Investors slam Sunak’s plan to raise corporate tax

Shareholders denounced plans by the UK government to raise the UK corporate tax rate and warned it could make the country less attractive for investment.

Chancellor Rishi Sunak on Wednesday announced plans to raise the corporate tax rate from 19% to 25% for large companies in 2023 – the first time it will be increased since 1974.

The Treasury estimates the move will bring in £17bn in 2025-26, but investors have expressed concern about how it could reduce corporate dividend payments.

Richard Buxton, fund manager at Jupiter, an investment group, said Sunak’s proposed increase in the corporate tax rate amounted to a “significant bite” in corporate profits.

“When looking at potential earnings over a three- to five-year horizon, investors will need to take this into account, and it will erode earnings and potential dividend growth,” he added.

“In turn, this may at the margin reduce the attractiveness of UK equities for domestic and international investors.”

The UK is one of the most popular financial markets in the world for investors seeking income.

Tom Stevenson, chief investment officer at Fidelity International, a fund manager, said Sunak’s corporate tax rate hike would leave the UK roughly competitive “but shareholders of the largest listed companies who will bear the weight of the measure will not appreciate it”. .

David Page, head of macro research at Axa Investment Managers, another investment group, said he expected more countries to raise corporate tax rates like the UK, but said he 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 after-tax profit and reduce profit available for dividends. This will not go unnoticed by those looking to invest in the UK.”

Sunak said in his budget speech to the House of Commons that even after its corporate tax reform, the UK’s overall rate would still be the lowest of the G7 countries.

But experts said the UK did not appear as competitive internationally on other measures, as it was far less generous than other countries – including France and Germany – in the share of spending on capital that companies were allowed to deduct from taxable profits.

An OECD measure of the marginal effective corporate tax rate – the amount of tax a hypothetical company pays on a pound of extra profit – shows the UK is close to the average for developed economies today today, but could have one of the toughest regimes among international economies member nations of the organization after 2023.

“The headline rate isn’t the only thing that matters… Mr. Sunak is betting that raising corporate taxes higher up the international pecking order won’t have too dire an effect on the investment,” said Paul Johnson, director of the Institute for Fiscal Studies.

The rise in corporation tax will give the UK a relatively high effective rate.  Chart illustrating the effective marginal corporate tax rate, 2019 (%).  With UK corporation tax rising in 2023, it will only be behind Australia, Spain and New Zealand in the OECD with marginal effective corporate tax rate

The IFS said the extra revenue from the higher corporation tax rate would in the long term be less than the government’s estimate of £17billion a year.

A higher rate would reduce incentives for companies to make investments that would boost profits in subsequent years, he added.

Sunak said on Wednesday the majority of businesses would avoid corporation tax reform as a 19% rate would apply to companies making profits of less than £50,000 a year.

He added that the increase in the corporate tax rate to 25% for large companies in 2023 would be preceded by a new deduction for capital expenditure, providing a 130% “super-deduction” on new installations. and machinery.

Dan Neidle, a partner at law firm Clifford Chance, said the two-year tax break would be a strong incentive for companies to accelerate ongoing investments, even if it hasn’t been long enough to generate new ones. capital expenditures that took time to plan. .

Tax campaigners TaxWatch UK also criticized the move, saying it would give tax relief to businesses that had thrived during the pandemic, including Amazon.

Analysis by TaxWatch found that Amazon Services UK, an entity that provides warehousing and delivery services, would see its corporation tax bill wiped out based on its last reported plant and machinery expenses. Amazon declined to comment.

Several smaller companies have said they will advance investments in the wake of Sunak’s proposed tax break, although larger firms, including defense maker Meggitt, have said it will be more difficult to change plans long-term.

Tony Wood, chief executive of Meggitt, said the company had made “decisions about where to do [the] engineering effort based on what is good for the decade rather than what is good for the two-year period”.

But Gavin Cordwell-Smith, managing director of the Hellens Group, which owns a manufacturer of paving slabs in the Sunak constituency of Richmond, said that “as a direct result 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 come up with investment plans – and likely increase them – at three plants, chief executive Nick Garthwaite said.

Some business leaders have expressed concern that Sunak’s planned tax relief will only last two years and will be immediately followed by the increase in the corporate tax rate to 25%.

“The Chancellor wants a two-year investment boom, but then we will go from feast to famine at a time when the consumer recovery could run out of steam,” said one executive.

Additional reporting by Sylvia Pfeifer in London

Video: Spring budget: UK spend now, tax later economic policy

Letters in response to this article:

Sunak’s tax relief should be for all businesses / By Jeremy Moody, Secretary and Adviser, Central Association of Agricultural Valuers, Longhope, Gloucestershire, UK

Fear of Amazon should not drive UK tax policy / De Miles Dean, Head of International Tax, Andersen UK, London EC2, UK

Luisa D. Fuller