A penny on the pound on income tax for...

Rishi Sunak has a problem. He’s spent an awful lot of money to enable the economy to limp through the pandemic and to save millions of jobs. And now, he has to find a way of staunching the flow of cash and to start to restore the national finances without causing the calamity he sought to avoid in March.

That’s going to be easier said than done. As Government ministers and right-wing pundits have realised, without people returning to town and city centres, those jobs can’t be protected forever, and as financial support is gradually withdrawn, businesses that didn’t have to pay to furlough staff are now having to face the prospect of either contributing increasing amounts toward keeping staff at home doing nothing, or letting them go. And you can probably guess what’s likely to happen...

The Sunday Times reports that Rishi is considering four things in terms of tax changes;

• An increase in the rate of corporation tax to 24% from the current 19%
• A resetting of capital gains tax rates to reflect the equivalent rates of income tax, effectively treating them as additional income
• Changing the way that company dividends are taxed - currently the tax system encourages companies to pay their directors in dividends rather than through a salary as dividends aren’t charged for National Insurance purposes
• Restricting the rate of tax relief on pension contributions to 30%

It’s interesting stuff, albeit not exactly radical or groundbreaking.

Today, I want to look at the recent history of Corporation Tax, as it’s something I know a bit about, having worked in the field for a decade after the turn of the millennium.

It’s easy to forget that the current rates of Corporation Tax are something of an aberration. Indeed, Corporation Tax rates peaked under the Heath Government in 1973 at 52% (42% for limited companies with annual profits lower than £25,000). You might not be surprised to hear that the Thatcher administration saw that rate fall to 34% (25% for limited companies with annual profits lower than £200,000).

Things stabilised for a while until the dog days of the 1992-97 Major administration when, in an attempt to be popular for something, rates were cut to 21% and 30% respectively.

Gordon Brown inherited that, and did little to change the basic rates, which stabilised at 20% for small companies and a basic rate of 30% otherwise. Instead, he tinkered with a starting rate, first at 10%, then at 0%. What that achieved was an explosion in the growth of limited companies, given the suddenly obvious advantages of paying yourself in dividends rather than exposing yourself to income tax and National Insurance Contributions. It didn’t last, but the damage was already done.

It was the Coalition years which saw the next dramatic move, with the basic rate being rapidly reduced to match the Small Companies Rate, parity being reached (at 20%) in 2015. Nonetheless, Government receipts from Corporation Tax have remained pretty buoyant and increased quite dramatically in the post-Coalition period (there’s usually a lag between rate changes and their effect).

So, an increase to 24% would really only return the position to that of 2012/13. Would it drive businesses offshore? Possibly in some cases, although if other countries are looking to raise income simultaneously, the benefits of relocation may be limited. And, in any event, even at 24%, the United Kingdom would still be competitive against its major European rivals.

In other words, how much harm could it do?

There are, of course, alternatives in terms of corporate reliefs - reducing the rate of first year capital allowances, for example - although it might be argued that a change in the basic rate is easily understood by those to whom a message is being sent.

My gut feeling is that equalising the basic rates of Corporation Tax and Income Tax would be unthreatening, even if it might not raise much money. Far better politically to do what Chancellors have tended to do in recent years - technical adjustments  that slide under the radar with the media but raise useful extra sums.