Approximately 50% of medium-sized companies in the UK intend to postpone their investment plans in response to the recent increase in corporation tax.
Economists attribute the sluggish growth in British productivity and living standards over the past decade, in part, to limited business investment. One contributing factor to this issue is the concern expressed by businesses regarding higher tax rates, which diminish their motivation to make substantial investments.
In accordance with a policy announced in March 2021, Britain’s headline rate of corporation tax increased from 19% to 25% in April of the following year.
According to accountancy firm BDO, 46% of surveyed businesses with a turnover ranging from £10 million to £300 million ($12 million – $379 million) stated that the hike in corporation tax would cause a postponement in their investment plans. Additionally, 39% of respondents expressed concerns that the tax increase would result in reduced hiring or potential job losses.
In an effort to mitigate the impact on investment, finance minister Jeremy Hunt announced in March a policy called full expensing, which allows businesses to promptly offset their investment in plant and machinery against tax liabilities. This measure aims to provide businesses with an incentive to continue investing despite the tax rise.
According to Paul Falvey, a tax partner at BDO, the recent increase in the headline corporation tax rate is expected to temporarily hinder current business investment plans. However, he noted that the introduction of the new full expensing capital allowances regime has garnered a positive response, indicating that the dampening effect may be short-lived.
Although Britain’s overall tax burden continues to be lower compared to most European countries, it has been gradually increasing in recent years. This upward trend can be attributed to factors such as an aging population and sluggish economic growth. If the current trajectory persists, the country is projected to experience its highest tax burden since World War Two.
During the British Chambers of Commerce’s annual conference last week, Hunt addressed businesses and expressed his desire to lower their taxes. However, he acknowledged the uncertainty surrounding the feasibility of such a reduction, as it would depend on the government’s forthcoming budget plans towards the end of the year.
The survey conducted by BDO gathered responses from 512 companies between March 30 and April 16, forming the basis of its findings.
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