Budget 2021: Raising Corporation Tax is a self-defeating strategy

As a rise in the Corporation Tax rate (currently 19%) remains a possibility for this year’s Budget (3 March), Richard Proctor, Tax Partner at Larking Gowen, believes the Government needs to stimulate enterprise and investment and, like it or not, the Corporation Tax rate is seen as an indicator for the attractiveness of the UK economy.

Richard said: “Small changes in tax rates are often more about influencing behaviour and sending a message than raising revenue. For foreign investors, already nervous about the post-Brexit environment, a rise in the headline rate of Corporation Tax could be a further disincentive for any potential overseas investment. It sends out a message about the UK’s willingness to preserve the current fiscal regime, which foreign investors find attractive and is one of the key drivers in the UK, as a preferred location when businesses are expanding internationally.

“The UK needs a fiscal regime centred around international competitiveness now more than ever. The Chancellor should concentrate on growth and the way to do that is to create a vibrant economy. He needs to use his fiscal tools, like varying tax rates, in a positive rather than a negative way. We have good foundations in place already, with our foreign dividend and participation exemptions, R&D tax relief, Patent Box relief and the Capital Allowance regime. It’s vital not to devalue these incentives as, post-Brexit, the UK is debatably now less attractive to overseas investors. With borrowing also currently very cheap, there’s arguably no need to pay for the pandemic in the short term.

“Corporation tax revenues are a relatively small part of the UK’s total tax revenue (around 6% in 2019/20) and total receipts have increased in recent years, despite the main rate being lowered in 2017 (from 20% to 19%).* A rise in the tax rate, even if it raised more revenue, couldn’t raise enough to compensate for the damage to the UK’s reputation for competitiveness.”

If you’d like to find out more, Larking Gowen is holding a Budget webinar at 1pm on Thursday 4 March. Their tax specialists will analyse the key Budget changes and share how this could impact on you and your business. You can sign up here.

*GOV.UK, Rates and allowance for Corporation Tax and HMRC Corporation Tax Statistics commentary and House of Commons Library Briefing Paper (Number CBP – 8513)