Pause for thought’ as corporation tax hike takes business by surprise

WITH this week’s forecast by the Office for Budget Responsibility (OBR) of a much faster return to pre-pandemic levels of output than previously suggested, the backdrop was set for Chancellor Rishi Sunak’s Budget following a year defined by Covid-19 – with the widely-trailed extension of the furlough scheme by no means its surprise headline.

Standing in the House of Commons presenting his first Budget as Chancellor barely a year ago, Mr Sunak could never have imagined how the coming months would play out. So, extending the coronavirus job retention scheme – a move to limit job losses and provide short to medium-term relief for struggling businesses – was exactly what people wanted to hear.

What did come as a big surprise, however, was his decision to hike the rate of corporation tax – from 19 per cent to 25% from 2023, with exemptions for small businesses. But while the scale of the increase stopped many in their tracks, there is time to prepare, as Liz Cameron, chief executive of Scottish Chambers of Commerce, pointed out at The Herald’s post-Budget Briefing yesterday.

Speaking at the online event chaired by Iain Macwhirter, political commentator for The Herald, she said: “It was unexpected but there is time to prepare and businesses will welcome that two-year delay. Let’s remember that the UK has a lower rate of corporation tax – lower than countries including the USA, Japan, France, Italy and Germany – so we can plan but there is a need to find a balance in order to remain competitive internationally.”

While the UK’s rate remains the lowest in the G7, this was the first corporation tax rise in the UK for in 47 years, although the Chancellor tempered that by announcing a new two-year “super-deduction” tax for businesses that invest in new plant or machinery as part of his efforts to improve productivity.

Panel member Roz Foyer, general secretary of the Scottish Trades Unions Congress (STUC), welcomed the rise in corporation tax, pointing out that many companies, such as Amazon, “have done well out of the pandemic”. She said: “We really need to make sure that those at the top are paying their share so there is fair distribution throughout the economy at a time when families are struggling.

“I’m in favour of incentives, too, but I would have liked to have seen the Government go further on this because we need businesses to invest in order to create high-quality jobs.”

Tracy Black, director of CBI Scotland, noted: “The question we have to ask is what state will the economy be in two years from now? The focus must be on how we get the recovery going.” She agreed with Liz Cameron that the rise in corporation tax might concern those planning to invest in the UK but hailed the Chancellor’s decision to introduce the super-deduction tax incentive to stimulate flagging levels of business investment.

Looking more widely at the taxation regime, Pete Murrin, tax and succession partner at Turcan Connell, suggested that overall there were too many complexities. He said the unexpected corporation tax increase would present much “pause of thought” and predicted future changes to the current inheritance tax threshold.

Rathbones’ head of asset allocation research, Edward Smith, conceded that the Budget was a “much-needed general boost to the economy” but said he would have liked “more targeted” support and was less optimistic about the super-deduction tax incentive than other panel members. “We want to see permanent incentives that will leave the UK better off in the long term,” he pointed out.

“I don’t think corporation tax is going to develop the economy and what we don’t want to see is the UK becoming an economic laggard – we need to concentrate on making sure the growth rate is supported in the short term too.”

Donald Boyd, partner at Azets, broadly welcomed the support for SMEs in Mr Sunak’s Budget. “There are wider discussions to be had over longer-term support and what the labour market is going to be like in three, four, five years but I think there was a lot of good news yesterday.”