Tax by tax, spend by spend

Onshore corporation tax

The text on this page has been updated with information available at the time of the October 2024 Economic and fiscal outlook. We are aware of a technical issue with our charts that means they currently show the March 2024 forecast. Please access the data from our October 2024 forecast supporting spreadsheets directly.

Onshore corporation tax (CT) is levied on the taxable profits of limited companies and other organisations, after taking into account various deductions (for the costs of running the business) and allowances (for example capital allowances for investment spending). The headline rate of onshore CT in 2024-25 is 25 per cent.

Onshore CT represents a significant source of revenue for government. In 2024-25 we forecast that it will raise £98.1 billion. That represents 8.5 per cent of all receipts and is equivalent to £3,400 per household and 3.5 per cent of GDP.

A separate corporation tax regime is in place for offshore firms operating in the oil and gas sector.

  Forecast methodology

Forecast process

The OBR commissions forecasts of onshore CT receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are then used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).

Forecasting models

The onshore CT model breaks receipts down into three sectors: industrial and commercial companies, life insurance companies, and financial sector companies (excluding life insurance). The model starts by aggregating the items included in the CT liability calculation for each of these sectors. This means grossing up data on the income side (e.g. profits, capital gains, foreign income) and then subtracting any deductions (e.g. capital allowances, group relief, trading losses carried forward). These individual income and deductions lines are then projected forward using the appropriate OBR economic determinants and/or econometric equations.

The model then generates forecasts on a cash basis (i.e. when the tax is paid). To generate this cash-basis forecast, various timing adjustments are made (based on historical trends) to convert the liabilities forecast into cash. In particular, larger companies pay CT in Quarterly Instalment Payments (QIPs). Separate timing adjustments are made for QIP payers and non-QIP payers due to different lags between liability and payment. Future changes to the tax system (announced as Budget measures) and other ‘off-model’ factors (such as the effect of increasing incorporations) are also included in the forecast.

Finally, the model converts the cash-basis forecast to the National Accounts time-shifted basis. Although this time-shifting approximates to the liabilities forecast, the results are not identical. The conversion requires two steps. First, based on previous patterns of payments over the financial year, a monthly profile for cash receipts is generated consistent with the financial year cash forecasts. Second, the monthly cash figures are shifted back to the appropriate months in accordance with the ONS methodology.

Main forecast determinants

The main determinants of our onshore CT forecast are those related to the tax base and those used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on onshore CT receipts.

Main forecast judgements

The most important judgements in our onshore corporation tax forecast are related to the economy forecast that underpins it – most important of all being the outlook for company profits and investment growth. Alongside those, we need to make a number of other forecast judgements. These include:

    • In-year estimate for cash onshore CT receipts.
    • The use of trading losses – losses generated by companies can be used to offset against current and future tax liabilities (although now subject to restrictions). The total stock of losses that is available to be used, and the extent to which they are used to offset against tax liabilities, is an important forecast judgement.
    • Incorporations – Our income tax, NICs and CT forecasts are affected by our assumption that incorporations will continue their rising trend. Employment income is taxed more heavily than profits and dividends, so when formerly employed or self-employed individuals incorporate, their tax bills generally fall. While this reduces income tax and NICs receipts, it boosts CT revenue (See Box 4.1 of our November 2016 EFO for more detail).
    • Assumptions on payment timings – Our forecast model uses assumptions on profits, investment and allowances to generate a projection for the amount of tax that is liable. But actual payments of tax by companies are adjusted to reflect previous changes in circumstance as well as anticipating future changes in profits or investment. We base our payment timing assumptions on historical trends. The time-shifted accounting treatment for corporation tax receipts is less sensitive – although not completely insensitive – to changes in payment timings as cash receipts are spread over earlier months.

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  Previous forecasts

We revised down our forecasts for onshore CT receipts repeatedly between June 2010 and March 2013. That reflected weak profits growth over that period and our underestimation of losses being carried forward by firms (notably in the financial sector) that can be used to offset future liabilities. It also reflected subsequent policy measures that meant the main rate of corporation tax was reduced further and faster than the plans set out by the Government in June 2010.

Following the onset of the coronavirus pandemic, we revised down our forecast for onshore corporation tax receipts based on the assumption that profits would drop by more than nominal GDP in 2020, in line with what had generally happened in previous recessions. However, since then we have consistently revised up our forecasts, often by large amounts, as profits held up and then grew faster than expected, initially thanks to large-scale government support schemes such as the CJRS and direct business grants.

