Don’t fear Rishi Sunak’s corporation tax rise – it may never happen

It will be the steepest rise in tax on businesses since the Labour chancellors Roy Jenkins and Denis Healey were in charge of the British economy in the 1960s and 1970s. It will move the UK into one of a dwindling group of countries where the state takes a quarter of any profits a business makes. And it will reverse a decade-long plan to make Britain one of the most tax-competitive countries in the world for multinationals.

In 2023, as chancellor Rishi Sunak announced last week, the corporate tax rate will rise from 19% to 25%. True, there will be tiers for smaller businesses and a new “super-deduction” for capital spending. Even so, plenty of businesses will be nervous about that, and so will investors. Rising tax rates cut right into profits that might otherwise have been given back to shareholders. But don’t panic. A week can be a long time in politics – two years is an eternity. It may not ever happen.

Revenues will soar anyway

Why not? First, it might not be necessary. With the success of the vaccine roll-out and US president Joe Biden’s massive stimulus package accelerating a global recovery, the economy may do a lot better over the next two years than anyone expects right now. Growth in the 6%-8% range is perfectly possible, so tax receipts should soar anyway. Ironically, that may well be led by corporation tax, even at the existing 19% rate, because firms will be making a lot of money in a recovery that strong and also because working from home and shifting business online over the pandemic will have improved the fundamental profitability of many businesses. If money is pouring into the Treasury at a much faster rate than forecast, and with an election looming, the chancellor might decide that a dramatic improvement in the public finances means a tax rise is not necessary after all.

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Second, other countries may cut taxes. President Biden’s pledge to raise the US corporate tax rate to 28%, reversing part of Donald Trump’s dramatic cut, was a key part of the logic behind the British move. If other countries are putting rates up, then it is safe for the UK to do so as well, and it can still maintain its competitive advantage. The trouble is, we don’t know if the US will actually raise rates (presidents, after all, don’t have the power to raise taxes by themselves – it is up to Congress), and there is no sign of other countries raising taxes. Indeed, with massive stimulus programmes around the world, it wouldn’t be a surprise if they were cut elsewhere. By 2023, a 25% corporate rate may look wildly uncompetitive, especially in a world where taxes are still falling.

Finally, expect some furious lobbying. Over two years, business will have lots of time to campaign against such a steep increase. In the middle of a pandemic, it is hard for anyone to complain about making sacrifices. It looks bad. But as that subsides and life gets back to normal, there will be more and more protests. One or two big companies may decide they can move to Ireland (with a corporate tax rate of 12.5%) or Hungary (9%) or even Sweden (21%), with plenty more putting out statements that they are examining all their options, and reminding everyone they have a duty to serve their shareholders to save money where they can. In an ever more mobile, digital economy, it is hard to tax corporations that can move assets from place to place. The UK may be about to learn that the hard way – it may take only one or two big moves to force a change.

Expect a change of mind

One thing we have learned during Sunak’s short time as chancellor is that he is willing to change his mind. He was going to wind up the furlough scheme after three months, but a year later it is still going strong. The self-employed were left to fend for themselves, then rescued; he was in favour of opening up the economy, then locking it down again. Like most effective politicians, he can change his mind in an instant. Business and investors may be worried about a steep rise in taxes. But it is a long way off – and there are compelling reasons to think it won’t ever actually happen.