Corporation tax rise could induce currency risks for treasurers
Further focus on currency hedging and management is to be expected in the wake of the Budget announcement
Further focus on currency hedging and management is to be expected in the wake of the Budget announcement
The Chancellor’s decision to raise the UK’s corporation tax rate could add currency risks for corporate treasurers, according to Greg Smith, founder of Hawk FX.
“The companies that will be affected are the large ones, the top 10 percent. Disproportionally, these companies are more international, have more overseas income, have more overseas investors, so if there is a noticeable impact on cashflow then those same companies are going to be more sensitive to currency risk as a result,” he says.
Rishi Sunak announced in this year’s Budget that the corporation tax rate for company profits will increase from 19 to 25 percent as of April 2023.
Businesses with profits of £50,000 or less will yet not be affected by this change, as the Chancellor announced the creation of a Small Profits Rate, in which the current 19 percent rate will be maintained.
The full 25 percent tax rate will only apply to companies with profits of more than £250,000.
“It’s not going to provide any benefits to the country’s finances over the next couple of years. We have massively increased public debt. [The Chancellor] wants to be seen to be doing something about it,” says Smith.
“Over time, this corporation tax increase will help to balance finances once the economy has recovered to a reasonable degree, aiming it at being a fair and progressive increase where it is going to disproportionally come from the largest, most profitable companies.”
Despite an unprecedented increase to 25 percent, Sunak reiterated that the UK’s corporation tax remained well below the G7 average, stating that the country will continue to lead a “UK-pro business tax regime”.
Whilst further clarity over Brexit has generated significant sterling strength over the past months, the rise in corporation tax announced by the Chancellor could contribute to a greater focus on currency hedging and management from treasurers, according to Smith.
“It would draw into focus that it’s something they need to manage carefully. It may change investment decisions; it may change where things are going to be invested given some of the other policies,” he says.
“That something that remains to be seen, but it certainly could increase the focus on currency risk management as it is larger companies that are more exposed.”
Smith stresses it is an important part of cashflow management for treasurers and will not be a “simple equation” for them to solve.