Labour had trailed that it would increase rates, and it is surprising that they did not feel able to entirely reverse the rate cuts which have occurred since corporation tax stood at 28% in 2010, settling instead at an increase to 26% from April 2022. However, that timidity has not been replicated in relation to other policies. Labour intends for the UK to unilaterally change its system of the taxation of corporate groups. This appears to have two aspects:
- corporate groups under common ownership will be treated as a unitary enterprise; and
- profits are declared and taxed where economic activity occurs and where value is created.
The policy seems to be targeting large multinational technology business (and, indeed, Facebook is given as an example of a multinational that currently operates with separate companies) but the proposals go much wider than that, catching entirely domestic groups across all sectors.
Labour is not alone in thinking that the existing model of international corporate taxation (where, broadly, non-residents are only subject to corporate tax in jurisdictions where they have a "permanent establishment") is no longer fit for purposes, having been left behind by the business models of, amongst others, the global technology giants. Indeed, the UK will introduce a digital services tax (DST) in April and, more generally, the OECD is in the process of consulting on a wide range of global tax reforms expressly to address the challenge of digitalisation. This raises the questions of whether Labour intends to scrap DST and whether they would implement whatever reforms the OECD ultimately recommends, but may also indicate that Labour is indeed setting its sights beyond addressing digitalisation.
More conventionally perhaps, as well as reforming the structure of corporate taxation, Labour is also targeting the tax benefits available to corporates, especially large ones. Over the course of this Parliament, research and development tax credits for large corporations and the patent box are to be phased out. In addition, Labour has promised to carry out a review of corporate tax reliefs. However, the outcome of this review has to some degree been pre-determined, as it will be set a target to achieve efficiencies of 1% of total tax relief expenditure by the final fiscal year of the Parliament, estimated to be around £4.3 billion.