Corporation Tax Rate Rise Reversal
Posted on: September 13th 2022 · read
One of the first things Liz Truss has promised is the reversal of the planned corporation tax rate rise on 1 April 2023 to 25%. One assumes the prevailing rate of 19% will remain in force albeit, prior to COVID, the government’s Business tax road map had the UK on a path to having the lowest corporation tax rate in the G20 at 17%. What will be more interesting therefore is how she sets out the Business tax strategy over the remaining terms of this parliament and beyond.
There is a continuing debate about the relationship between lower tax rates and growth, but notwithstanding in the current extraordinary circumstances we are in, the reversal of the proposed increase should be welcomed. Empirical research has shown an inverse relationship between corporation tax rates and wages i.e.: as the corporation tax rate rises, average wages fall, mainly a result of lower business investment. The key in this case therefore is not just maintain the current corporation tax rate but together with other measures, Truss needs to put the UK in a better position to secure investment to generate growth which in turn will have a positive impact on jobs and wages.
Whilst we have a currently have the temporary “super deduction” for capital expenditure which would have been clawed back by the corporation tax rise, one measure which should be considered is the introduction of a permanent 100% deduction for all new investment in qualifying plant and machinery. The current system of deferring capital allowances means that, due to the impact of inflation, an investor will never get tax relief on 100% of the cost of an investment which is therefore a disincentive to invest. Given the current rates of inflation this disincentive will only be exacerbated if we simply revert to type.
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