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The truth about corporate tax Alex Dunnagan from TaxWatch explains how corporation tax works in the UK
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orporation 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%, while Jeremy Hunt and Sajid Javid set out plans to cut the rate to 15% before they were eliminated from the contest. When the Coalition government came to power in 2010 the headline rate of CT stood at 28%. Since then it has been gradually cut to an all-time low of 19%. It was initially planned that the rate would be reduced to 17% from April 2020, but that was reversed, and in 2021 the then Chancellor Rishi Sunak announced that it would be increased to 25% 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% 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%. 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 that 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% 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 two million actively trading companies at the start of 2021, almost half of which had no employees. 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% 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 PQ Magazine September 2022
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vast majority of these companies – some 94% of those with liabilities – would have profits of under £250,000, and thus would not be subject to the increased 25% CT rate. Comparing rates The European average rate is 19.84%, but this includes a number of very small economies with very low rates. The average European rate when weighted by GDP is 23.97%. The G7 average rate is 26.69% (26.41% weighted by GDP). The OECD average rate is 23.04% (25.81% weighted by GDP). 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. The countries listed charge CT at both a central and a sub-central level – that is 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%. However, Japan also has a sub-central rate that averages 7.4%. Once deductions are factored in, the total CT rate in Japan is 29.7%. Germany’s total rate is 29.9%, the US is 25.8%. France does not levy a sub-central CT, but the CT rate alone is 28.4%. The OECD provides a useful dataset that show the central, sub-central, and combined CT rates for countries. Who will pay 25%? In discussing CT it is important to remember that raising the UK’s rate to 25% 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% 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% 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. • Alex Dunnagan is a researcher at TaxWatch.
TaxWatch is a UK charity dedicated to compliance and sound administration of the law in the field of taxation. It is an investigative think tank which conducts forensic research and analysis on tax avoidance, tax policy and tax law, publishing research to improve public understanding of tax issues. It seeks to encourage high standards of tax conduct and civic responsibility. It is independent of any political party. See https://www.taxwatchuk.org/ You can subscribe to the TaxWatch newsletter at https://www.subscribepage.com/taxwatch 23
