Labour and Lib Dems pledge to increase corporation tax

A clear divide has emerged between the main rival campaigns in the general election campaign, with Labour and Liberal Democrats on one side and the Tories the other when it comes to corporation tax.

Both the left-of-centre parties have pledged to increase the tax paid by businesses, saying they will use the money to fund spending on education in particular, following an outcry over effective real terms funding cuts for schools worth close to £3bn.

Labour's £8.4bn plan would be paid for by increasing corporation tax from its current rate of 19 per cent to 26 per cent by 2020-2021, taking it back to within two per cent of its rate when the party was last in power.

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Smaller firms with annual income below £300,000 would see their rate increased more slowly to 21 per cent.

The Lib Dems would raise money for their £7bn plan by increasing the rate to a more competitive 20 per cent, which is still below the global average. It says it would also reverse the married tax allowance and save money by remaining in the EU single market.

The Tories are planning to cut corporation tax to 17 per cent in an effort to bring businesses to the UK, especially after Brexit.

Corporation tax is an easy target, but set the rate too high and odd things can happen, says Kamal Ahmed on the BBC. Despite being cut nine per cent cut since 2010, the amount the levy brings in has risen from £43bn to close to £50bn.

Part of this reflects the economic recovery, meaning firms are now paying on higher profits. However, advocates of lower taxes say businesses have also moved to the UK as a result.

Ahmed adds that although the headline rate declined, other taxes on businesses increased, while allowances for the likes of machinery reduced. Consequently, at Labour's rate, businesses might well be facing an overall higher tax burden than in 2010.

The Institute for Fiscal Studies said Labour's plan would raise £19bn in the short term but "substantially less" longer term because companies would invest less in the UK, says The Guardian.