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Corporation Tax: To Rise or not to Rise?
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In an interview, he said investment decisions around the world were long-term, with corporation tax being the one tax that could be compared globally. He told reporters he wanted to make sure the UK was as competitive as possible, while also "maintaining fiscal discipline".
Corporation tax is one of the topics up for discussion in the Conservative leadership contest, due to be decided by 5th September. As former chancellor, Sunak announced his plans for the corporation tax rate to rise from 19% to 25% from 2023. If he becomes Prime Minister, he plans to stick to this increase.
Meanwhile, his rival in the leadership battle, Liz Truss, has pledged to scrap the rise.
Zahawi's views on corporation tax are likely to put him at odds with his predecessor. The former oil industry adviser is known for supporting lower taxes. He recently opposed a windfall tax on North Sea oil and gas companies.
History of corporation tax
Corporation tax was introduced in the UK as a result of the Finance Act 1965. Until then, companies were taxed at the same rate as individual taxpayers, with a profits tax levied on top.
The Budget in March 2021 announced an increase in the main rate of corporation tax from April 2023, from 19% to 25% for big companies that made annual profits higher than £250,000.
The rate of corporation tax was 30% in 2007 but had steadily dropped since then, levelling off to the current rate in 2017. Currently, the UK has one of the lowest rates of corporation tax in the developed world. If it went up to 25%, it would still be lower than it was before 2012.
Colombia has the highest rate of corporation tax at 35%. Hungary has the lowest rate at 9%. The government estimates cancelling the proposed increase would cost £17 billion a year.
Is the rate of corporation tax likely to rise?
Liz Truss is currently the favourite to win the Conservative leadership contest, based on bookies' odds, so her plans to scrap the rise are more likely to be the outcome at present. She points out that a lower tax rate will strengthen incentives to invest in the UK, saying it will promote economic growth and help to recoup some of the initial cost of the tax cut. It is estimated this would make the long-term cost considerably lower than £17 billion a year.
On the other hand, Rishi Sunak believes cuts in the rate of corporation tax will have only a limited effect on investment. He states it will be more effective to target incentives for investment in a more direct way.
Treasury policy paper
In May, a Treasury policy paper invited views on a range of possible ways to increase investment allowances. While still chancellor, Sunak indicated he intended to announce some such increase in the autumn Budget. It would come into effect in April 2023. However, it would also be open to Truss to introduce investment allowances increases, while also cancelling the headline corporation tax rate rise.
In the interim, the business world awaits the outcome of the leadership race in the hope of gaining more clarity on whether corporation tax will rise or not. According to the most recent poll on Bloomberg, Truss, the Foreign Secretary, is a firm favourite, with a 90% chance of becoming the next Conservative Party leader.
However, nothing is set in stone, so until September, UK companies are left up in the air. Some are seeking the advice of a professional accountant to help them navigate the complexities of business accounting, including corporation tax returns. This means companies can take full advantage of corporation tax allowances and reliefs.