Rishi Sunak plots major overhaul of UK corporation tax system

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

Sunak’s spring declaration on Wednesday will be overshadowed by the growing cost of living crisis, with pressure on the Chancellor to offer immediate help to families, including a reduction in fuel taxes.

But Sunak’s allies said he would use the declaration to warn that the only sustainable way to protect and improve living standards is to spur growth, including through increased business investment.

After a post-Covid surge, the UK economy is set to register small annual increases in gross domestic product of just over 1.5%, according to official forecasts.

Employers’ groups such as the CBI have reported declining business confidence and have raised concerns over government plans to raise national insurance contributions and corporation tax.

Sunak is expected to use his spring statement to commit to corporate tax reform, setting the stage for detailed decisions in his fall budget, allies say.

This should lead to a reform of the corporate tax system to further encourage business capital expenditure.

Sunak is also likely to push forward reform of research and development tax credits, which he says do not offer value for money, especially when it comes to small and medium-sized businesses.

The Chancellor is preparing to use the Spring Statement to set out plans to improve the way the Apprenticeship Levy works, to ensure it incentivizes employers to deliver the right kind of training to boost productivity.

The statement will set policy direction ahead of the autumn budget, where ministers consider options to incentivize businesses to invest after the super-deductive tax break ends in 2023.

Last month in his But economic conferenceSunak warned that unless productivity and growth increase, “people will begin to lose faith in the moral and material case of free markets,” undermining democracy itself.

He said the problem was “no longer the government – companies just aren’t investing enough” and that his priority was “to reduce taxes on business investment” in the years to come.

Sunak’s analysis is that business underinvestment is chronic across all regions, with UK business capital expenditure averaging just 10% of GDP, below the OECD average of 14% for advanced economies.

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

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

He said last month: “It is not clear that the reduction in the overall corporate tax rate has led to a radical change in business investment. We need our future tax policy to be focused and strategic.

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

“This is a top priority for Rishi,” a government insider said. “This will be a central theme of the spring statement.”

The CBI has called for a scheme similar to the super-deductor to be put in place on a permanent basis – suggesting a 100% tax deduction for capital expenditure – which it says would trigger an annual increase of £40billion.

He said there was a risk that business investment would slow just as growth stalled.

“The Treasury needs to act to stabilize business confidence now,” said CBI chief executive Tony Danker.

The Treasury declined to comment.

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