Business leaders on Friday demanded that Liz Truss urgently find ways to help companies cope with her planned increase in corporation tax, warning that inaction risked damaging investment in the UK.

Following the government’s announcement in its “mini” Budget last month that the planned rise in corporation tax would not go ahead, alternative plans around investment incentives were ditched and a bank surcharge on profits was kept at a higher rate.

But after Truss’s U-turn on Friday, company bosses said businesses could be left worse off than before, with lenders facing a combined tax rate of 33 per cent on their profits.

“Raising corporation tax in 2023 may help on the fiscal credibility front but if this move is made in isolation it could backfire,” said Tony Danker, director-general of the CBI, Britain’s largest business group.

Tony Danker: ‘The government should balance any rise in corporation tax with investment allowances’ © Charlie Bibby/FT

“Currently we have tax incentives for investment which are working but due to expire,” he added. “So the government should balance any rise in corporation tax with investment allowances. That way you help achieve both stability and investment.”

Banks have also voiced concern over what Truss’s decision will mean for taxes in the sector. Former chancellor Kwasi Kwarteng last month said the decision not to raise corporation tax meant the bank surcharge on profits would not be lowered from 8 per cent to 3 per cent, as was proposed last year by then chancellor Rishi Sunak.

Following the corporation tax U-turn, bankers said ministers should reduce the surcharge, citing the threat of a combined 33 per cent rate of tax.

David Postings, chief executive of UK Finance, which represents UK lenders, pointed out that the move by Boris Johnson’s government to increase corporation tax initially included a reduction in the surcharge levied on banks.

“Following today’s decision to revert to the originally proposed headline corporation tax rate, we urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK’s banking and finance industry,” he said.

It is not clear whether Truss will introduce any further tax breaks for businesses before the medium-term fiscal plan is set out on October 31.

Johnson had proposed a permanent replacement to a temporary capital spending allowance, due to run out in April next year, as a way to offset the rise in corporation tax.

But Truss’s decision to go ahead with the rise in corporation tax leaves companies without this extra support to balance the effect of the increase against their investment plans.

Groups including BT have previously said business capital spending incentives will play an important role in boosting investment in essential infrastructure, such as broadband.

One business leader described the decision to raise corporation tax without introducing a similar tax break on investment as the “worst of both worlds”.

He added that international companies were already pausing their investment plans as upheaval in Westminster meant policy decisions could not be trusted. “This is not back to where things were — this is worse.”

Stephen Phipson
Stephen Phipson: ‘There are far bigger issues at play than just a single decision on tax. We cannot go on zig zagging from one policy to the next’ © Anna Gordon/FT

The CBI, which backed Sunak’s proposals to permanently replace the “superdeduction” scheme, has warned that UK business investment as a share of gross domestic product will fall to the lowest level among G7 members in 2023, when the scheme ends and corporation tax rises.

According to a survey by manufacturers group Make UK that is due to be published next week, two-thirds of UK companies believe lifting corporation tax to 25 per cent will make the UK less attractive for foreign investment. More than half say it will result in manufacturers investing less capital.

Chief executive Stephen Phipson said the “short-term decision to increase corporation tax again sends the wrong signal to investors as to how attractive the UK is as a destination for foreign investment”.

But he added: “There are far bigger issues at play than just a single decision on tax. We cannot go on zig zagging from one policy to the next.”

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