The UK Chancellor’s statement last Wednesday included lots of grandiose pronouncements about recovery and growth — but the most significant elements of his budget were tax rises that will stifle that growth.
The increase of corporation tax (business tax on profits) to 25% (for the largest and most profitable companies) will result in the UK’s headline rate being precisely twice the rate of Ireland’s — our nearest and most competitive nation for foreign direct investment.
Ireland has long played its hand as one of the most desirable places for large multinationals to set up shop. But the UK was (prior to March 2020) very successful in competing with Ireland given the importance of London as a money market. Our relatively low personal taxation rates helped too — as well as the relative size of the UK market compared to Ireland’s tiddly one. And why set up an operation in Ireland when staff would soon become disgruntled with higher rate tax kicking in (at 40%) on any income above around £30,000 (and tiny personal tax-free allowances)?
But with a Corporation Tax rate of 25% in play the semantic personal taxation differences between the UK and Ireland won’t matter that much. Twice the rate. That’s the headline. The Irish will be popping corks. And, of course, with everyone working from home what’s to stop businesses flip-flopping all over the place to suit their profit recognition needs? It’s not as though staff have to be where the office is.
The story was very different just over a year ago. The UK’s corporation tax rate of 19% was on a downward trajectory. The rate was supposed to be 17% by now, but that was cancelled once lockdown and furlough and the Covid regulation paraphernalia kicked in — and the associated spending splurge pushed sovereign debt ever upwards. It’s now at grotesque levels in order to support cripplingly expensive and ill-conceived interventions like track and trace and apparently endless furlough (i.e., generous unemployment payments in drag).
Therefore, pronouncements about recovery and growth ring pretty hollow when the most obvious basis for companies investing — having the investable profits to plough back into the business — is undermined.
Brexit was supposed to provide the UK with the ability to be independent minded and create massive competitive advantage. Some were even talking about slashing the CT rate. Northern Ireland was even provided special dispensation to set its own rate — to compete aggressively with Ireland. But that option is out the window now that it’s trapped in the EU single market — with a corporation tax now twice the rate of the nation with whom it shares a land border. And the so-called Brexit “deal” with the EU clearly isn’t yet complete when herb growers in Yorkshire are not free to export their products to another UK region. It’s pretty fundamental that all parts of the UK should be able to trade with each other unfettered. But fundamentals have been lost along with liberty during lockdown.
Where, in the past, Chancellors could talk about doing things to encourage growth we could argue the merits, or otherwise, of the policies in the context of a normal economy. Now we’re in a situation where a vast chunk of business is closed through no fault of its own. Indeed, many big/profitable businesses that would have been in the target frame for the 25% corporation tax hit have gone or are about to fall at the next hurdle. Profitable “major multiple” retail chains are like hen’s teeth and the travel and tourism sectors are decimated. Some tech has done well — but Amazon’s European operations are ostensibly based in Luxembourg (another low tax haven in the EU) and other beneficiaries of lockdown (like Zoom or Microsoft) will not be recognising the bulk of their profits in the UK any time soon.
Conservative chancellors have argued in the past that hiking corporation tax (when suggested by the Labour Party) would have the effect of substantially reducing the tax take. Businesses might move their HQ operations to other markets with lower rates. Or they might avoid excessive profits by recognising them in odd ways. Creative accounting is made more attractive if the consequence of reporting profit is a huge tax bill. All these arguments still hold. But now it’s a Conservative government that’s spending (and borrowing) at levels we’ve never seen before. Repayment of this debt will be impossible given the forecast paltry growth rates we’ll see after consumers deplete whatever savings they’ve built up during the last year of near constant lockdowns. Indeed, they may not spend it at all if they know that the ending of furlough will be followed by an extended period of unemployment or under-employment.
It could have been so different. Lockdown as a policy response was conceived by the Chinese and ill-conceived for a so-called liberal democracy. But to kick business and wealth creators when the trading circumstances are so dire for so many feels like sheer vindictiveness.