How high should the corporation tax rate be? Tax experts give their view

28 Apr 2021

After the Chancellor announced a six-percentage point rise in corporation tax to a new 25 per cent rate from 2023 the CIOT and IFS asked a panel of tax experts how high the corporation tax rate should be, in their latest online debate.

CIOT President Peter Rayney opened the debate, saying it was very topical given the changes to corporate taxes in the Budget. The Chair was Paul Johnson, Director of IFS, who said this is a hugely important question at the moment, which may explain why about 550 people registered to watch the debate ‘live’

Helen Miller, Head of Tax at IFS, said the main headline rate of corporation tax is not all that matters because there are a range of corporate tax rates that the UK Government sets, such as on banks. The tax base also matters and determines 'effective' tax rates. We have seen a recent broadening of the tax base, observed Miller. She explained why a government should design a tax base so that the effective marginal tax rate - that is, the tax rate on a project is only just worthwhile - is ‘zero’  – anything more and you discourage investment, she argued. Matters other than tax effect business’ decisions of where to locate, such as infrastructure and workforce skills. But she cited evidence that high statutory rates encourage profit shifting and high average tax rates deter inward investment, although exact effects will differ across firms and over time. “There is no magic headline rate,” she advised politicians and civil servants.

On the super deduction announced in the Budget, Miller noted that for investments already subject to AIA this is, mostly, not particularly ‘super’. She also talked about some unpleasant side effects such as a bias towards plant and machinery and the risk of tax avoidance and evasion. In a wide-ranging contribution, she said the small profits rate should not be reintroduced because, for example, this is not distributing anything from rich people to poor people.

Morag Loader is an infrastructure project finance tax specialist, until recently Finance Director and Head of Tax and Accounting at a City based infrastructure project finance consultancy. Loader opened her remarks by saying it is employment taxes rather than profit taxes which are the biggest burden to businesses, especially in labour intensive industries. Similar to Miller, Loader said tax is not the be-all-and-end-all for business location decisions, saying the rule of law, political stability, ease of doing business, cultural facilities and other leisure amenities, are important too.

Loader explained that many infrastructure projects are signed off within a 25-year tax context. This means the UK’s planned corporation tax rate rise is a big blow and means the internal rate of return on some projects will take a hit. It also means an overseas company may be less likely to bid on a UK project in future, meaning less competition which pushes up the price for the Government (and therefore the British taxpayer). On the super deduction, some capital intensive projects such as waste processing plants were actually worse off claiming it than with the current capital allowances regime due to loss set off rules.  Maybe the Government should look at some kind of exemption for the infrastructure sector, perhaps relaxing the 50 per cent profit restriction on the use of carried forward losses so that infrastructure projects can fully utilise the super deduction by the end of the project life?  she asked

Brian Chapman, former tax director for BAE Systems and Unilever, remarked upon the challenge of making policy when companies are so varied in their characteristics. A range of factors that affect the impact of the change in corporation tax rates, he said, adding as an aside that some businesses are quite passive on tax planning while others are far more active and aggressive. Like Miller and Loader, he said that businesses are affected by a range of factors of which tax is just one. US, China and India are, he said, examples of large markets that companies want to be in and they have gone there despite fairly unattractive tax regimes. Most companies are run on pre-tax bases, in any case, he added.

Chapman said that many external investors show little interest in tax, in his experience. Businesses want stability and certainty on tax in order to make five-year plans. You may struggle to find businesspeople who do not accept the need to fix the public finance as a result of the impact of the pandemic.

David Murray, Tax Policy Principal at Anglo American, a multinational mining company, said the effective rate of tax is more important to businesses than the headline rate – but the increase to the UK’s corporation tax rate will have a material impact on how UK plc is viewed and that non-tax factors are more important than small differences between rates. Companies will not be ‘wowed’ by the UK having the lowest rate in G7, rather they will look at 25 per cent and say ‘that's a middle of the road European rate’, he thought. It will be factored in by more mobile businesses. But businesses do recognise tax rises will be needed. Businesses (especially loss making ones) would rather have taxes on profits than on revenues or fixed costs.

Murray said businesses would look beyond tax at the broad opportunities for their business in the UK and how our country is managed and governed, including how professionally HMRC are run. He welcomed the two-year advance warning of changes to UK corporation tax. He warned that, while it is hard for many countries to justify a reduction in corporate tax rates because of their COVID-battered public finances, some countries will cut rates all the same.

He concluded that most businesses agree that the timing of changes is important and welcomed the advance warning of the rate change, and that the complexities of what will qualify for the super deduction, how it will interact with losses, what incentives other countries are offering, what the long term rate is, etc, will mean that while businesses do welcome it, they will need to think carefully about lots of factors before making investment decisions.

In the question-and-answer session, Murray said he has seen no evidence on a macro level of lower corporation tax in the 2010s having made the UK more attractive to foreign businesses/investors. Miller partly agreed but explained we should not expect evidence because you have no sense of what might have happened anyway. On a political note, Loader speculated that the Chancellor could be tempted to bring the 25 per cent rate of corporation tax in more gradually than was announced at the Budget because Rishi Sunak was under pressure from the public to announce some headline tax rise to address the pandemic economic debt at that fiscal event. But Murray was not sure he could see a huge benefit in setting the rate at 23 rather than 25 per cent.

On the USA’s new push for a global minimum tax, Murray thought a minimum rate was coming but wondered what the base would be. He said there is a still a gulf between the USA and EU on the rate and therefore the political battle on this is far from over. Chapman agreed with Murray but praised the BEPS process for making a big difference in a short space of time.

Photograph caption: (top left to top right) Miller, Murray and Johnson; (bottom left to bottom right): Chapman and Loader

By Hamant Verma