The Chancellor’s corporation tax increase will hit UK competitiveness rating

  • The planned rise in corporation tax to 25% will give the UK one of the least competitive tax systems in the OECD
  • In the 2020 edition of the International Tax Competitiveness Index, the UK ranked 22nd out of 36 OECD countries
  • Raising the tax rate in 2023, just as the investment super-deduction ends, will make the UK drop to 28th place overall

The Chancellor’s planned hike of corporation tax will make the UK plummet from having the 7th most competitive corporate tax system to 29th place in the rankings for business taxation once the super-deduction ends and the rise comes into effect in 2023.

Post-Budget analysis by the Centre for Policy Studies and the US-based Tax Foundation shows that the plans outlined would see the UK’s corporate tax regime go from being one of the most competitive in the OECD, to one of the least competitive, effectively overnight.

The think tanks are concerned that introducing a cliff-edge of this nature into the tax system is bound to exercise a chilling effect on investment and growth.

The Tax Foundation’s International Tax Competitiveness Index is a ranking of 36 OECD countries based on how supportive their tax systems are of economic growth. It looks at 40 different tax policy variables in assessing the pro-growth qualities of a country’s tax system.

In the 2020 edition of the Index, the UK ranked 22nd out of 36 OECD countries.

In the short term, the expanded loss carrybacks and super-deduction for capital investment outlined in the Budget would significantly boost the UK’s tax competitiveness. Coupling these measures with the existing 19% corporation tax rate would give the UK the 7th most competitive corporate tax regime in the OECD (up from 17th place today), and the 19th most competitive tax system overall.

However, that boost to tax competitiveness will reverse sharply in April 2023, when these measures end and the headline tax rate goes up to 25%. The UK would drop to 29th in the corporate tax competitiveness rankings, and to 28th place overall.

Daniel Bunn, the Tax Foundation’s Vice President for Global Projects, said:

This Budget is a good start on a path toward a more competitive tax system for the UK, and some of the policies are in line with recommendations from the joint Tax Foundation and Centre for Policy Studies report released last year. However, the best provisions are temporary. The UK government needs to ensure that its tax system is geared toward jobs and growth for the long term.’

Tom Clougherty, Head of Tax at the Centre for Policy Studies, said:

The Chancellor’s super-deduction for capital investment is exactly the kind of economy-boosting measure we need right now. However, it won’t boost long-run growth unless it is made a permanent feature of the tax system. The government will need to introduce further reforms if it wants to avoid a precipitous fall in our international tax competitiveness in 2023.”

Date Added: Thursday 4th March 2021