As Jeremy Hunt prepares to present his first spring budget next week, the Treasury is coming under renewed pressure from business leaders to announce greater support to revive faltering investment and economic growth.
Companies are facing a “one-two punch”, with a planned increase in the main rate of corporation tax from 19 per cent to 25 per cent coinciding with the end of the two-year “super-deduction” capital investment scheme.
Hunt is set to go ahead with the rise in corporation tax, given the strained public finances and the sensitivity of markets to unfunded tax cuts after the disastrous Liz Truss mini-budget.
With Labour galvanised by the fallout from that fiscal statement, Rachel Reeves, the shadow chancellor, announced that Labour would carry out a review of the business tax regime to make Britain the fastest-growing economy in the G7.
In a speech to manufacturing leaders at the annual conference of Make UK, the sector’s trade body, in London, Reeves said corporation tax has “gone up and down like a yo-yo … it’s no wonder businesses are unable to plan and our investment rates are cratering”.
She called the super-deduction a “short-term fix” — but said Labour would back an affordable scheme for investment “to help get our economy growing again”.
The government also remains under fire from some senior business figures over its fiscal policy. Sir James Dyson, the inventor and entrepreneur, in a letter to the Treasury criticised the government for piling “tax upon tax on to British companies” and warned of the “unintended consequences” of raising corporation tax.
Dyson cited comments from Sir Pascal Soriot, chief executive of Britain’s biggest pharmaceuticals group, who said last month that Britain’s uncompetitive fiscal policies were behind AstraZeneca’s decision to invest $360 million in a new manufacturing facility in the Republic of Ireland.
Responding to Dyson’s letter, Hunt said that despite the rise in corporation tax the rate remained “internationally competitive and supportive of growth”.
The chancellor also argued that 70 per cent of companies would not see their corporation tax increase due to the introduction of a small profits rate for companies making profits of £50,000 or less.
Tim Martin, chairman and founder of the JD Wetherspoon pubs chain, said Britain had been “all around the houses in the last half-century” and it was clear that to attract foreign investment “you need corporation tax rates that encourage international companies to invest and which give a business-friendly vibe to overseas entrepreneurs planning to set up”.
Martin added: “Maybe we can’t match the Republic of Ireland, but we should aim to be close.”
Sir Peter Wood, the insurance veteran who founded Direct Line and Esure, said the country had to become “investable”.
“It seems we’re doing the opposite of that and it’s complete madness.”
For now, though, other bosses and some of Britain’s largest business groups are instead urging the government to offer new investment incentives when Hunt stands up in the Commons next Wednesday.
The Treasury has consulted on reforms to capital allowances and is likely to push forward with changes.
For bosses, corporation tax is just part of the issue. Archie Norman, chairman of Marks & Spencer, said all corporate taxes needed to be considered, including national insurance, business rates and the apprenticeship levy, set against allowable investment deductions.
“Corporation tax is the banner headline tax and sends a strong signal so it matters, but the total tax climate is what really matters. M&S is not a FTSE 100 company but pays FTSE 30 taxes.”
Norman added: “This year and next year’s rate is not critical. The UK needs a clear, long-term, nailed-on supply side strategy that should include a pathway to being internationally competitive, and that means lower corporation tax.”
Sir Martin Sorrell, the marketing mogul and founder of S4 Capital, said the government was not in a position to reverse course again on corporation tax given “the current state of government finances” from the cost of post-Covid support through to Russia’s invasion of Ukraine and Brexit. “I don’t think the government has any option at this stage in the cycle, except, perhaps, to give specific, targeted accelerated depreciation or investment reliefs.”
Bosses at BT agree. Britain’s biggest telecoms group is not calling for a reduction or delay to the corporation tax rise but improved investment incentives. In a research paper last month, BT said the impending rise in corporate taxes, alongside the expiry of the corporation tax super-deduction, has created a “burning platform”. The super-deduction scheme, which offered 130 per cent tax relief on company purchases of equipment, had encouraged BT to speed up installation of its full-fibre broadband network.
Business groups are being pragmatic. Kitty Ussher, chief economist at the Institute of Directors, said: “Of course, given the choice between a higher or lower rate of corporation tax, business would choose the latter. However, our focus for the budget is to use the tax system to sharpen pre-profit investment incentives to raise long-term economic growth in Britain that benefits businesses and those they employ, regardless of their level of profitability.”
The IoD wants the super-deduction extended, plus a new tax credit for skills investment in shortage occupations. Some policy experts, including the Resolution Foundation think tank, argue that improving investment allowances is more likely to boost growth in the coming years than a lowering of corporation taxes.
Chris Sanger, head of tax policy at EY, the professional services firm, said the budget “offers the chancellor the opportunity to cushion this new high tax-rate era with targeted incentives that replace the outgoing super-deduction and mitigate the impact of the incoming corporation tax rise.”
Sanger added: “If that doesn’t happen, it would be difficult to see how the government creates the right environment for sustained economic growth ahead of the next election.”
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Act now to rescue the economy, bosses tell Hunt before the budget