Rishi Sunak prepares big overhaul of UK corporate tax system

Chancellor Rishi Sunak will next week pave the way for a major overhaul of Britain’s corporate tax system, as he seeks to boost business investment and improve the UK’s weak economic growth prospects.

Sunak’s spring statement on Wednesday will be overshadowed by the growing cost-of-living crisis, with pressure on the chancellor to offer immediate help to families, including through a cut in fuel duty.

But Sunak’s allies said he will use the statement to warn the only sustainable way to protect and improve living standards is to boost growth, notably through increased business investment.

After a post-Covid spurt, the British economy is set to record weak annual increases in gross domestic product of a little over 1.5 per cent, according to official forecasts.

Employer groups such as the CBI have flagged that business confidence is waning, and raised concerns about the government’s plans to increase national insurance contributions and corporation tax.

Sunak is due to use his spring statement to commit to reform of business taxation, setting the stage for detailed decisions in his autumn Budget, according to his allies.

This is expected to lead to reform of the corporate tax system to encourage more capital spending by companies.

Sunak is also likely to push ahead with reform of tax credits for research and development, which he believes are not delivering value for money, particularly in relation to small and medium-sized companies.

The chancellor is preparing to use the spring statement to set out plans to improve the operation of the apprenticeship levy, to ensure it is incentivising employers to deliver the right kind of training to boost productivity.

The statement will set the policy direction ahead of the autumn Budget, where ministers are considering options to provide incentives to investment by companies after the end of the super-deductor tax break in 2023.

Last month in his Mais economic lecture, Sunak warned that unless productivity and growth increased “people will begin to lose faith in the moral and material case for free markets”, undermining democracy itself.

He said the problem was “no longer the government — businesses simply aren’t investing enough” and that his priority was “to cut taxes on business investment” in the years ahead.

Sunak’s analysis is that business under-investment is chronic across all regions, with capital spending by UK companies averaging just 10 per cent of GDP, less than the 14 per cent OECD average for advanced economies.

The chancellor believes George Osborne, one of his predecessors as chancellor, focused on the wrong thing by aggressively cutting headline corporation tax rates.

Sunak wants to focus on the UK tax treatment of capital investment, which he said was “much less generous than the OECD average”.

He said last month: “It is unclear that cutting the headline corporation tax rate did lead to a step change in business investment. We need our future tax policy to be targeted and strategic.”

With corporation tax due to rise from 19 per cent to 25 per cent from 2023, Sunak is facing calls from business groups to come up with a much more generous regime to promote capital investment.

“It’s a top priority for Rishi,” said one government insider. “It will be a central theme of the spring statement.”

The CBI has called for a similar scheme to the super-deductor to be put on a permanent basis — suggesting a 100 per cent tax deduction for capital spending — which it has calculated would trigger an annual £40bn boost.

It said there was a risk that business investment could tail off just as growth stalls.

“The Treasury must act to stabilise business confidence now,” said Tony Danker, director-general of the CBI.

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