What is corporation tax? Business profits levy explained

Chancellor Nadhim Zahawi has identified corporate tax as something he could lower

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But there are concerns in some quarters that he could still be trying to implement key directives during the time he left 10 Downing Street, despite having no parliamentary support to do so.

Corporation tax is a key source of revenue for the Treasury but Conservatives argue it hurts the UK’s attractiveness for business (Image: AFP/Getty Images)

One of Mr Zahawi’s stated goals in his short tenure as Chancellor of the Exchequer has been to cut corporate taxes – something he could do if he is elected the next prime minister.

So what exactly is this tax, what did Nadhim Zahawi say about it – and how likely is it to change?

What is corporate tax?

Corporate income tax is a tax on a portion of the profits made by companies.

All UK limited companies are required to pay it and it is calculated in a similar way to the income tax we pay as individual employees.

Some member clubs, clubs and associations as well as cooperatives are also subject to contributions.

Currently the UK corporation tax rate is 19%.

Most countries have some form of corporate tax, but some territories — like Guernsey, the Isle of Man, and the Cayman Islands — don’t have them.

Because of this, some multinational companies choose to locate in these locations or divert their profits through them.

For this reason, right-wing politicians tend to argue that the tax should be set low to attract business, which is one of the reasons it has been cut from a 28% rate by successive Tory chancellors over the past decade .

The current interest rate in the UK is well below the global average of 23.6% and the average in America (27.16%), although it is in line with the European average (18.98%).

Close neighbors such as Ireland (12.5%) and Hungary (9%) have significantly lower rates.

How will corporate income tax change?

Corporate tax is set to rise next year for the first time since 1974.

As announced in Rishi Sunak’s Covid Budget 2021 last spring, the overall rate for corporate profits over £250,000 will rise to 25% from the next financial year in April 2023.

Companies whose profits are less than £50,000 have to pay a “small profit rate” of 19%.

New Chancellor Nadhim Zahawi has said he wants to look into a potential corporate tax change (Image: AFP/Getty Images)

Mr Sunak said at the time it was “fair and necessary to ask [businesses] to contribute to our recovery” from the Covid pandemic.

The surge is justified, he said, given that public spending of more than £100billion has been spent on emergency support to businesses during the various lockdowns.

The government estimates that a further £47.8bn is to be raised for public purses by April 2026, which would allow the government to boost business investment.

What did Nadhim Zahawi say about corporate tax?

While his radio interviews on Wednesday (July 6) were dominated by questions about Boris Johnson’s future, Nadhim Zahawi was able to lay out some of his plans as Chancellor.

With the cost of living crisis putting pressure on UK households to he told Sky News’ Kay Burley His priorities are “rebuilding the economy after the pandemic and reviving growth, as well as tax cuts.”

Referring to tax cuts, he said: “Nothing off the table”.

Pushed for corporate tax – a profits levy unpopular with many right-wing Conservatives – Mr Zahawi said he wanted the UK to be “as competitive as possible while maintaining fiscal discipline”.

Nadhim Zahawi is unlikely to pass corporate tax changes (Image: AFP/Getty Images)

“I want to be one of the most competitive countries in the world to invest in.

“I know that boards of directors around the world are making long-term investment decisions, and the only tax they can compare globally is corporate income tax.”

Is there a corporate tax cut?

While the Chancellor had corporate tax on her mind on Wednesday, it seems unlikely that the planned increase for 2023 will be stopped.

Despite concerns that Boris Johnson could defect, he is unlikely to be able to get legislation through Parliament.

Mr Zahawi is also likely to focus on his own campaign for Conservative Party leadership over the next few weeks.

Even if he wins, there would be no guarantee that corporate income tax would be a priority for a Zahawi government.

It would also be expected that the next Conservative leader would seek general election soon after being named party leader, meaning he would not have much time to implement major policies.