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CORPORATION TAX: ONE STEP BACK AND TWO STEPS FORWARD

Earlier in the year the Chancellor announced a rise in corporation tax, a move many believed was in contrast to the need to generate business activity. Our newly appointed Chief Financial Officer Ravi Tara discusses his thoughts on the decision, how it affects business and how Mattioli Woods has dealt with the issue.

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Ravi Tara
Chief Financial Officer
11 June 2021
4 Minutes

When the Chancellor announced that there would be a rise in corporation tax (“CT”) in his budget earlier this year many commentators were surprised as it appeared to contradict the need to generate business activity following the recent challenges created by the pandemic and appeared to go against the previous policy adopted by the Conservative party.

From 2011 to 2016 former chancellor George Osborne gradually reduced the corporation tax from 26% to 20% before dropping even further in 2017 to 19% where it has continued to stay since and will continue at this level for businesses with profits of £50,000 or less. Businesses with profits above a threshold of £250,000 will move to 25% corporation tax from 2023, with profits between £50,000 and £250,000 taxed on a tapered scale, which reverses the historic policy and has been seen as a challenge to the ability for UK plc to encourage investment in the face of BREXIT, not dissuading investment as this move, on the face of it could promote.

In many quarters of our industry there is frustration but acceptance that the debt created by the pandemic needs to be addressed and repaid, and looking at this through many of our clients’ eyes and our own, we believe that this is the right thing to do given the social and financial support that has been provided to those in need during the pandemic. After all, tax is to be paid to support the country’s long-term prosperity and the numbers involved are sizeable.

As an indication, the Office for Budget Responsibility predict that borrowing to cover the ongoing Covid-19 pandemic could reach as high as £355 billion (close to the GDP of Belgium, pre-pandemic) which could take decades to repay. In fact, the debts caused by the Second World War - we were left with a debt of around £27 billion to the US in today’s money as well as owing money to Canada – took us 61 years to repay.

However, for our clients, there will be many opportunities to manage the tax positions effectively. The continuation of the CT relief for research and development, the new super deduction for plant and machinery investment and of course, looking after employees by putting money aside for retirement and through the continued level of tax relief for pension contributions. It is also great that other benefits that keep our workforces engaged and safe in the event of unforeseen circumstances, which I am sure we can all relate to, have been retained tax efficiently.

All of this will hopefully stimulate economic growth that over the last few years has seen, for good reason, businesses nervous about further investment activity. With these CT reliefs set against higher rates of CT tax we hope the focus on investment and development of businesses, rather than sitting on cash which in itself is receiving low interest returns, will create an opportunity for real growth in turn repairing the financial impacts of the pandemic.

Indeed, as a business we are proud that the taxes we pay will help the combined effort of us all to get the country’s finances back on track.  We have been operating in a sector that has remained important throughout the pandemic, as the call for our trusted advice, the need for financial planning and financial services in general has never been greater. Over the last year we have taken active steps to underwrite and retain our full complement of staff, without taking any financial support from the Government, to enable us to continue to deliver a high level of service to our clients and to deliver exactly what they need. Incredibly in the early months of the pandemic we saw increased levels of activity, all while working remotely from home, to protect both our clients and our staff wellbeing.

On the back of this, as we come out of the pandemic, we continue to see heightened levels of activity with a sustained need for financial planning and an increased appetite for investment. We continue to invest in our team and where relevant bring in more staff and expertise. Recruitment, as we have seen before in challenging economic markets, is a confidence barometer for general economic growth. Ultimately our current and prospective clients are looking to us for guidance to take their business and indeed their personal financial affairs to where they need to be. To do this we ensure that we have the appropriate balance of technical, creative and empathetic qualities within our team.

Maybe the tax hikes in CT are not that bad after all, all things considered.

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