UK corporation tax cut will cost billions more than expected | Taxes and expenses

The government’s planned corporate tax cuts are set to cost the public treasury billions more in lost revenue than previously thought, according to a new analysis.

The corporate income tax rate is expected to be reduced from its current level of 19% to just 17% by the end of the decade. But even before the planned cuts, the UK already had one of the lowest corporate tax rates in the developed world.

An analysis based on HMRC data suggests the loss of revenue from the planned cuts, initiated by former Chancellor George Osborne but backed by incumbent Philip Hammond, could amount to more than £6billion.

HMRC recently raised its estimate of how much a 1 percentage point rise in corporation tax could net the Treasury from £2.8bn to £3.1bn a year – which means the 2p tax cut plan in the £1 could cost around £6.2bn.

Estimates of the amount lost have been steadily revised upwards since the tax cut was first announced in 2016. HMRC’s original estimate based on a 2p in the £1 cut was at a cost of £4billion , while Adam Corlett, senior economics analyst at the Resolution Foundation, said his initial estimate was between £2bn and £3bn.

Hammond confirmed in the autumn that he would deliver on Osborne’s promises, despite needing to find an extra £20billion a year for the NHS by 2023-24.

There has been growing opposition to the planned tax cuts, especially as Britain’s public finances could be strained by a disorderly Brexit.

Rupert Harrison, a former Osborne adviser who now works for city investment firm BlackRock, said on Twitter last week that it was “hard to see why further corporate tax cuts are good value,” while Labor seized on his comments.

Peter Dowd, the shadow chief secretary to the Treasury, said: “Even Osborne’s former adviser knows that further corporate tax cuts are a bad use of public funds. Philip Hammond should cancel his plans for more corporate gifts and invest in our public services.

Labor argued they would undo the cuts to raise more money for spending on public services.

But a Treasury spokesman said: “The strength of our economy means we expect to collect more corporate taxes in 2020 than we expected a year ago.

“A low corporate tax supports the economy by allowing businesses to reinvest in their business, creating jobs and raising wages.”

Corporate tax revenues have increased since the financial crisis, although corporate profits have increased as the economy has recovered. Around £60billion a year is collected through corporation tax, although analysts at the Institute for Fiscal Studies think tank estimate that around £16.5billion a year has been lost due to reductions in recent years.

Business investment has consistently lagged other major economies, while business spending since the Brexit vote has entered the worst period since the 2008 financial crisis, due to a lack of clarity on the future of the UK.

Torsten Bell, director of the Resolution Foundation think tank, said the corporate tax cut was ‘nuts’ given the higher spending needs of the NHS over the coming decades, adding: ‘It puts highlight a big tax mistake that we are about to make.

“There’s not even a case for these tax cuts from a competitiveness perspective. When you’re already winning the race to the bottom, you don’t need to speed up.

This article was updated on January 28, 2019 to clarify the increase in the estimated costs of the 2-point corporate tax cut since its announcement in 2016.

Luisa D. Fuller