Nadhim Zahawi’s corporation tax review raises more questions than answers

Nadhim Zahawi’s musings on business taxes may become irrelevant at any moment, but this week’s chancellor of the exchequer arrived with an idea to kick around: delay, reform or simply cancel his predecessor’s hike in corporation tax from 19% to 25%, due to take effect from next April.

That, at least, seemed to be the meaning of Zahawi’s many references to the tax in his day-one interviews. “I know that boards around the world, when they make investment decisions, they’re long term, and the one tax they can compare globally is corporation tax,” he told Sky News.

Well, yes, it is true that comparisons are easy when one looks at only one number. The point about Rishi Sunak’s approach, however, was that it was based on an analysis that the business taxation game is more complicated if the aim is to boost investment by companies, where the UK’s performance has been dire since 2016.

“It is unclear that cutting the headline corporation tax rate did lead to a step change in business investment; we need our future tax policy to be targeted and strategic,” said Sunak in a speech in March – virtually the only speech in his Covid-battered chancellorship that attempted to sketch a long-term economic plan for the UK.

Thus a major thrust of the Treasury’s thinking on business taxes, until now, has been how to design a successor to the “super deductions” – effectively big tax breaks on spending on equipment – that Sunak introduced as a two-year emergency measure in his spring 2021 budget. The CBI, for one, wants the deductions to be made permanent, seeing them as the surest way to lift the UK off the bottom of the G7 league table for business investment.

Data on the effectiveness of the deductions is mixed, it should be said: there has been little sign of a meaningful pick-up in business investment so far. But, if there is anything close to consensus in FTSE 100 boardrooms, it is that Sunak had at least identified the correct problem: the UK’s yawning productivity gap versus European peers, especially France and Germany.

A key question for Zahawi, then, is whether the “super deduction” plan would survive a cancellation of the hike in corporation tax. Given the state of the public finances, it would be hard to have both. An increase in the rate to 25% was projected to raise an extra £17bn annually, of which maybe £11bn would be returned via investment incentives. If you’re waving goodbye to the £17bn, your room for specific pro-investment giveaways is severely limited.

Zahawi stressed he was merely in “review” mode, but the hint on corporation tax was heavy. Business leaders are hard-wired to cheer a cut – or a freeze in this case – but, if the new chancellor takes this route, their second question may be about how a low headline rate is supposed to boost business investment. Sunak looked for the evidence and didn’t find it.

AO World does much-needed housekeeping

Welcome to the 90% club, AO World. Or, at least, honorary membership of the group of companies whose share prices have crashed by nine-tenths from their peak. AO’s high, seen as recently as January 2021, was 429p. Now the online retailer of fridges and freezes is printing shares at 43p, which is as near to 90% lower as makes no difference.

John Roberts, founder and chief executive, called the £40m fundraising “a sensible piece of financial housekeeping given the short-term macroeconomic uncertainty”, a breezy way to describe a cash-call that is needed because the balance sheet is stretched and last year’s optimism has been punctured.

Investors who climbed aboard at the top – when Roberts was proclaiming that the pandemic had permanently improved AO’s prospects and pan-European expansion was ready for liftoff – may not be amused.

AO ditched its seven-year-old experiment in Germany last month and took a vow to concentrate solely on the UK again. That is sensible given that the UK operation is well-established with a strong reputation for customer service. But Roberts could help himself by reining in his instinctive bullishness.

As recently as Monday, the company, in response to a Sunday Times report about a credit insurer reducing cover for suppliers, declared that its liquidity position was unaltered from April.

Two days later, it tapped investors in a fundraising that expands the number of shares in issue by 20%. That is more than a modest bit of housekeeping.