New HMRC forecast means 2% cut in rate to 17% will now cost Treasury £6.2bn in lost revenue
The government’s planned cuts to corporation tax look set to cost the public purse billions more in lost revenue than previously thought, according to new analysis.
The tax rate on company profits is slated to be cut from its current level of 19% to just 17% by the end of the decade. But even before the planned cuts, the UK already had one of the lowest corporation tax rates in the developed world.
An analysis based on HMRC data suggests that the loss of revenue from the planned cuts, initiated by former chancellor George Osborne but supported by incumbent Philip Hammond, could add up to more than £6bn.
HMRC recently raised its estimate for the amount a 1 percentage point increase in corporation tax could bring in for the Treasury from £2.8bn to £3.1bn per year – meaning the plan to cut taxes by 2p in the £1 could cost about £6.2bn.
Hammond confirmed in the autumn that he would go ahead with Osborne’s promises, despite the need to find £20bn a year more for the NHS by 2023-24.
There has been mounting opposition to the planned tax cuts, particularly as Britain’s public finances could come under huge strain from a disorderly Brexit.
Rupert Harrison, a former adviser to Osborne who now works at City investment firm BlackRock, said last week on Twitter that it was “hard to see why further cuts to corporation tax are good value,” while Labour seized on his comments.
Peter Dowd, the shadow chief secretary to the Treasury, said: “Even Osborne’s former adviser knows that further cuts to corporation tax are a bad use of public funds. Philip Hammond should cancel his plans for more corporate giveaways and invest in our public services.”
Labour has argued that it would reverse the cuts to raise more money for spending on public services.
But a Treasury spokesperson said: “The strength of our economy means we are expecting to collect more corporation tax in 2020 than forecast one year ago.
“Low corporation tax supports the economy by enabling companies to reinvest in their business, create jobs, and increase wages.”
Corporation tax receipts have increased since the financial crisis, although profits of firms have risen as the economy has recovered. About £60bn a year is raised through corporation tax, although analysts at the Institute for Fiscal Studies thinktank believe about £16.5bn a year has been lost from the reductions in recent years.
Business investment has consistently lagged behind other major economies, while corporate spending since the Brexit vote has entered the worst period since the 2008 financial crisis, due to the lack of clarity over the UK’s future.
Torsten Bell, director of the Resolution Foundation thinktank, said the corporation tax cut was “bonkers” given the higher spending requirements of the NHS over the coming decades, adding: “It highlights a big fiscal mistake we’re about to make.”
“There’s not even an argument for these tax cuts from a competitiveness point of view. When you’re already winning the race to the bottom you don’t need to speed up.”
Lesley Woutersen, one of the co-founders of the EconomicInform gives away all of his free time to the project. He is interested in stock exchange and digital assets. Lesley can be reached by firstname.lastname@example.org.