Shareholders have hit out at the British government’s plans to raise the UK corporation tax rate and warned it could make the country a less attractive place for investment.
Chancellor Rishi Sunak on Wednesday set out plans to increase the corporation tax rate from 19 to 25 per cent for larger businesses in 2023 — the first time it will have been raised since 1974.
The Treasury estimates the move will raise £17bn in 2025-26, but investors expressed concern because of how it could reduce dividend payments by companies.
Richard Buxton, fund manager at Jupiter, an investment group, said Sunak’s proposed increase in the corporation tax rate amounted to a “sizeable bite” out of businesses’ profits.
“When looking at potential profits over a three to five year time horizon investors will have to factor this in, and it will erode earnings and potential dividend growth,” he added.
“In turn, this may at the margin reduce the attraction of UK equities to both domestic and international investors.”
The UK is one of the world's most popular financial markets for income-seeking investors.
Tom Stevenson, investment director at Fidelity International, a fund manager, said Sunak’s increase in the corporation tax rate would leave the UK just about competitive “but shareholders in the largest, listed companies that will bear the brunt of the measure will not welcome this”.
David Page, head of macro research at Axa Investment Managers, another investment group, said he expected more countries to raise corporation tax rates like the UK, but added: “Does this make the UK less attractive? At the margins yes.”
Nigel Green, chief executive of deVere Group, a financial adviser, said Sunak’s move “will reduce profit after tax and slash the profit available for dividends. This will not go unnoticed by those looking to invest in the UK”.
Sunak said in his Budget speech in the House of Commons that even after his corporation tax reform, the UK’s headline rate would still be the lowest among G7 nations.
But experts said the UK does not look as competitive internationally on other measures, because it is much less generous than other countries — including France and Germany — in the share of capital spending that companies are allowed to set against taxable profits.
An OECD measure of the effective marginal corporate tax rate — the amount of tax a hypothetical company pays on an extra pound of profit — shows the UK is close to the average among developed economies now, but could have one of the toughest regimes among the international organisation’s member nations after 2023.
“The headline rate is not the only thing that matters . . . Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment,” said Paul Johnson, director of the Institute for Fiscal Studies.
The IFS said the extra revenue stemming from the higher rate of corporation tax would in the long run be less than the government’s £17bn a year estimate.
A higher rate would reduce incentives for companies to make investments that would increase profits in later years, it added.
Sunak said on Wednesday the majority of businesses would avoid the corporation tax reform given a rate of 19 per cent would apply to businesses making profits of less than £50,000 each year.
He added the rise in the corporation tax rate to 25 per cent for larger companies in 2023 will be preceded by a new allowance for capital spending, providing a “super-deduction” of 130 per cent on new plant and machinery.
Dan Neidle, a partner at the law firm Clifford Chance, said the two year tax break would be a strong incentive for companies to accelerate investments that were in the works, although it was not long enough to generate new capital spending that took time to plan.
Tax campaigners TaxWatch UK also criticised the move, saying it would give a tax break to companies that have thrived during the pandemic, including Amazon.
Analysis by TaxWatch found Amazon Services UK, an entity that provides warehousing and delivery services, would have its corporation tax bill wiped out based on its last reported spending on plant and machinery. Amazon declined to comment.
Several smaller companies announced they would bring forward investments as a result of Sunak’s proposed tax break, although larger businesses including defence manufacturer Meggitt said that it would be more difficult to change long term plans.
Tony Wood, chief executive of Meggitt, said the company made “decisions on where to do [the] engineering effort based on what is right for the decade rather than what is right for the two year timeframe”.
But Gavin Cordwell-Smith, chief executive of Hellens group, which owns a paving slab manufacturer in Sunak’s Richmond constituency, said that “as a direct consequence of the [chancellor’s super deduction] announcement, we have already decided to accelerate our growth plans, including a new production line”.
Chemicals maker Christeyns will also bring forward investment plans — and likely increase them — in three factories, said director Nick Garthwaite.
Some business leaders expressed concern at how Sunak’s planned tax break would only last two years, and be immediately followed by the increase in the corporation tax rate to 25 per cent.
“The chancellor wants a two year investment boom, but we will then go from feast to famine at a time when the consumer recovery might be tailing off,” said one executive.
Additional reporting by Sylvia Pfeifer in London
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2021-03-04 20:03:47Z
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