U.K. Tax Change to Yield Higher Costs, But Much-Needed Certainty For Companies

With the latest change, the corporate tax rate has flip-flopped four times in less than a year. The tax increase, from the current rate of 19%, will apply to companies with annual profit of more than £250,000, equivalent to more than $307,000. The higher rate is set to raise around £18 billion in additional tax income a year, the government said in October. 

A few months before the levy is set to take effect in April, finance executives say they welcome the certainty—if not the higher taxes—as they prepare their budgets for 2023. With a host of other hurdles on the horizon, from rising financing costs to a tight labor market, it is one less wild card. 

“What I really disliked was, at one point it was going down, then it was going back again, then it was going down and now it is going back up again,” said

Associated British Foods

PLC Finance Director

John Bason,

referring to the corporate tax rate. “We can plan ahead now. We know it is increasing to 25%.” 

The U.K. government’s change brings the corporate tax rate in line with those of other large economies. Both China and France have the same rate, the U.S. is at 21% at the federal level while Germany’s corporate levy effectively is at 30%, according to professional services firm PricewaterhouseCoopers.

Associated British Foods, the owner of fast-fashion chain Primark and other businesses, will see its full-year tax bill increase by around £20 million from a total of roughly £300 million due to the tax change, Mr. Bason said. ABF, which reported a 22% increase in annual revenue to £17 billion and a 46% increase in operating profit to around £1.2 billion, said it would review its investment plans in the U.K. “We certainly will look at our investments,” Mr. Bason said. “But at this point, it is not leading to a reappraisal of any of the investments that we’re making.” 

For London-based financial technology company

Wise

PLC, clarity around the corporate tax is helpful as the company looks to expand its business, Chief Financial Officer Matt Briers said. “All we ask for in the U.K. is that it is predictable and stable,” Mr. Briers said.

Wise, which reported a 55% increase in revenue to £397 million and saw total income rise 63% to £416 million for the six months ended Sept. 30, is working to maintain its profit margin and run its business more efficiently, Mr. Briers said. “The tax rate we certainly can’t control. … Those are the controllables,” Mr. Briers said, referring to Wise’s profit and its plans to save capital.

U.K. companies planning for 2023 are weighing factors such as access to labor—which is more limited after the U.K.’s exit from the European Union—inflation, financing costs and future tax obligations, said Sharon Bell, European equity strategist at

Goldman Sachs Group Inc.

“Of course, clarity is a very useful thing,” Ms. Bell said about the increase in the corporate tax rate. 

U.K. companies’ costs are rising on multiple fronts. Interest rates have gone up to 3% and are expected to rise further, which is driving up borrowing costs. That is after a decade during which many companies were able to renew financing terms at cheaper rates than those that they previously had as the Bank of England loosened monetary policy, Ms. Bell said. Borrowing costs for all businesses have risen, she said, with European companies looking to refinance now facing rates of around 4% to 5%, up from 1% to 2% a year or two ago. 

Inflation rose to a 41-year high in October, running at 11.1% as prices for energy and other items have surged. The pound remains down more than 7% from a year earlier at around $1.23.

The outlook for companies is getting darker. U.K. companies issued 86 profit warnings in the third quarter, up from 51 a year earlier and 64 in the previous quarter, according to EY-Parthenon, the strategy arm of professional services firm Ernst & Young. More companies in the third quarter issued their third or more warning in a 12-month period, according to Jo Robinson, a turnaround and restructuring strategy leader at EY-Parthenon.

“Businesses are facing an unprecedented combination of headwinds, including rising costs, slowing demand and excess supply, making it increasingly difficult to balance competing priorities,” Ms. Robinson said, according to a release. “Increasing uncertainty means that events could move quickly for companies that show signs of stress.” 

But compared with a few months ago, the economic outlook is more stable, said ABF’s Mr. Bason. Interest rates are higher, but aren’t rising as rapidly as before, and the U.S. dollar has lost some of its strength, he said. 

“Some of those moves, particularly interest rate moves and exchange rate moves, were so extreme,” Mr. Bason said. “We’re in a better place.” 

Write to Jennifer Williams-Alvarez at [email protected] and Nina Trentmann at [email protected]