Truss promises £19bn extra taxes for big companies after U-turn

Prime Minister Liz Truss’s U-turn, which will add an extra £19 billion to the tax bill of big companies, will only fill around a third of the hole in the public finances that economists have identified.

After three weeks of pressure following Chancellor Kwasi Kwarteng’s fiscal statement, he was shown the door on Friday alongside one of the biggest tax cuts he announced.

It would have cancelled the plan introduced by former chancellor Rishi Sunak to bring the corporation tax rate to 25% in April next year, from 19% currently.

The rate is levied on businesses with more than £250,000 in profits every year.

Ms Truss said: “I have… decided to keep the increase in corporation tax that was planned by the previous government.”

Economists at the Institute for Fiscal Studies estimated that the Government might have to make savings of more than £60 billion a year by 2026.

But the U-turn will barely cover a third of that, meaning further action might be needed to get debt falling, the IFS said

“The direct effect of re-introducing the corporation tax increase (or cancelling the cancellation) is… less than a third of the tightening we identified as being necessary,” said IFS economist Isabel Stockton.

She said that the changes could bring other impacts that lessen or increase the burden on public finances, and stressed that the £60 billion figure depends on how much the economy grows.

“But it’s optimistic to expect the corporation tax change to be sufficient to get debt falling on its own.”

Mr Sunak said at the time he hiked corporation tax that the government needed the money to help balance the books after massive spending during the pandemic to prop up jobs and keep businesses going.

But on the Tory leadership campaign trail in July, Ms Truss promised she would cancel the planned hike.

In the mini-budget three weeks ago, it was one of a raft of tax cuts – or scrapped tax rises – that Ms Truss and Mr Kwarteng promised.

They also vowed to scrap the additional rate of income tax, something that will cost around £2 billion a year.

The Government has now U-turned on both of these policies after their unfunded tax cuts sparked market turmoil.

It means ministers have rowed back on a little under half of the changes announced in the mini-budget.

By the financial year ending in 2027, the cuts were estimated to cost around £45 billion. The U-turns have reversed nearly £21 billion of this.

The Resolution Foundation think tank said that the remaining billions in tax cuts and worsening economic outlook could leave the new chancellor, Jeremy Hunt, with tough decisions.

“The last two weeks have seen the announcement and unravelling of the worst unforced error in British economic policy making for generations,” said Resolution Foundation boss, Torsten Bell.

“The Prime Minister today got rid of her Chancellor and has junked almost half of her tax cuts.

“However, the need to fund the remaining tax cuts and darker economic outlook, including higher debt interest costs, means that despite today’s U-turns, Jeremy Hunt has just two weeks to decide how to fill a black hole of several tens of billions of pounds in the public finances.”