The Case For Keeping Corporation Tax Low

We have so far seen the majority of candidates for the leadership of the Conservative Party and the next Prime Minister of the UK offering to cut taxes. Talk about tax cuts is inevitable when there is a leadership contest or a General Election.

High on the list of taxes talked about currently by candidates is the impending rise of the rate of Corporation Tax – currently 19% – which is due to rise to 25%. Several candidates have talked about cancelling the increase and keeping the current 19% rate or even reducing it to 15% in April 2023.

Historical rates of Corporation Tax in the UK

In 1980 under the premiership of Margaret Thatcher the rate of Corporation Tax was at 52%, reduced to 35% before John Major became Prime Minister.

By the time Tony Blair had become PM the rate had been reduced to 33% and then taken down further to 31% and 30%. When Gordon Brown became PM, the rate was again reduced to 28%.

Since the Conservative Party came into government in 2010 the Corporation Tax rate was reduced year on year from 28% down to 19% in 2017.

An economists point of view

Most economists agree that lower rates of business taxes lead to economic growth through further investment in capital expenditure and higher job creation.

In theory, although lower rates of corporation tax allow businesses to make more profit, which means its shareholders gain more through increased dividends, it does allow businesses to increase their spending in investment.

As any business owner/manager would tell you, they know what they need to do to grow their business. However, in order to make those investments they need to be able to raise those funds, and larger profits allow them to do this.

The more disposable income a company has or is expected to have the greater the chance of them investing in plant machinery, plant equipment, business vehicles, labour etc.

What many economists will also tell you is that if a cut in taxes for business is temporary, it is less effective in encouraging business owners/managers to make those investments. Instead they are much more likely to simply enjoy the profits from the tax breaks and this has little or no effect in growing the economy.

Friend Partnership is a forward-thinking firm of accountants, business advisers, corporate finance and tax specialists. We act for entrepreneurial businesses and successful individuals on a national & international basis