Jeremy Hunt faces a backbench Tory rebellion after he announced a rise in corporation tax at Wednesday’s Budget.
Influential MPs on the right – including Priti Patel and Simon Clarke – have warned that raising the rate from 19 to 25 per cent would “hammer” businesses and curb growth.
Mr Hunt confirmed the hike will go ahead from April as he argued that major tax cuts now would only destabilise efforts to balance the books.
But the chancellor announced new schemes aimed at encouraging investment. His “full capital expensing” policy will allow companies to deduct every pound invested in IT equipment, plant, or machinery from profits for the next three years.
And a new tax credit will be set up for small and medium-sized firms that spend 40 per cent of their expenditure on research and development. Tax reliefs for film, TV and video gaming will also be extended, he said.
However, Tory rebels have warned that businesses are “fleeing” Britain because of the corporation tax rise. “This is a tax on jobs and growth,” Mr Clarke told The Telegraph.
The former Treasury secretary, a key Liz Truss backer, added: “It is very hard to see how it doesn’t have a chilling effect on the whole economy in a way which will cost every family in the country.”
Ms Patel warned that retail businesses were being “absolutely hammered” by corporation tax and said a “flight of capital” from the UK was already under way.
The former home secretary told The Express: “The Conservative party is nothing if it does not stand for low taxes and sound money and importantly also the ability to help people do well and prosper and stand on their own two feet.”
She accused Rishi Sunak and Mr Hunt of an “incoherent and inconsistent” approach to tax, dismissing a previously announced “super deduction” to encourage investment.
“We cannot speak about tax freedoms in one breath and then tie our hands behind our backs in tax sovereignty on other things such as corporation tax, it’s just incoherent and inconsistent”, she added.
Earlier this month Boris Johnson urged Mr Sunak and Mr Hunt to cut corporation tax to “Irish levels” as part of a post-Brexit push to become a low-tax society.
Former Tory chancellors Lord Hammond, George Osborne and Kwasi Kwarteng have all warned against the rise in corporation tax.
Opponents have pointed to drugs giant AstraZeneca’s decision to build a new factory in Republic of Ireland rather the UK because the tax is going up to 25 per cent.
But Mr Sunak has insisted Britain will be able to attract foreign companies, pointing out that the UK would still have the lowest level of corporation tax of any G7 nation.
But John Redwood – a member of the Conservative Growth Group full of Truss loyalists – has argued that governments with the “courage” to corporate tax “collected rather more revenue and not less”.
Meanwhile, Mr Hunt has announced 12 new low tax investment zones outside of London to “supercharge” growth in hi-tech industries.
Officials said the scheme – backed by £80 of investment over five years in each of the new zones clustered around universities – is designed to accelerate research and development in the UK’s “most budding industries”.
The Treasury said each of the new investment zones is aimed at bringing growth to areas which have traditionally underperformed economically – a nod to the so-called “levelling-up” agenda.
But one frustrated south-west Tory MP told the BBC that ministers were trying to woo northern voters in seats the party was “going to lose anyway”.