^[ii] even after the rise in April. This is expected to help businesses offset some of the increased costs associated with the rise in corporation tax, and encourage investment in new equipment and machinery. The government hopes that this measure will help to drive economic growth and create jobs, particularly in sectors such as manufacturing and construction.

What are some of the concerns regarding the changes?

Despite the government's initial assessment that around 70% of companies will continue to be taxed at the current 19% rate, many businesses are concerned about the impact of this increase in corporation tax on their bottom line. The Federation of Small Businesses (FSB) has predicted that this reduction in support for energy bills will have a significant impact on businesses, particularly small and medium-sized enterprises (SMEs). The FSB estimates that businesses will be £12.5bn worse off as a result of this reduction in support, with the cost for the government falling from £18bn to £5.5bn. This means that businesses will have to bear a larger share of their energy costs, which will have an impact on their profitability.

Lord Michael Spencer, founder of interdealer broker ICAP and a Tory party donor, expressed his concern, saying that the UK should maintain corporation tax at no higher than 20 percent to put the country in the most competitive bracket globally. He argues that the UK is not an attractive enough place to invest with a corporation tax at 25 per cent, as international firms will just direct their FDI^[iii] elsewhere, where they can retain higher profits from lower taxes.

In addition to the increase in corporation tax, businesses will also face a sharp cut in government support for energy bills from April 1st, while the living wage^[iv] is set to rise by 9.7 per cent. The Confederation of British Metalforming has warned that hundreds of smaller manufacturers could be forced to close due to the cut in support for energy bills.

It remains to be seen how the UK economy will fare in the wake of these changes. While the government is hoping to generate more revenue from the increased corporation tax, many businesses fear that it will lead to a reduction in investment and job creation. At the same time, the reduction in support for energy bills could have a significant impact on the bottom line of many businesses, particularly smaller ones. Only time will tell how these changes will play out and whether the UK economy will emerge stronger or weaker as a result.

Footnotes:

[i] Tax break – a tax deduction, credit, exemption, or exclusion that helps individuals and businesses save money on their tax bills.

[ii] G7 – The international Group of Seven is an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States; additionally, the European Union is a "non-enumerated member".

[iii] FDI – Foreign direct investment is an investment in the form of a controlling ownership in a business, in real estate or in productive assets such as factories in one country by an entity based in another country.

[iv] The Living Wage – The real Living Wage is the only UK wage rate that is voluntarily paid by over 12,000 UK businesses who believe their staff deserve a wage which meets everyday needs.

Bibliography:

UK businesses face ‘week of woe’ as corporation tax rise hits

How will the April 2023 Corporation Tax rise affect small businesses? – Bytestart

Corporation tax: Jeremy Hunt confirms rise to 25% from April - BBC News