New figures released today show that Jeremy Hunt and Rishi Sunak’s corporate tax hike is poised to put pressure on the UK economy through slowing investment.
Nearly half of medium-sized companies plan to delay big spending projects because the chancellor and prime minister snatch a bigger share of the company’s profits, according to consultancy BDO.
Last month, the corporate tax rate jumped to 25 percent from 19 percent, reversing years of cuts to the main dividend tax rate. It is still low compared to other OECD countries.
Of the 500 medium-sized companies surveyed, the BDO said, nearly a third (31 per cent) warned that an increase in corporate tax had caused them to consider leaving the UK.
Pharmaceutical giant AstraZeneca decided earlier this year to build a £320m factory in Ireland rather than the UK, in part because of tax hikes by Hunt and Sunak.
Corporation tax is a tax on profits over £250,000. Economists warned that raising it weakens the incentives for companies to invest in resources that enable them to create more goods and services, as this leads to reducing a larger share of the return resulting from such spending.
Britain, like most other rich countries, has been grappling with an economic slowdown since the 2008 financial crisis, mainly due to slowing productivity growth.
Experts believe that boosting investment is key to increasing productivity because it gives workers better tools to produce products. Business investment has fallen since the 2016 Brexit vote, dealing a blow to the UK’s economic potential.
In order to mitigate the six percentage point tax increase, the chancellor gave companies an effective tax break by allowing them to deduct the full cost of certain investments from their corporate tax liabilities.
This step aims to direct companies towards investment by offering them tax cuts on the condition of increasing capital spending. It will run until April 2026 and replace the 130 percent discount.
The BDO said more than two-thirds of mid-market companies plan to ramp up investment to take advantage of the tax break.
“The major corporate tax rate will mitigate existing business investment schemes although positive reaction to the new ‘full expense’ capital appropriation scheme suggests this may only be a short-term effect. Paul Valve, tax partner at BDO, said,” It has also highlighted a high degree of concern about the international competitiveness of the UK’s corporate tax system.”
Budget Search expanded last March from free child care for children between nine months and five years old for most working parents to a huge expansion of the welfare state, which BDO will make it easier for companies to hire new employees.
A Treasury spokesperson said: “Our corporate tax rate is the lowest in the G-7 industrialized nations, and companies with profits of less than £250,000 are protected from the full price hike – with 70% of UK companies seeing no increase at all.”
“Growing the economy is one of our top priorities, which is why we have provided significant incentives for business investment through measures such as radical full spending – itself the equivalent of an effective £9 billion a year corporate tax cut.”