The small print of the 25% corporation tax

Last week the Chancellor announced at the Budget that the rate of corporation tax in the UK will increase to 25% by April 2023. While the rate of corporation tax will remain competitive amongst the G7 and mid-table amongst OECD jurisdictions, the headline rate is only a shop window advertisement. The small print will be what concerns businesses and investors.

Over a decade ago, the centrepiece of George Osborne's first Budget as Chancellor in the coalition government was to reduce the rate of corporation tax from 28% to 24%. This giveaway was funded by a reduction in capital allowances. 

In budgets that followed, the rate of corporation tax would be cut to 20% and there was a planned reduction to 17%, although the rate has remained at 19% since 2017. There is a similar story with these subsequent reductions. These were funded largely by a base broadening exercise and the introduction of new taxes.

• Loss relief restrictions
• Corporate interest restrictions
• Anti-hybrid rules
• Bank surcharge
• Diverted Profits Tax

This is borne out in the corporation tax receipts over the same period, despite the reduction in rate, receipts have remained broadly stable. 

When the rate increase takes effect and the temporary super deduction comes to an end in 2023, businesses will feel the full force of the 25% rate and those earlier base broadening measures all at once. As the IFS says, this is a gamble. It will be interesting to see if the government follows through with this approach when the time comes.