Large firms are set to enjoy another Corporation Tax cut following Budget 2013, but while the headline rate has been reduced significantly under the current Government, small companies will not benefit.
All UK companies pay Corporation Tax on their profits. Larger firms (with profits of £1,5m per year or more) pay the main rate of Corporation Tax – currently 24%, and small firms (with profits of £300,000 or less per year) pay the ‘small profits rate’, which is currently 20%.
A system of ‘marginal relief’ applies to profits which fall between the two bands.
Corporation Tax cut for larger firms
When the Coalition Government entered office in 2010, the main rate of Corporation Tax stood at 28% – itself the lowest UK rate of corporate tax since the 1970s.
This rate has been cut rapidly by the Chancellor over the past three years, as he aims to create one of the most competitive tax regimes for larger firms in the G20. The main rate in 24% during the current (2012/13) tax year; it will fall to 23% in 2013/14, 21% the year after, and now to a mere 20% from April 2015.
Corporation Tax makes up a relatively small slice of Treasury receipts (around 7 to 8%), and although the cut to 20% is likely to cost the Government £400m in 2015/16, it is hoped that the more generous tax rate will raise the overall tax take in the longer term.
What about smaller companies?
Although accountants may be pleased to see the main rate and small profit rates of Corporation Tax align at 20% in a few year’s time, it does raise the question; if small companies are so important to leading an economic renaissance in the UK, why hasn’t the Government done more to lower the corporate taxation burden on SMEs over the past three years?
Over the past thirty years, the small companies’ rate has always been lower than the main rate. The difference between the two rates has often been around 10 percentage points. When New Labour came to power in 1997, the rates were 31% and 21%.
Since the start of the 2008 tax year, just after the credit crunch hit, successive Chancellors have lowered the main rate – from the 30% rate which stood before April 1st 2008. Over the same period of time (five years), the small companies’ rate has been cut by a single percentage point.
Business reaction mixed
Despite the implementation of a new ‘Employment Allowance‘, which will enable small firms to reclaim up to £2,000 in employers’ NICs, from April 2014, some business commentators believe that the Chancellor should have taken the opportunity to further reduce the Corporation Tax rate paid by the UK’s SMEs.
However, the CIOT applauded the plan to align the two rates of Corporation Tax, not only because the justification for having a lower rate for small firms was “wafer thin”, but also because “there will be no incentive for companies to, sometimes artificially, keep profits to under £300,000.”
George Bull from Ernst & Young has an interesting angle on this tax change; “The 20% corporation tax rate will make the UK a tax haven in the eyes of many developed economies. This will inevitably affect the Chancellor’s international status as he attempts to tackle multi-national tax avoidance.”