Liz Truss is poised to impose corporation tax as part of a Downing Street plan to backtrack on the huge package of unfunded tax cuts in her mini-budget, sources say.
The Prime Minister has come under intense pressure from restless Tory MPs to make a major economic turnaround to calm markets in the face of a financial storm.
However, the move would represent a massive setback, as his promise to cancel Rishi Sunak’s plans to raise corporate tax from 19% to 25% was a central promise of his leadership campaign.
A government source told the Guardian that No 10 officials were reviewing the mini-budget in a bid to bolster Truss’s position as prime minister after Kwasi Kwarteng’s disastrous economic growth plan last month.
Another source suggested the option of raising corporation tax was “on the table” as the Prime Minister tries to balance the books, although that may be just one or two per cent.
They indicated that no decision would be announced until the chancellor returned from Washington, where he is at a meeting of the International Monetary Fund, on Friday. However, there was speculation within Whitehall that the scale of the U-turn could make it impossible for Kwarteng to remain in place.
On Thursday morning, No 10 ruled out further changes to the mini budget despite pressure from Tory MPs with the Prime Minister’s official spokesman saying “the position has not changed”.
Both UK government bonds and the pound rallied strongly, partly due to continued bond buying by the Bank of England, but also in response to speculation about a reduction in planned cuts to corporate taxes and dividends.
At Prime Minister’s Questions on Wednesday, Truss ruled out any rise in corporation tax, telling MPs: “I think it would be a mistake at a time when we are trying to attract investment to our country at a time of global crisis to increase taxes”.
The government has already made a key promise to scrap the 45p top rate of income tax, a major blow to Truss’s authority, which has left his prime minister on edge and mutinous MPs warning which must change course or face a vote of confidence.
Rachel Reeves, the shadow chancellor, said: “Today’s disaster shows the utter chaos this government is in. This is a Downing Street-made crisis and Labor is paying the price.
“Labour has repeatedly said they must reverse the kamikaze budget and restore confidence.
“This is urgent as the Bank of England’s intervention in the markets ends tomorrow. The Tories cannot allow the chaos caused by their mini-budget to continue any longer.”