A rise in the pre-measures effective tax rate has also pushed up onshore CT forecasts since the pandemic. In particular, receipts have been concentrated in some relatively tax-rich sectors of the economy (e.g. financial services, retail and professional services) and among very large companies. Much of this strength is assumed to persist through the forecast. Forecast revisions also reflect policy announcements – in particular the six percentage point rise in the main rate of corporation tax, the temporary super-deduction capital allowance measure and the announcement of the temporary and then permanent full expensing measure in the March 2023 Budget and the 2023 Autumn Statement.

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  Policy measures

Since our first forecast in June 2010, governments have announced a number of policy measures affecting our forecast for onshore CT. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Chapter 3 of the relevant Economic and fiscal outlook (Annex A prior to the March 2023 EFO).

The change of methodology for recording CT receipts in the official data will affect the years in which policy changes affect measured receipts. For example, cutting the main rate of CT affects cash receipts with a lag in accordance with the timing of payments by larger and smaller companies. On the new time-shifted methodology, the effect of a rate cut is concentrated much more in the year in which it takes effect. Table A.4 in Annex A of our March 2017 EFO set out the differences for the bigger policy measures that were recosted on the new methodology in that forecast.

Key onshore CT policy changes announced since 2010 have included:

Headline rate changes

    • Successive reductions in the headline rate of onshore corporation tax. Between 2010-11 and 2017-18, the standard rate of corporation tax was reduced from 28 per cent to 19 per cent.
    • An increase in the main rate of corporation tax from 19 to 25 per cent was announced in the 2021 Spring Budget. This came into effect from 1 April 2023, alongside the reintroduction of the small profits rate at 19 per cent of profits up to £50,000, which is then tapered until it reaches 25 per cent at profits over £250,000. This raises progressively larger amounts, reaching £20 billion a year by 2027-28. A supplementary forecast release, available here, provides more detail of this rate rise.

Capital allowance changes

    • Changes to the annual investment allowance (AIA). The AIA is a 100 per cent capital allowance for most capital expenditure up to a limit. Expenditure above the limit is subject to the usual capital allowances rules. In 2010-11 the AIA stood at £100,000 a year. This subsequently varied between £25,000 (in 2012) and a temporary level of £1 million (between January 2019 and the end of March 2023). An AIA level of £1 million was made permanent in the November 2022 Autumn Statement.
    • A 130 per cent super-deduction on most types of investment in plant and machinery was in place for the two years from April 2021, with a cost of £9.4 billion in 2022-23.
    • At Spring Budget 2023 the Government announced a temporary 100 per cent capital allowance (or ‘full expensing’) regime that will be in place for three years from April 2023. It means that all investment in new plant and machinery that qualifies as a ‘main rate’ asset can be written off against taxable profits in the year in which the cost is incurred. We estimate that this will have a maximum cost of £10.7 billion in 2024-25.
    • In the November 2023 Autumn Statement, the 100 per cent capital allowance was made permanent. This reduced receipts relative to full expensing ending in 2026-27.

Broadening the base

    • Bank loss restrictions. These measures restrict banks’ ability to set their accumulated losses off against their taxable profits, boosting corporation tax revenues. The measure was introduced at Autumn Statement 2014 and was extended at Budget 2016.
    • Restricting interest relief. Budget 2016 announced a restriction on the deductibility of corporate interest expenses from April 2017.

Other measures

    • Anti-avoidance and compliance measures. These include measures to close loopholes, reduce evasion (such as the Budget 2016 measure on offshore property developers), increases in HMRC resources to improve compliance and the accelerated payments scheme for disputed tax to be paid upfront.
    • Pillar 2 reforms. The Government announced at the November 2022 Autumn Statement that it will implement the OECD ‘Pillar 2’ reforms that focus on protecting tax bases against tax avoidance from multinational companies. The reforms seek to establish a minimum level of taxation on multinationals, effectively requiring companies to top-up their tax paid when the effective tax rate on foreign operations is less than 15 per cent

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  Ready reckoners

‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2024 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found ‘Tax and spending ready reckoners’ spreadsheet we have published on the data section of our website.

The table below shows that:

    • Corporation tax receipts are highly sensitive to changes in company profits (the base of the tax).
    • Because some losses can be used to offset profits in future years, stronger-than-expected profits only brings forward the point at which some companies are liable to pay corporation tax, rather than immediately raising their payments. This is particularly true for financial companies. Therefore, our forecast is less sensitive to changes in financial company profits and the determinant is separated out.
    • Higher gross fixed capital formation reduces receipts as companies take advantage of capital allowances. The lessening of this impact at the end of the forecast is due to full expensing being a temporary policy when these ready reckoners were produced in March 2023.
  • WordPress Data Table

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