Aggressive corporate tax cuts pushed Britain to the top of the rankings of multinationals’ favourite jurisdictions a few years back. The relationship has since cooled. Next week, chancellor Rishi Sunak is tipped to announce a sharp rise in Britain’s corporation tax rate, currently 19 per cent, over the parliament.
Each percentage point increase in corporation tax raises nearly £3.3bn. But the impact will be uneven. The pandemic will leave many businesses — especially in travel and hospitality — nursing big losses that can be offset against future profits.
It is the biggest and most profitable companies that pay most corporate tax and will be most affected by a rate increase. But a lot depends on where the highest value-generating activities are located. Big Tech still pays relatively little tax in important markets such as the UK.
Debt can shield companies from corporate tax bills, as interest payments are tax-deductible. Innovation-led companies benefit from tax breaks known as patent boxes. Thus FTSE 250 polymers group Victrex would be largely unaffected by a rate rise to 23 per cent that would knock between 1 and 2 per cent off earnings of UK chemical companies, says Berenberg.
Conversely, some companies pay more than the headline rate. A surcharge on bank profits, along with loss restrictions and anti-avoidance measures, clawed back about £10bn of the £13bn a year spent reducing the statutory rate, according to the Institute for Fiscal Studies. That explains why the UK only ranks in the middle of international league tables if all allowances are taken into account.
The UK government hopes to save face. It may still have the lowest rate in the G7 if the US goes ahead with proposals to increase the rate from 21 per cent to 28 per cent, reversing half the cuts made in 2017. That reform boosted earnings per share by about a tenth for S&P 500 companies, according to Barclays. If finance ministries push up corporate tax rates, investors should prepare for such gains to unwind.
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