Tories must cut corporation tax to have hope at polls
Corporation tax won’t go above the current 25pc rate during the first term of a Labour government. So said shadow chancellor Rachel Reeves to a crowd of business types in London.
Sitting on a 20-point-plus poll lead, Labour “will govern as a pro-business party”, pledged Reeves, unveiling her first major pre-election tax pledge. But Labour strategists may have made an error that the Tories could exploit.
Reeves’s speech provoked ire, as intended, from her party’s Left wing. The leadership wants centre-ground voters to notice that Sir Keir Starmer’s Labour has abandoned Jeremy Corbyn’s radicalism – which means provoking the awkward squad.
“Our public services are battered and starved of funds,” said the Momentum campaign group, staffed by Corbyn-era ideologues. “Starmer and Reeves cosying up to big business is bad policy and bad politics.” Coming from the hard Left, that’s music to the Labour leadership’s ears.
Reeves is right that the Tories have lately “flip-flopped” on corporation tax and now there’s a “need for stability”. After taking office in 2010, with the main rate at 28pc, chancellor George Osborne made successive reductions.
By 2017, corporation tax was just 19pc – the lowest rate of any major economy. But since Rishi Sunak’s Treasury announced a hefty rise to 25pc in the spring of 2022, to be implemented a year later, we’ve seen multiple about-turns.
During her short stint in No10, Liz Truss announced she was scrapping Sunak’s increase before it was introduced. She then backtracked amid the market turmoil that ultimately ended her premiership – with Chancellor Jeremy Hunt confirming the 25pc rate last spring.
Yet keeping the tax low by no means only helps “big business fat cats”, as Labour’s hard Left claims, but gives much smaller companies an even bigger leg-up. The tax is paid by all businesses, whatever their size, a levy on even the most modest of profits.
The very smallest businesses, with returns under £50,000 a year, still pay 19pc. But annual profits above that, all the way up to £250,000, attract a 26.5pc catch-up rate – so, if and when the annual £250,000 threshold is reached, an average 25pc rate applies across the board. And on top of that, of course, the dividends company owners often use to pay themselves are hit with income tax too.
Countless small building, plumbing and heating companies, then, are paying corporation tax at a marginal rate of 26.5pc. So are many restaurants, one-off shops and tiny hotels, hair salons and dog-grooming businesses.
Tens of thousands of family-run businesses, created and maintained by hard-working people, often toiling around the clock, have since last April, endured a massive 6.5 percentage point rise in the marginal rate of corporation tax. For many, that’s a large slice of their profits, digging deep into take-home pay.
Such enterprising small-business owners are often instinctive, if non-ideological, Tory voters. Over the last year, this Conservative government has been absolutely hammering them – and for what?
Last year’s corporation tax rise to 25pc never made sense. Such a sharp increase, so soon after the ravages of lockdown, and amid ongoing supply chain inflation and still sky-high energy bills, has pushed thousands of
Levy that hits small firms hardest is a vote killer – so Conservatives have to ease burden to beat Labour
firms over the edge. Insolvencies over the last year are 14pc up.
Hunt tried to soften the blow by introducing “full expensing” – allowing companies to write off the costs of investing in qualifying plant and machinery against the tax.
Yet many of our small- and mediumsized enterprises (SMEs), generating over half of GDP and employing two thirds of the workforce, lack the finance to invest.
Having been hit hard by Hunt’s corporation tax rise – with those pushing to grow toward the £250,000 profits threshold singled out for particular punishment – they’re in no position to take advantage of fullexpensing. Most UK manufacturers are SMEs – often in the regional Red Wall seats the Tories must retain this autumn. To describe such companies as run by business fat cats is absurd.
Having struggled badly in recent years, many SME regional manufacturers, often important local employers, are shouldering a rise of almost 40pc in their effective corporation tax rate – from 19p to 26.5p in the pound.
With balance sheets stretched tight – given soaring wages and spiralling costs – the idea of raising funds to benefit from “full-expensing” is, for them, a sick joke.
Hunt’s corporation tax rise won’t even raise much money for the Treasury. When he made his move last April, the Office for Budget Responsibility claimed the higher rate would soon raise an extra £18bn a year. I have little faith in that estimate.
That’s because corporation tax revenues, historic evidence shows, follow a Laffer effect – named after US economist Art Laffer – with total revenues rising as the headline rate falls. In 2010, when the rate was 28pc, corporation tax raised £36.1bn, equivalent to 1.4pc of GDP. By 2019, with the rate down at 19pc, revenues were £60.2bn or 2.1pc of GDP – because the lower rate meant more firms survived and did more business, so growing further still.
This illustrates the dynamic impact of some tax changes, which the OBR and other Whitehall economists so often underplay. Restoring corporation tax back to 19pc across the board, far from costing the Treasury, would more be a revenue-raiser.
And that’s the Tories’ opportunity, if only they had the wherewithal to take it. Hunt should use his March 6 Budget statement to take radical steps, returning corporation tax to its pre-pandemic level – or, better still, to 15pc, as he himself advocated during the 2022 Tory leadership contest.
‘Such a sharp increase, so soon after lockdown, has pushed thousands of firms over the edge’