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What is corporation tax and who has to pay it? What is corporation tax and who pays it?
(21 days later)
The government has reversed changes to corporation tax which it announced less than a month ago. Chancellor Jeremy Hunt has confirmed that corporation tax will rise from April 2023.
What is the tax and what is happening with it? But he has also announced a scheme that will allow companies to reduce the amount they pay if they invest in their businesses.
How much is corporation tax and who pays it?How much is corporation tax and who pays it?
Corporation tax is paid to the government by UK companies and foreign companies with UK offices.Corporation tax is paid to the government by UK companies and foreign companies with UK offices.
They are currently charged 19% of their profits. Profits are the amount of money a company makes, minus any money it has spent. It is charged on their profits - the amount of money companies make, minus their costs (money spent on things like staff and raw materials).
Since 2015 there has been a single rate of corporation tax. Before then companies with profits under £300,000 a year paid a lower rate. The tax is currently charged at 19% of profits. From April 2023, this rate will rise to 25%.
The rate of corporation tax was cut rapidly by the Conservatives - from 28% when the party came to power in 2010, to 19% in April 2017. The Office for Budget Responsibility (OBR) estimates this will raise about £20bn a year by 2027-28.
What is happening to corporation tax? Small businesses with profits of less than £50,000 will continue to pay 19%. The tax rate will increase gradually for companies as their profits rise from £50,000 to £250,000.
Liz Truss has said she will now go ahead with an increase to corporation tax that she had previously rejected. The government will also allow businesses to subtract money they invest in things like IT equipment and machinery from the profits they pay corporation tax on, for the next three years.
In March 2021 former chancellor Rishi Sunak said corporation tax would rise from 19% to 25% in April 2023. He said companies should pay more because they'd received so much support during the Covid pandemic Because it's only a temporary measure, the OBR says it will not change overall business investment - instead it will increase investment for the next three years and it will fall after that.
In July 2022, during the Tory leadership campaign, Ms Truss said she would reverse Mr Sunak's decision and keep corporation tax at 19%, to attract investment into the UK But the independent forecasters said if it was made permanent, as Jeremy Hunt said was his aspiration, it would cost about £10bn a year.
On 23 September, Ms Truss's then chancellor, Kwasi Kwarteng, announced corporation tax would indeed stay at 19% What has happened to corporation tax since?
On 14 October, Liz Truss said corporation tax would go up to 25% after all and sacked her chancellor. The rate of corporation tax was cut rapidly by the Conservatives: from 28% when the party came to power in 2010, to 19% in April 2017.
The extent of the unfunded tax cuts announced in the mini-budget - which also included changes to National Insurance and the top rate of income tax - caused problems on financial markets. In March 2021, Rishi Sunak - who was chancellor then - announced the rise in the tax. He said companies should pay more because they'd received so much support from the government during the Covid pandemic.
In July 2022, during the Tory leadership campaign, Liz Truss said she would reverse Mr Sunak's decision and keep corporation tax at 19%, to attract investment into the UK.
On 23 September, after Ms Truss had become prime minister, the then chancellor Kwasi Kwarteng announced corporation tax would indeed stay at 19%.
The extent of the unfunded tax cuts in their "mini budget" - which also included changes to National Insurance and the top rate of income tax - caused problems on financial markets.
The cost of borrowing for the government and for mortgages both rose considerably and the pound fell against the dollar.The cost of borrowing for the government and for mortgages both rose considerably and the pound fell against the dollar.
That put pressure on the government to reverse its decision on the top rate of income tax and then on corporation tax. On 14 October, Ms Truss sacked her chancellor and reversed the decisions, saying corporation tax would go up to 25% after all.
Is the turmoil Liz Truss's fault? On 17 November, new chancellor Jeremy Hunt confirmed the increase.
What do other countries do?What do other countries do?
The government says that keeping the corporation tax rate at 19% will mean it is "significantly lower than G7 counterparts". The UK's 19% headline rate of corporation tax is lower than other countries in the G7 group of big economies.
The G7 is a group of countries with big, industrialised economies. The next lowest country for corporation tax in the G7 is France at 25.8% - higher than the UK even once it increases in April.
The next lowest country for corporation tax is France at 25.8% - higher than the UK even once it increases in April.
But this chart doesn't tell the full story.But this chart doesn't tell the full story.
Governments leave loopholes. Companies may pay less tax, if they invest in their businesses for example, or set up in certain parts of a country. Governments leave loopholes. Companies may pay less tax if they invest in their businesses for example, or set up in certain parts of a country.
So the taxes that companies pay can look very different to the headline rates of tax charged. So the taxes that companies actually pay can look very different to the headline rates of tax charged.
The headline level of corporate tax among the 27 EU countries varies: from the lowest of 9% in Hungary, 10% in Bulgaria and 12.5% in Ireland to the highest of 31.5% in Portugal, 29.8% in Germany and 27.8% in Italy.
Another way of looking at this is how much is raised in corporate taxes as a proportion of the size of the economy measured by GDP.
The UK's tax take as a proportion of GDP puts it third in the G7 behind Japan and Canada, where it is expected to stay even after the increase to the headline rate.
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