Executive Summary
The UK’s business tax system should encourage entrepreneurship, reward investment, and ensure that businesses contribute fairly to the communities in which they operate.
This policy introduces a simpler and more progressive corporation tax system with two headline rates. Small and medium-sized businesses will pay a reduced corporation tax rate of 15% on profits up to £10 million, allowing them to retain more capital for investment, innovation and job creation. Large enterprises earning profits above this threshold will transition through a taper before reaching a 30% corporation tax rate.
Unlike the current system of property-based business rates, this policy replaces them with a share of corporation tax allocated directly to local government. This means businesses contribute based on their profitability rather than the size or value of their premises, while giving councils a direct financial incentive to support economic growth.
The Problem
The current business tax system creates several challenges.
Business rates are based on the value of commercial property rather than a company’s ability to pay. A growing manufacturer, warehouse or retailer can face significant tax bills even during periods of low profitability, while highly profitable online businesses may contribute relatively little to the communities where their customers live.
At the same time, smaller businesses often face higher borrowing costs, limited access to investment and greater risks than large corporations, yet they operate within a corporation tax system that offers relatively limited support for growth.
Local authorities also have little direct financial incentive to attract new businesses or help existing employers expand, despite providing planning, transport, infrastructure and local services that businesses rely upon.
The current system therefore discourages investment, places disproportionate burdens on some sectors, and fails to align local government funding with local economic success.
Objectives
This policy aims to:
- Reduce the tax burden on small and medium-sized businesses.
- Encourage entrepreneurship and investment.
- Replace outdated property-based business rates.
- Ensure large corporations make a fair contribution.
- Eliminate tax cliff edges that discourage growth.
- Strengthen local government finances.
- Support high streets, manufacturers, warehouses and industrial businesses.
- Create a simpler, fairer and more transparent business tax system.
Policy Details
Small and Medium Businesses
Businesses generating taxable profits of up to £10 million per year will pay:
15% Corporation Tax
This lower rate recognises the importance of smaller businesses in creating employment, driving innovation and supporting local economies.
Large Businesses
Businesses with profits above £10 million will gradually transition through a taper before reaching:
30% Corporation Tax
The taper prevents businesses from facing a sudden increase in taxation simply because they exceed the threshold, ensuring companies are never financially disadvantaged by growing.
The exact tapering mechanism will be determined following consultation with businesses and tax experts.
Local Government Corporation Tax Share
Instead of traditional business rates, part of corporation tax will be retained by local government.
Businesses within the 15% rate
- 10% to Central Government
- 5% to Local Government
Businesses within the 30% rate
- 20% to Central Government
- 10% to Local Government
This gives every council a direct incentive to support business growth, improve infrastructure and attract investment.
Allocation of Local Government Revenue
Single Site Businesses
Businesses operating from a single location will pay the local government portion of corporation tax directly to the authority in which that business operates.
Multi-Site Businesses
Businesses operating across multiple locations will allocate profits between their sites using an HMRC-approved formula based on economic activity.
The local government share of corporation tax will then be distributed to each authority according to the profits generated at those locations.
This ensures that communities supporting warehouses, factories, offices and retail premises receive an appropriate share of tax revenue.
Online Businesses
Businesses operating primarily online will also contribute fairly to local government.
Rather than avoiding local contributions due to limited physical presence, the local government share of corporation tax will be allocated according to the geographical distribution of UK sales using customer billing or delivery addresses.
This ensures digital businesses contribute alongside traditional retailers while reflecting where economic activity occurs.
Compliance and Enforcement
A simplified tax system should also be more difficult to avoid.
HMRC will continue to audit businesses using risk-based assessments supported by modern digital reporting.
Businesses found deliberately manipulating accounts or artificially shifting profits to avoid UK taxation will face substantial financial penalties.
Company directors and professional advisers found knowingly participating in fraudulent tax arrangements may also face director disqualification, professional sanctions and criminal prosecution where appropriate.
Benefits
Supporting Small Businesses
- Lower corporation tax.
- Greater cash flow.
- Increased investment.
- Higher employment.
- Improved business survival rates.
- Stronger innovation.
Fair Contributions from Large Companies
Businesses benefiting from economies of scale, national infrastructure and mature markets make a proportionately larger contribution while remaining internationally competitive.
Stronger Local Government
Replacing business rates with a share of corporation tax creates a direct link between economic success and local government funding.
Councils that encourage investment, regenerate town centres and support employers will directly benefit from increased revenues.
A Fairer Digital Economy
Online businesses will contribute to local communities in proportion to where their customers are located, creating a more level playing field between digital retailers and businesses with physical premises.
Simpler Taxation
Businesses will no longer face complex property valuations and periodic business rate revaluations.
Taxation becomes linked to profitability rather than property values, making the system fairer and easier to understand.
Implementation
Phase 1
- Legislate new corporation tax rates.
- Abolish business rates.
- Establish the local government revenue-sharing framework.
- Publish guidance on profit allocation for multi-site businesses.
Phase 2
- Introduce the 15% corporation tax rate.
- Begin local government revenue sharing.
- Implement the taper for businesses growing beyond £10 million profits.
Phase 3
- Introduce the full 30% corporation tax rate for large enterprises.
- Review thresholds after three years to ensure they remain appropriate.
Frequently Asked Questions
Why replace business rates?
Business rates tax property rather than business success. Replacing them with a share of corporation tax ensures businesses contribute according to profitability rather than the buildings they occupy.
Won’t businesses split into smaller companies?
Existing anti-avoidance legislation would be strengthened so that connected companies under common ownership are treated as a single economic entity where appropriate.
Why should councils receive corporation tax?
Councils provide planning, transport, infrastructure and local services that businesses depend on. Sharing corporation tax gives local authorities a financial incentive to encourage investment and job creation.
Will online businesses pay fairly?
Yes. The local government share of corporation tax will be distributed according to where sales are made, ensuring digital businesses contribute to the communities they serve.
Will this discourage business growth?
No. A taper between the two corporation tax rates ensures businesses transition gradually and are never penalised simply for exceeding a threshold.
Criticisms
“Large businesses will relocate overseas.”
Corporation tax is only one element of investment decisions. This wider programme of reform—including lower energy costs, planning reform and infrastructure investment—aims to make the UK a more attractive place to do business overall.
“Local authority funding will become unequal.”
A national equalisation system will continue to ensure every council can provide core public services while still rewarding those that successfully grow their local economies.
“Profit allocation will be complicated.”
Large businesses already allocate profits across business units and jurisdictions. HMRC will develop a standard methodology to provide consistency and minimise administrative burdens.
Supporting Documents
References
- HM Revenue & Customs
- HM Treasury
- Office for Budget Responsibility
- OECD Corporate Tax Statistics
- Institute for Fiscal Studies
- Local Government Association