Corporation Tax levels and the Conservative Party leadership contest

14th Jul 2022

Corporation Tax level: You can boost economic growth and guard against the threat of recession by cutting taxes

Following several Conservative Party leadership candidates stating they would scrap the proposed rise in Corporation Tax from 19% to 25% in 2023, Chris Denning, Head of Corporate and International Tax, believes scrapping the rise would strengthen the economy in the face of a looming recession:

Against the rising threat of a recession, scrapping the government’s proposed increase in corporation tax to 25% in April 2023 would encourage greater economic activity in the UK, which in turn would lead to higher tax revenues for the exchequer.

Corporation tax represents a relatively low proportion (circa 8/9%) of the UK’s total tax take, but from an international perspective it is one of the key factors that influences investment into the UK, in turn creating investment and employment.

The opposite can occur - if the level of corporation tax is too high this can prompt multinational organisations to move functions, activities and risks out of the UK, thereby decreasing the revenues that the tax is designed to generate. Therefore, the benefit of an increase in corporation tax and any additional tax revenues this may generate, will arguably be lost through less investment in the UK and some multi-national corporation groups moving activities out of the UK.

In this regard the reversal of the proposed corporation tax increase should be welcomed, as would maintaining investment reliefs such as the super deduction. Both will encourage increased economic activity which in turn will lead to higher tax revenues for the exchequer.

Depending on the result of the current Tory leadership contest there may well be a longer-term desire from the government’s new leadership to reduce the tax rate to 15%, which would align with the Organisation for Economic Co-operation and Development’s (OECD) proposed global minimum corporation tax rate. However, in the short term this is unlikely to be perceived in a positive way by the electorate, particularly against the backdrop of a worsening cost of living crisis, and may well result in reduced corporate tax revenues in the immediate term.

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