What is corporation tax? The levy on corporate profits explained
Chancellor Nadhim Zahawi has identified corporation tax as something he could reduce
But some fear he could still try to implement major policies in his remaining time at 10 Downing Street, despite having no parliamentary backing to do so.
One of Mr Zahawi’s stated aims during his brief tenure so far as Chancellor of the Exchequer has been to cut corporation tax – something he could implement if he decides. he was elected as the next prime minister.
So what exactly is this tax, what did Nadhim Zahawi say about it – and how likely is it to change?
What is corporation tax?
Corporation tax is a tax on part of the profits made by companies.
All UK limited liability companies have to pay it, and it is calculated in the same way as the income tax we pay as individual workers.
Some clubs, societies and member associations, as well as cooperatives, must also pay it.
Currently, the corporate tax rate is set at 19% in the UK.
Most countries have some form of corporation tax, but some territories – such as Guernsey, the Isle of Man and the Cayman Islands – do not.
This is why some multinationals choose to establish their headquarters there or channel their profits there.
For this reason, right-wing politicians tend to argue that the tax should be set low to attract business, which partly explains why it has been reduced by successive Tory Chancellors from a rate of 28% to course of the last decade.
The UK’s current rate is well below the global average of 23.6% and the Americas average (27.16%), although it is comparable to the European average (18.98%) .
Close neighbors like Ireland (12.5%) and Hungary (9%) have much lower rates.
How will corporate tax evolve?
Corporation tax is set to rise for the first time since 1974 next year.
As announced in Rishi Sunak’s Covid 2021 budget last spring, the headline rate will increase to 25% for business profits above £250,000 from the next financial year in April 2023.
Companies with profits of less than £50,000 will have to pay a ‘small profit rate’ of 19%.
Mr Sunak said at the time that it was “just and necessary to ask [businesses] to contribute to our recovery” from the Covid pandemic.
The hike was justified, he said, as there was government spending of more than £100billion on emergency business support during the various shutdowns.
It is expected to raise an additional £47.8bn from the public purse by April 2026, according to government estimates, and would allow the government to boost business investment.
What did Nadhim Zahawi say about corporate tax?
While his interviews broadcast on Wednesday July 6 were dominated by questions about Boris Johnson’s future, Nadhim Zahawi was able to outline some of his plans as Chancellor.
With the cost of living crisis weighing on UK households, he told Sky News’ Kay Burley his priorities were ‘to rebuild the economy after the pandemic and restart growth, along with tax cuts “.
Regarding tax cuts, he said, “There is nothing on the table”.
Pushed on corporation tax – a levy on profits unpopular with many right-wing Tories – Mr Zahawi said he wanted the UK to be “as competitive as possible while maintaining fiscal discipline”.
“I want to be one of the most competitive countries in the world for investment.
“I know that boards around the world, when making investment decisions, are long-term, and the only tax they can compare globally is corporate tax. “
Is corporate tax likely to be reduced?
While the Chancellor had corporation tax front and center on Wednesday, it seems unlikely that the hike planned for 2023 will be halted.
Despite concerns that Boris Johnson could go rogue, he is unlikely to be able to push legislation through parliament.
Mr Zahawi is also expected to focus on his own Conservative Party leadership campaign for at least the next few weeks.
Even if he wins, there is no guarantee that corporate tax will be a priority for a Zahawi administration.
The next Tory leader would also be expected to seek a general election soon after his nomination as party leader, meaning he would not have much time to implement major policies.