It was easy to spot the gaps that Labour needs to fill in the review of business taxation announced by the shadow chancellor, Rachel Reeves. On the rate of corporation tax, Labour wants to be “in lockstep with the G7”, which is a terribly vague formulation. On long-term tax breaks to boost investment, Reeves is enthusiastic but has committed to nothing specific. Any role for windfall taxes, where Labour is still calling for a “proper” additional levy on North Sea producers, was not mentioned in her speech to the trade body Make UK.
The “to-be-decided” list, then, is long. In the meantime, Reeves said Labour would support “a genuine boost to investment … if it is affordable”, if that’s what the government produces in next week’s budget. There was nothing here to frighten business – but, equally, nothing much to excite.
Yet one core principle was definitely worth spelling out: a sensible regime for business tax must be capable of lasting the length of a parliament. High taxes deter investment but so does fear of the unexpected. “In recent years, corporation tax has gone up and down like a yo-yo while the government has papered over the cracks with short-term fixes like the super-deduction,” argued Reeves, overdoing her metaphors but accurately describing the Conservative experience.
George Osborne arrived as chancellor in 2010 with a mission to lower corporation tax, taking it down in stages from 28% to 19% in 2017 (although the last shove was by Philip Hammond). Now, barring a monumental U-turn, Jeremy Hunt will move the rate to 25% at the start of April – that pledge was one of the key elements in the overthrow of Trussonomics last autumn.
The crack-covering manoeuvres are well known. They were the yearly fiddles with investment allowances and R&D (research and development) tax credits that ensured that, even as the headline corporate rate tax fell, the government’s overall tax-take from business was remarkably stable as a percentage of GDP. Companies have had a job to see the wood for the trees.
Reeves could also have pointed at Brexit because business investment in the UK only truly stalled versus G7 countries after 2016. But, yes, it is plainly true that companies tend to spend less on long-term projects if they cannot be confident about what’s coming round the next tax corner. Stability matters.
It is one reason why the super-deductions referenced by Reeves have only half succeeded. Launched by Rishi Sunak as chancellor in 2021 as a way to boost investment as the economy emerged from lockdown, they allowed companies to offset 130% of investment spending on plant and machinery against profits for two years and clearly had some impact: exhibit A is BT’s acceleration of its fast-fibre rollout. But the two-year cut-off inevitably created a “cliff edge” moment that has now arrived.
Thus the wailing from boardrooms as super-deductions disappear just as corporation tax is hiked. Take your pick from the many tallies of where the UK will sit in international league tables but the Confederation of British Industry calculates a fall from fifth-most competitive tax system in the Organisation for Economic Co-operation and Development for capital investment to 30th place out of 38 if nothing changes.
Hunt, one assumes, is not blind to the statistics and will replace super-deductions with something. Since the increase in corporation tax will generate an extra £15bn-£18bn annually and, given that overall economic forecasts look rosier (or less horrible) than six months ago, he has some room for manoeuvre. Full expensing of capital investment in plant and machinery, costing an initial £11bn, is probably out of the question but a less generous 50% formula feels possible.
If so, though, Hunt would also be guilty of the “chaotic 11th-hour approach” cited by Reeves. Covid and the Truss interregnum obviously didn’t help but hosting an annual guessing game on allowances is no way to encourage long-term investment. Boards don’t only take decisions at budget-time.
Note, too, that President Biden’s Inflation Reduction Act programme in the US is a 10-year project, which is the other reason – aside from the lavish subsidies for green energy and manufacturing – why companies are cooing over it. The UK can’t compete with US largesse but it can vow to be roughly consistent on business tax and incentives.
Reeves, then, has read that particular breeze correctly. It’s a start. But actual tax and investment policies, as opposed to tonal shifts, are still required. If long-term planning is your pitch to business, you cannot wait until a month before a general election to unveil what you’d do differently. A review is welcome. Don’t take ages to complete it.