We need to talk about Corporation Tax
Corporation Tax (CT) has been in the headlines again after several candidates in the Conservative Party leadership race promised to cut the rate. Liz Truss has promised to reverse the planned increase to 25 per cent, while Jeremy Hunt and Sajid Javid, set out plans to cut the rate to 15 per cent before they were eliminated from the contest. 15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules
This note sets out what the UK’s current plans regarding CT are, who the tax affects, how much it contributes to the treasury, and how the UK compares internationally.
Changes in the Corporation Tax rate
UK Corporation Tax rates over time
When the Coalition government came to power in 2010 the headline rate of CT stood at 28 per cent. Since then it has been gradually cut to an all time low of 19 per cent. It was initially planned that the rate would be reduced to 17 per cent from April 2020, but that was reversed, and in 2021 the then Chancellor Rishi Sunak announced that it would be increased to 25 per cent from April 2023. Should Sunak become the next Conservative Party leader, and with that the UK’s next Prime Minister, there are no indications that the proposed rate increase would change.
It should be noted that the planned rate increase affects companies differently dependent on how much profit they make. Companies with profits under £50,000 will continue to pay 19 per cent in what’s known as the “small profits rate”. Businesses with profits between £50,000 and £250,000 will pay a “marginal rate” somewhere between 19 and 25 per cent. Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax
Who pays Corporation Tax?
The key thing to remember when looking at CT is that it is a tax on profits, not on revenues. There is also a difference between the statutory tax rate, be it 19% or 25%, and the effective tax rate, which is the amount of corporate tax a company actually pays on its pre-tax profits. There are various reasons for this difference. Companies are able to claim various tax reliefs, for example if they invest in Research and Development. There is an Annual Investment Allowance which allows businesses to claim tax relief on certain assets. A “super-deduction” on purchases of capital goods was introduced in the 2021 Spring Budget, allowing companies to deduct 130 per cent of the cost of “main rate assets” – more than the cost of the equipment itself – from their taxable profits in the year they purchase it. These are just a few of the reasons why companies often pay an effective rate lower than the statutory rate.
Of the three main legal forms of businesses in the private sector (sole proprietorships, ordinary partnerships, and companies) only companies are liable to Corporation Tax. There were 2 million actively trading companies at the start of 2021, almost half of which had no employees. Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, … Continue reading
Over two thirds of the companies that paid CT in 2019-20, approximately 1.1 million companies, had liabilities of less than £10,000. A further 27 per cent of companies had liabilities between £10,000 and £49,999. While it is not clear from the data exactly how much profits these companies turned in order to have these liabilities, it would be reasonable to assume the vast majority of these companies – some 94 per cent of those with liabilities – would have profits of under £250,000, and thus would not be subject to the increased 25 per cent CT rate.
Number of companies and their CT liabilities by liability band, 2019-20 Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021
How much does Corporation Tax contribute to the Treasury?
Total revenues reported by HM Revenue & Customs (HMRC) from 2017-18 to 2021-22 ‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and … Continue reading HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for … Continue reading
How does the UK Corporation Tax rate compare internationally?
Average Corporate Tax Rate by Region or Group 2021 https://files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf
The European average rate is 19.84 per cent, but this includes a number of very small economies with very low rates. The average European rate when weighted by GDP is 23.97 per cent. The G7 average rate is 26.69 per cent (26.41 per cent weighted by GDP). The OECD average rate is 23.04 per cent (25.81 per cent weighted by GDP) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091378/HMRC_Annual_Report_and_Accounts_2021_to_2022_Web.pdf
Jeremy Hunt, who is no longer in the race, stated recently that “We’re scheduled to increase corporation tax to be higher than Japan, America, France or Germany.” This is half true at best. Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/
The countries listed charge CT at both a central and a sub-central level, i.e. at a state, regional, or municipal level. The UK only charges a central CT. While the UK’s central rate may be higher than some of these countries when it increases to 25%, the total rate will not.
Take Japan for example. In 2021 Japan’s central CT rate was 23.2 per cent. However, Japan also has a sub-central rate that averages 7.4 per cent. Once deductions are factored in, the total CT rate in Japan is 29.7 per cent. Germany’s total rate is 29.9 per cent, the US is 25.8 per cent. France does not levy a sub-central CT, but the CT rate alone is 28.4 per cent. The OECD provides a useful dataset that show the central, sub-central, and combined CT rates for countries. Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT
In discussing CT it is important to remember that raising the UK’s rate to 25 per cent as planned will not affect the vast majority of businesses, nor will it turn the UK into a high-tax outlier. In fact, the only companies set to pay 25 per cent will be those that are turning profits of over £250,000, and even then, they will likely pay a lower effective rate as a result of various reliefs. An increase from 19 per cent will move the UK to a rate closer to that of other large developed economies, and will still be lower than the rate the UK had in 2010.
|↑1||15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules|
|↑2||Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax|
|↑3||Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1019907/2021_Business_Population_Estimates_for_the_UK_and_regions_Statistical_Release.pdf|
|↑4||Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021|
|↑5||‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and fines and penalties.|
|↑6||HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for National Insurance Contributions, and £148.8bn for VAT.|
|↑9||Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/|
|↑10||Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT|