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CBI attacks Treasury over growing tax burden on UK plc

Employers' organisation warns that businesses face £4.2bn hike as pressure grows on Bank of England to cut rates this week

Business is facing a £4.2bn tax hike thanks to the Budget, the CBI will warn today, as the British Chambers of Commerce prepares to publish a bleak diagnosis of the UK's financial health.

The CBI's research, based on Treasury figures, shows the huge tax rise has come despite the 2p cut in the headline rate of corporation tax. The organisation said the figures "undermine the Government's claim to be boosting the UK's international tax competitiveness".

Its analysis of this month's new tax rules shows that companies will pay an extra £1.84bn in tax in the 2008-09 tax year, with a further £1.24bn in 2009-10 and £1.13bn in 2010-11.

The CBI said the majority of the extra tax comes from the loss of plant and machinery investment allowances and the abolition of tax relief on empty properties. It insisted that the extra burden would not just fall on big companies but would hit small firms as a result of the penny-in-the-pound increase in the small-business tax rate to 20 per cent last year, due to rise to 22 per cent in 2009-10.

The deputy director-general of the CBI, John Cridland, will today say: "When the economy is slowing the last thing a Government should do is raise taxes on the part of society that creates jobs and wealth, but that's what's happening."

This view will be underlined when the BCC publishes its quarterly economic survey on Thursday – the day the Bank of England is due to announce its decision on whether to cut interest rates.

It is understood that the survey will show that the slowdown in Britain's economy is deepening, with confidence in both the manufacturing and service sectors falling over the past three months. The figures are expected to paint a bleak picture of business investment and show that difficulties exist in both domestic and overseas markets.

The BCC's economic adviser, David Kern, said the Bank had to cut rates: "A cut to 5 per cent is urgently needed, and long overdue, but it is no longer sufficient. We urge the MPC to consider a further cut in rates in May, to 4.75 per cent.

"Inflation risks are serious, and the MPC must be vigilant. However, the threats to growth are more urgent."

A quarter-point cut in the base rate to 5 per cent has been quoted by the financial bookie Cantor Spreadfair as odds on at 4-11. However, a half-point cut is viewed as unlikely, with punters offered 5-2 against.

A Treasury spokesperson said: "Measures the Government is introducing will support business and enterprise. From today, the UK's corporation tax rate will be cut by 2p to 28p – its lowest ever level, and the lowest of all major industrialised nations – and a new annual investment allowance will be introduced for all UK firms, providing a major incentive for them to expand or improve their business."

A source argued that more than half of the measures the CBI highlighted were about tackling tax avoidance.