Jeremy Hunt must scrap the disastrous corporation tax rise in his budget

Pity Jeremy Hunt. He reminds me of the donkey in a game of Piñata, the game where players try to smash open the papier-mâché animal with a stick to get hold of the sweets hidden inside. 

As each day goes by, ahead of the Budget on 15 March, there are more players having a bash: the latest to pile on the pressure over the Chancellor’s ill-judged corporation tax raid is BT. Although not known for treading into the political arena, the telecoms giant has gone in for a full attack on Hunt’s plans, inherited from Rishi Sunak, to hike corporation tax from 19% to 25%. Not mincing his words, BT’s finance boss, Simon Lowth, warned that Britain is moving close towards a “cliff-edge deterioration in the tax environment for investment” and in a “drastically anti-investment direction.” 

Hunt’s hike, together with the end of the so-called “super deduction” policy which gives tax incentives for investment, would damage productivity, and therefore growth, said Lowth. “Productivity growth is stubbornly low – and although not just a UK problem, does mean that some of our international competitors are starting to outpace us. Business investment has also been poor; a problem because it’s one of the key ways of helping the UK to break the cycle of low growth.”

BT’s criticism – by far the most stinging of any big business so far – follows on from comments made by Sir Pascal Soriot, the boss of AstraZeneca, who described the UK’s tax rates as “discouraging”. He gave the higher rate as one of the reasons why the pharma giant is switching its new £300 million manufacturing plant to Ireland where the corporation tax rate is just 12.5%. 

What’s driving business to enter the political fray for the first time in years is the extraordinary switch in Conservative tax policy that Hunt’s planned hike in corporation tax is about to achieve.  From being the ninth lowest corporation tax payer among the 38 members of the OECD block, we are about to become the ninth highest, at the same level with Belgium. Talk about freedom from Brussels to set our own national policies.  

Both big and small businesses are up in arms about the hike. In so many ways, the worst hit will be small businesses. As the Federation of Small Businesses warns, thousands of smaller firms will just stop investing in their businesses which will mean lower productivity and fewer jobs, or both.

Tina McKenzie, the FSB’s policy chair, points out that if corporation tax hits 25%, it will make the UK’s tax burden compared to GDP the highest in three-quarters of a century. What’s more, she adds the reductions in the headline rate in the last decade were at the same time that the Treasury expanded the tax base, which means that this hike in tax rate will hit much harder.

It’s not exaggerating to say small firms are deeply concerned about the future. Not only because of the corporation tax rise but also ongoing higher energy costs, even though prices have fallen back, and Hunt’s planned cut in R&D tax credits which will hit smaller businesses disproportionately. Indeed, the FSB’s research shows that three out of five small businesses already say the rate at which corporation tax is set is a challenge, even before April’s hike. (Only those with turnover of less than £50,000 will not be charged the higher rate.)

More pertinently, the new increase will hit the country’s one million or so of owner-manager firms and one-person limited companies the most. It’s a double-whammy for this group of small business owners who were left out during the lockdown as they were excluded from the various Covid furlough and support schemes.  

As McKenzie points out, they are the only group of people left paying the extra 1.25% NICs equivalent tax. They have had their dividend allowance halved and will now pay higher corporation tax as well. It’s why the hike being supported by Hunt – who makes much of his background as a successful entrepreneur by building his own small business so should understand the dynamics –  is so deeply counterproductive.

It will be obvious to most businessmen and women, although it is not obvious to the closeted Treasury civil servants who support this ill-conceived policy. Whacking up taxes at such a difficult moment will hurt the smallest, and most dynamic businesses the most. They still don’t get that it’s the six million or so SMES which create more than two-thirds of all new jobs: it’s an extraordinary statistic but it is the reality. 

Big businesses – like BT and AstraZeneca – will have an easier time coping with the tax rises. They can switch locations, fiddle a little on the edges with their investment plans and ride the storm. Yet even the CBI, not known for criticising tax policy, warns that inward investment is drying up while money is leaving the country because of the government’s current policies. 

What a state for the Tories to be in. Yet it’s a self-induced state of their own cock-eyed policy and misunderstanding or, indeed, willing blindness. Some might say it’s one of self-flagellation. They don’t need to go far to get a grip on the impact of this policy: the National Institute of Economic and Social Research estimates that the new corporate tax rate will cut business investment by around £150 billion over the next five years. That translates into a 0.65% reduction in GDP growth each year and therefore thousands of jobs – and therefore thousands of people’s livelihoods and their well-being.  

No wonder then that those carrying the biggest sticks with which to beat the Chancellor are from his own backbenches. Some say it’s getting close to a serious rebellion with a growing number of MPs from at least three different Conservative cliques including the Conservative Growth Group, the European Research Group and Northern Research group as well as high-profile rebels such as Sir John Redwood.  Together they number about 150 MPs out of 355: quite a chunk of the party and they could do severe damage if they rally against the corporation tax proposal around the Budget.  

Expect fireworks. Hunt is due to meet with the first of the groups – the Conservative Growth Group, headed by Simon Clarke, next week to go over his plans. It should be an interesting meeting: the Chancellor will have to explain why he has changed his mind so dramatically since his pitch for the Tory party leadership last summer when he went all out on a platform of low corporation tax. Really low.

Back then, Hunt wanted to cut corporation tax to 15%, arguing that only by doing so, could the UK create the conditions for a low-tax, high-growth economy. (During his earlier bid for the leadership in2019, he wanted to cut the level to 12% so it would suggest he is a low-taxer by instinct.)

You can see why Hunt thought he had to change his mind when he – and Rishi Sunak – took over from the Liz Truss maelstrom. The political temperature had become hysterical and the economic mood worrying. The duo had to act fast to demonstrate fiscal restraint and restore some semblance of stability to the markets. Yet that’s been achieved, mainly because global financial markets have settled down and moved on, inflation is coming down and UK tax receipts are far higher than anticipated – and much higher than the OBR, typically hopeless at forecasting, had forecasted. The OBR also got its sums wrong on the public finances after last autumn’s emergency, it emerged this week too. 

Citigroup is even predicting that UK inflation will be down to below 2% by this autumn while the Treasury’s coffers have an extra £30 billion bouncing around because of increased tax revenues in January. Times have changed since last autumn, and just imagine how Labour will use the headlines over the highest business taxes in nearly a century to beat up Sunak and Hunt as they head for next year’s election.

Which is why the Tory rebels in the CGG group – and all the other various factions – will be wielding their sticks and asking Hunt why won’t he change his mind again as the facts have changed again. How would he prefer to be remembered? As the Chancellor who brought in the equivalent of a new poll tax on business or the man who restored growth? He must abandon this terrible tax rise.

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