The government will raise corporation tax despite promising not to do so in the mini-budget.
Kwasi Kwarteng, who was today sacked as chancellor, promised in the mini-budget last month to keep corporation tax at 19% instead of increasing it to 25% as planned in April.
Liz Truss confirmed her government’s change of direction at a news conference hours after dismissing Mr Kwarteng.
She said the change would raise £18bn for the public purse.
It is the second major tax cut U-turn in three weeks after the government confirmed it would not go ahead with a plan to scrap the 45p top rate of income tax promised in the mini-budget on 23 September.
Mr Kwarteng cut short his trip to the International Monetary Fund in Washington DC and returned to the UK on Friday morning as expectations of another significant U-turn mounted.
But his early return was not enough to save his job and less than two hours after he landed, he had been sacked.
The past three weeks have been marked by economic turmoil, with the pound reaching a record low against the dollar, interest rates soaring and the Bank of England having to intervene.
The reversal follows warnings from the Institute for Fiscal Studies, a leading economics think tank, that Mr Kwarteng’s £45bn package of unfunded tax cuts had left a £62bn black hole in the public finances.
The government has come under increasing pressure from senior Tories to take steps to reverse aspects of the mini-budget to allay market concerns.
Speaking about the u-turn Fiona Graham, Director of External Affairs and Policy at the Institute for Family Business, representing thousands of family businesses across the UK, said: “Over and over again we hear family businesses say what they need is economic policy that allows them to plan and invest for the future. After years of disruption, and with business still facing global challenges, we need the Government to recognise the damage that instability causes to business and urgently seek to rebuild confidence. This is the key to delivering growth and prosperity for generations to come.
“When Rishi Sunak announced the Corporation Tax rise in the Spring Statement, this was part of an overhaul that would see higher headline rates alongside a reformed business investment landscape. If the Government are now going ahead with that Corporation Tax increase, we need to see detail on how long term business investment will be supported, and the outcome of the consultation on reforming the UK capital allowance regime.”
Tony Danker, CBI Director-General added his thoughts to the announcement by Liz Truss, saying: “The instability of recent weeks has paused investment and hit livelihoods, so it was important today that the Government responded to those market concerns.
“In the weeks to come, government plans will need to continue to restore fiscal credibility to give markets and business confidence to invest.
“Once stability is restored, we must plan for economic growth from 2023. That will be the moment to set out a new long term tax regime that will kickstart business investment and ensure the UK is competitive in a changing world.”
Richard Godmon, tax partner at accountancy firm, Menzies LLP, added his opinion on the announcement, by saying: “The government making a U-turn on such an important fiscal policy does not only raise concerns for business owners in terms of their long-term financial plans, but also begs the question, ‘if tax cuts aren’t going to boost growth, what will?’.
“When the planned rise of corporation tax in April 2023 was scrapped, many business owners made changes to their budgets and cashflow accordingly. With this six per cent increase in available spending, businesses have likely made plans to invest this cash in equipment, perhaps to take on more staff, or invest it into employee pay rises. To go back on this agreement creates uncertainty and uncertainty does the opposite of what the financial statement hoped to do – it hinders growth.
“Amid all the political and economic upheaval, business owners are going to feel stifled as they attempt to plan for the months ahead. In times of turbulence, maintaining a positive cashflow remains the most important factor for any business. Considering the level of uncertainty business owners are facing, ensuring that any potential investment plans fit safely within the business’ afforded budget is crucial if they are to manage this wave.”