Jeremy Hunt is set to unveil tax reforms designed to encourage investment in the UK as he battles against a Conservative rebellion on corporation tax.
The Chancellor will confirm in next week’s Budget that the rate of corporation tax will rise from 19 to 25 percent in April despite appeals from MPs and business leaders to freeze the levy.
He is expected to argue that the largest companies should contribute disproportionately to repaying the cost of economic support during the pandemic, along with the wealthiest individuals.
But Mr Hunt will unveil long-awaited changes to the country’s capital allowances regime – with enhanced tax breaks for companies that invest rather than taking cash out.
The decision to raise the rate of corporation tax, after years in which it was repeatedly lowered, was first taken by Rishi Sunak in 2021 when he was still Chancellor.
Mr Hunt has been under mounting pressure from backers of Boris Johnson and Liz Truss to abandon the policy weeks before it is due to take effect, but he has decided to go ahead after being told that freezing the rate would cost £18bn because its rise is already baked in to future fiscal forecasts.
Instead, he is set to announce the conclusion of a year-long consultation into how the UK’s capital allowances regime – determining how much tax businesses can save by reinvesting their profits – should work in future.
The so-called “super deduction”, which allowed firms to write off 130 per cent of their capital investments, will expire shortly and the Treasury has not yet revealed what will replace it. The Treasury is expected to reject plans to let companies write off the full value of their investments, a policy known as “full expensing”, and is instead considered likely to push for more targeted schemes.
The Defence Secretary has vowed to double down on his push to boost the military’s long-term funding as he prepares for a partial victory in the upcoming Budget.
Mr Hunt is expected to confirm next week that he will pump more money into the Armed Forces in the wake of the war in Ukraine – but less than the £10bn-plus package which Ben Wallace had requested.
Next week is also scheduled to see the publication of an update of the integrated review of foreign, defence and security policy, while Rishi Sunak is holding a defence summit with the leaders of the US and Australia.
Mr Wallace has repeatedly argued that Russia’s invasion of Ukraine shows the threats facing the UK are more dangerous than previously thought, and that the defence budget has been hit particularly hard by inflation because of the need to buy large amounts of equipment.
The Prime Minister and Chancellor are poised to announce an uplift in military spending as one of the few areas of Government funding that will be significantly increased at the Budget.
The Defence Secretary told a Conservative Home conference on Monday: “What happened before Ukraine is we unlocked a huge investment from the then-chancellor and the prime minister, the £24bn or £16bn of extra that, in some case, dealt with the historical black holes, but also managed to start that modernisation.
“We were prepared to take some risks in the timeframes of bringing in new capability. Then, of course, Putin invades Ukraine and that changes some of those middle-of-the-decade timetables that we were prepared to take a risk in. The negotiations I’m involved in are about how I can bring some equipment forward in order to mitigate those risks.”
Mr Wallace said the Budget would send “a strong signal that the public and the Treasury will just have to get used to the fact that come the next spending review, defence will just have a greater share than it traditionally has done”.
But he added that “the real battle to come” would be after the next general election, when the Government’s spending review is due.
Mr Hunt has said that a long-term increase in defence spending will need to be linked to a refresh of the UK’s strategic aims, which will be outlined in the new integrated review expected shortly before next Wednesday’s Budget. The previous version of the review, published in 2021, promised an “Indo-Pacific tilt” but the update is likely to focus more on European defence.