Treasury mulls corporation tax rebate as lifeline for ailing firms
BUSINESSES that made a profit during the Covid crisis could bear the brunt of a hefty rise in corporation tax over the coming years as Rishi Sunak considers plans to give loss-making firms a higher rebate.
Treasury officials are understood to have held discussions with tax experts about an expansion of the so-called loss carry-back rules, which allow firms that previously made a loss to cut their tax bills when they return to profit.
The move would sweeten the pill of an expected rise in corporation tax from 19pc to 25pc next week as the Chancellor begins the task of repairing the public finances. It would mean firms hit with the highest losses – such as fashion chains and airports – could reduce their tax bills for years to come. By contrast, companies which made a profit during the crisis would be unable to cut their future tax bills in the same way.
Firms can only carry back losses for a year. The plans being considered would extend this to three years, allowing them to claim bigger rebates.
A source said: “We have had discussions with them over the types of firms which would benefit. The one big advantage of this is that it would benefit these companies now.”
The proposed scheme echoes the measure introduced by Alistair Darling in November 2008 in the wake of the financial crisis, which was targeted at smaller businesses. A revived version could be open to firms of all sizes, and targeted at industries hit hardest. It is understood that the extended carryback would be an attractive option as it targets support to firms with a previous record of profitability, helping avoid the risk of propping up unsustainable businesses.
The CBI argued for the move before Christmas in evidence to the Treasury select committee. The Treasury declined to comment. Separately, the Chancellor has confirmed plans for a fast-track visa programme. He told the Financial Times: “We want to be innovative, entrepreneurial, agile.”
Ministers are also considering a shake-up of research and development tax credits to help spur investment.
Asteep rise in corporation taxes. A “reform” of capital gains taxes that means entrepreneurs pay more. A few green levies, and an online sales tax, because, hey, it is always a good idea to take the one part of the economy that is growing fastest and give it a whack over the head. In his Budget next week, Rishi Sunak appears poised to unveil a round of increases in taxes on business to pay for the mounting cost of the Covid-19 crisis. The stage is set for one of the most punishing Budgets for companies in post-war British history.
But hold on. That is crazy. Of course, putting up taxes on business might be popular with the voters, even Tory ones as our poll today makes clear. But while taxes may be levied on companies, they still end up being paid by all of us in the form of higher prices, lower wages and smaller pensions. Sure, the crisis needs to be paid for, but we need to do that with long-term restructuring of the national debt, by rethinking the role of the state and with faster growth – not with panicky tax rises on the one part of the economy that might lead us out of this mess.
Measured by the leaks coming out of the Treasury, most entrepreneurs or chief executives would probably be better off hiding behind their sofa, or burying their head in some socially distanced sand, than watching the Chancellor’s speech on Wednesday. They are going to take a pummelling. With President Joe Biden promising to reverse his predecessor’s cuts in business taxes, a rise in the corporation tax rate – perhaps to 23pc from the current 19pc over several years – looks inevitable. There is lots of talk about an online sales tax to level the playing field between the new internet companies and the dying High Street. Capital gains taxes look ripe for increase, especially the generous entrepreneur’s rate. And we can expect a round of green levies that whack extra charges on anything that uses any kind of fossil fuel.
You probably have to go back to Ken Clarke’s first Budget or Geoffrey Howe’s 1980s round of increases for the last time a Conservative Chancellor raised taxes on the scale that Sunak seems to be contemplating, and at least on those occasions the pain was shared equally by individuals and companies.
Here’s the problem, however. Sure, we can understand that the public finances are in a dire state. We know that the Covid-19 crisis has been eye-wateringly expensive and will have to be paid for one day. Even so, this is still the worst possible moment we could choose to be pushing up taxes for businesses.
First, and most importantly, business taxes are paid by everyone, and not just by a few fat cats in the boardroom and wealthy shareholders sunning themselves in the Mediterranean. It is easy to assume companies can be easily squeezed for more money. In fact, as we steadily cut corporate rates, receipts went up. Between 2013 and 2019, as the corporate rate reduced, the total amount raised went up from £41bn to £57bn annually. Companies are already paying a lot. In truth, all taxes are paid by someone, it is just a question of who. Higher taxes on businesses mainly translate into higher prices, because companies have to get the money from somewhere, or lower wages, partly because companies have less money, but also because it reduces investment, and that means fewer new jobs are created, and so salaries stagnate. If dividends go down, then so do our pensions. Whichever way you look at it, ordinary families end up paying one way or another.
Next, in case anyone hadn’t noticed, we have just left the European Union and exited the single market. That is almost certainly the right decision in medium term. But it is crazy to think our economy is so competitive that it doesn’t matter, or that it won’t make some companies rethink whether this is the right place to base themselves. If you face some extra paperwork with a base in the UK but you also pay less tax, that sounds like an OK trade-off. More paperwork and higher taxes? Not quite so much. We should be doing everything we possibly can to make our economy hyper-competitive over what may prove a bumpy two or three years – and that definitely does not include raising corporate taxes.
Finally, we have made a magnificent success rolling out Covid-19 vaccines faster than any other major economy in the world. That should allow us to open up our economy more quickly. With factories back up to speed, and offices buzzing again, we could take a once-in-a-generation lead over many of our main rivals. Surely we should be trying to capitalise on that, encouraging companies to invest in the first economy to lift lockdowns, not immediately undermine ourselves by whacking businesses with a fresh round of taxes?
In fact, we may well be at the point where not much more tax can be squeezed out of the economy. Over the past four years before the pandemic, the state collected 37pc of GDP in taxes. In our post-war history, it has rarely been able to get above 40pc, and then only briefly.
Over the medium term, we will have to pay for the pandemic one way or another. But we should do that by accepting, as with a war, that the public debt will be higher for a generation or two, and no worse than most comparable countries. And by reforming our economy to reboot and revitalise growth so there is more wealth to share. Tax rises on business next week won’t get us out of this mess – they will only make it worse.