Corporation Tax and the General Election - Don’t let corporation tax break the bank!

The 2019 general election on 12th December – the third in little more than four years – will go down in history as the Brexit election. Even something as sacrosanct as Christmas will play second fiddle, as village halls up and down the land are converted into polling stations rather than panto sets or winter fêtes. And all because MPs can’t agree on how to leave the EU, or even if we should leave at all. Will Boris Johnson win a majority that lets him ‘get Brexit done’, or will Jeremy Corbyn prevail and deliver his promise of a second referendum?

Despite being billed as the Brexit election, the whole thing was prompted by Parliament’s impasse over Brexit in the first place and Britain’s departure from the EU isn’t the only thing at stake. While the general public also keeps a close eye on traditional election issues like the NHS, crime and the environment, SMEs will focus on other issues that could impact their bottom line – like corporation tax.

Corporation tax

There’s more to election campaigning than just trying to win the hearts and minds of the people in the street; the parties must also appeal to the nation’s businesses. Corporation tax levels have a huge influence over their political preference. This tax that all limited companies must pay against their profits is an important revenue-raiser for the UK government, accounting for around 9% of their total tax take. The three major party leaders took to the stage at the annual Confederation of British Industry conference to make their election pitch to business bosses.

Conservative Party

Boris Johnson has vowed to delay planned cuts to corporation tax from 19% to 17% next April. This step was first proposed by former Chancellor George Osborne in 2016, to boost business in the wake of the Brexit referendum. The Conservative Party leader declared that the rate all firms pay on their profits would be kept at current levels indefinitely, freeing up funds for other priorities like the NHS.

According to the government, cuts to the headline rates of corporation tax between 2010 to 2019 cost around £13 billion a year. They estimate that an additional reduction from 19% to 17% would cost a further £6 billion – money a Conservative government would now make available to spend on ‘national priorities’. Labour claimed these business ‘handouts’ had done real damage and the Conservative party would ‘revert to type’ after the general election.

Labour Party

If UK businesses were hoping for a handout from the Labour party, they were left disappointed when Mr Corbyn announced he would raise the main rate of corporation tax to 26% by 2022 – the level it was in 2011. A move he believes will generate billions to be spent on the party’s priorities, including health and education. Speaking at the conference, Mr Corbyn added that it was ‘nonsense’ to suggest he was anti-business.

Liberal Democrats

Liberal Democrat Leader Jo Swinson’s unwavering commitment to remaining in the EU might have proved popular with business delegates. However, her plans to raise corporation tax from 19% to 20%, raising almost £10bn annually, were less well-received. Despite pledging to use the extra funds to improve adult education, business leaders’ thoughts had already turned to tax budgeting.

Make savings elsewhere

The Conservative Party regained power back in 2010. Since then we have seen the UK corporation tax rate cut from 28% to 19% in 2019, leading to significant savings for businesses. These halcyon days appear to be over, after the major political parties’ poured cold water on the prospect of further cuts. Labour and the Liberal Democrats even promised to hike the rate if they gain power. While this may be bad news for your business’s bank balance, it’s worth noting that the UK currently has the lowest rate of corporation tax in the G20, although not as low as Switzerland or Singapore.

The news leaves decision-makers scratching their heads trying to work out how they can make savings elsewhere. For cross border businesses with international payment requirements, the answer could lie in something they can control: exposure to currency market risk and how they manage it. The importance of which has been brought into sharp focus by the impact of the protracted Brexit process on the value of the pound.

Exposure to fluctuations in exchange rates is a major concern for businesses that operate internationally. Since the UK voted to kickstart the Brexit process in June 2016, the prospect of Britain leaving the EU has accentuated this concern. The gathering clouds of political and economic uncertainty has caused the value of the pound to fall off a cliff. For example, in August the GBP/EUR rate fell below €1.06 – its lowest level in 10 years – driving up the cost of sending money to the EU even further.

Before you start thinking about establishing a currency strategy that mitigates this risk, you need to understand how the outcome of the election could impact the pound:

  • Conservatives: a Conservative majority would generally be considered a favourable outcome for the pound. This could provide Mr Johnson with the platform he needs to pass his deal in Parliament and break the Brexit deadlock. With the uncertainty that has weighed on the pound since the EU referendum gone, it’s likely to prosper.
  • Labour: if Labour were to win and Mr Corbyn keeps his promise of a second referendum, uncertainty will remain and the pound is likely to suffer.
  • Liberal Democrats: while Jo Swinson’s pledge to scrap Brexit would remove an element of uncertainty from the equation, an inexperienced coalition government led by the Lib Dems could put the pound under pressure elsewhere.

You can mitigate the risk of these election and Brexit- fuelled market movements increasing the cost of your business’s international payments, by speaking to a currency specialist like RationalFX. You will be assigned an experienced account manager, who will take the time to assess your business’s commercial context and risk appetite, before helping you develop a FX strategy. We have helped over 5,000 businesses with their global bank to bank transfers; from simple international trade-related payments to sophisticated currency strategy, our guidance could prove invaluable.

Email: brexit@rationalfx.com
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Useful links
You can calculate your corporation tax here.
To read a summary of the Conservative Party manifesto, click here.
To read the Labour Party manifesto, click here.
To read the Liberal Democrats’ manifesto, click here.
To find out what’s in the SNP’s manifesto, click here.