Sunak Gives Himself Scope to Increase U.K. Corporation Tax

(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak is giving himself scope to raise corporation tax in next week’s budget to help fund some of the massive spending Britain accrued during the pandemic, after a similar proposal from U.S. Treasury Secretary Janet Yellen.

The U.K. expects to keep business levies competitive with the other Group of Seven nations, two officials familiar with the matter said. At 19%, the domestic rate is the lowest in the G-7, with the U.S. the next most competitive at 21%. Yellen’s proposal to lift the U.S. rate to 28% gives the U.K. chancellor more room to maneuver, given rates in Canada, France, Germany, Italy and Japan are all above 25%.

If the U.S. follows through on those plans, Sunak has space to raise the U.K. rate by as much as six percentage points in the coming years, and still leave Britain with the lowest level of corporation tax in the G-7. The Treasury declined to comment.

“The government is presumably feeling that with the trend in corporate tax rates that’s anticipated in the U.S., there’s a bit more space both economically and politically to do that than there otherwise would be,” former Office for Budget Responsibility Chairman Robert Chote said Thursday at an Institute for Government event.

The officials, who asked not to be identified because the discussions are private, spoke after the Financial Times reported that Sunak plans to announce a “sharp” rise in corporation tax. The Times said the government is looking at a rate of as high as 25%.

Sunak will unveil his spending plans on March 3 as he seeks to fuel the U.K.’s recovery from its deepest recession since 1709. There’s been good news of late as the government’s coronavirus-vaccination program is among the world’s fastest and Prime Minister Boris Johnson has mapped out a path from the country’s third lockdown.

But after committing about 300 billion pounds ($424 billion) to tackle the virus and support companies and workers in the current tax year alone, the budget deficit is hitting peacetime records. That’s left the chancellor in a tight spot as he tries to balance economic revival with restoring public finances to sustainable levels.

‘Sacred’ Duty

Sunak aims to prioritize jobs and employment in his budget, to ensure businesses can get up and running when allowed to reopen. Johnson on Monday laid out a road map to re-opening the economy that would see the last businesses able to open their doors again on June 21 at the earliest.

Officials have indicated that support for businesses and workers will track that road map, suggesting there’ll be extensions to programs including furlough, which pays workers as much as 80% of their wages, the business rates holiday, and reduced sales tax rates for hospitality and tourism at least until mid-year. Officials also suggested:

On Thursday, the Resolution Foundation think tank urged the chancellor to deliver a 100 billion-pound fiscal boost next week to help the recovery.

Sunak has said it’s his “sacred” duty to rein in the deficit, and warned of “tough choices” ahead in order to do so. He began making a dent in the deficit in November, freezing pay for millions of public-sector workers and cutting overseas aid, and officials have suggested more decisions to cut spending or raise tax will be announced next week.

The Conservatives promised in their 2019 election manifesto not to raise the rates of income tax, value-added sales tax or national insurance -- the Treasury’s biggest revenue raisers.

With Johnson vowing to stick to that pledge, Sunak’s options for raising large amounts are limited. But estimates from the government’s tax authority suggest that each percentage point increase in corporation tax would boost Treasury coffers by about 2 billion pounds in the 2021-22 tax year, and 3 billion pounds the following year.

Before the 2019 election, Johnson pledged to cancel a planned cut in corporation tax to 17% so the government could spend money on priorities such as the state-funded National Health Service. That was formalized by Sunak in the 2020 spring budget.

“If you’ve said, ‘I’m not going to raise the main rates of VAT, income tax and national insurance,’ corporation tax is essentially the last main rate you’ve got left to do anything with,” Chote said.

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