High-tax Tories spur capital flight
Rishi Sunak’s corporate tax hike is causing companies to rethink just how attractive the UK really is
When Rishi Sunak announced the decision to raise Britain’s rate of corporation tax from 19% to 25% back when he was still chancellor, it was sold as a necessary step to restore the public finances, and one that would have a negligible impact on business. After all, our rate was significantly lower than France, Germany and even the US, and higher rates there had done little to harm productivity and growth. It didn’t seem fair that firms should pay less than ordinary individual taxpayers, especially when many of the tech giants were paying virtually nothing. It was time big business paid a little more, ran the argument, and most would be perfectly happy to do so.
The thinking behind the hike
It is not working out as planned. Last week, the pharmaceuticals giant AstraZeneca announced that it was building a new plant in Ireland rather than the UK. The reason? The tax regime, including in its case the rules on selling drugs to the NHS, had become so hostile in the UK that its chief executive, Pascal Soriot, decided it was better to go elsewhere. The fact that it was AstraZeneca was especially painful for the government – this, after all, was the company that only a couple of years ago was lauded for selling Covid vaccines at cost, and is one of the jewels of the British corporate sector.
It is far from alone. Last week, the Confederation of British Industry complained that the tax regime in the UK was already deterring investment and it would only get worse once taxes went up in April. Some of the major energy companies, such as Shell and Equinor, have already said they are cutting back on investment in the North Sea – despite lots of demand for oil – because the combined windfall and corporate taxes mean it is virtually impossible for them to make any money, and certainly not enough to justify the risk.
Even the IMF, which complained loudly about former PM Liz Truss’s attempts to cut taxes last autumn, is now arguing that tax rises are the real problem and are killing off any chance of a sustained UK recovery.
The assumption behind the hefty hike in corporation tax was that the UK could simply match the rate levied in other major economies. In France, the standard rate is 25%. In Germany it is a hefty 30%. In Spain it is 25%, and in the US the federal rate is 21%, although there are state levies to pay as well. Set against that, the British rate does not seem at all out of line. Sure, companies can always try Ireland, with its 12.5% rate, or one of the tax havens that charge nothing at all, but for most major firms it wouldn’t be very different from what they were paying elsewhere. And, at least according to many economists, firms are little influenced by tax rates anyway.
Time to change course
There are two big flaws in that analysis. First, the UK does not have the infrastructure, or skills, or transport network, or the depth of engineering and manufacturing expertise to match France and Germany. Nor does it have the market size of the US. It has poor infrastructure, punishing housing costs and a volatile currency. Lower tax rates were a way of compensating businesses for all the different ways in which the UK was a relatively unattractive location for investment.
Next, lowish taxes are built into expectations. Since the 1980s, firms have thought of the UK as a low-tax economy, in a way that they have not of France or Germany, say. It is a very sudden change to reverse that, and while investors might get used to it after a decade or two, initially it is going to come as a shock. Many will decide to stay away while they assess the change, and think through the alternatives.
It would be a humiliating climb-down for Sunak to reverse the tax hike now. The rise was his idea, and implemented on his watch. He fought his leadership campaign on sticking with it. It is the policy he is most associated with. Yet it is impossible to ignore the growing evidence that it is deterring investment, and over the months ahead we are going to see more and more examples of that. The rise needs to be cancelled – before it does any more damage.