The recent budget slapped businesses in the face. Not only are many still reeling from the impact of Covid (and will for many years to come), now they’re faced with the first rise in corporation tax in 47 years.
But it’s OK. All the media’s headlines reassure us that the increase will only affect big businesses.
For many people, the term ‘big businesses’ conjures up images of global corporations such as Google, BT and the like; the companies that make so much money, a rise in corporation tax won’t make a huge impact.
The problem is, in the context of the new tax hike, ‘big businesses’ could mean you if you make a profit of £250,000 or more.
The definition of a big business in terms of corporation tax
In a recent interview with the BBC, Rishi Sunak announced that “…yes, it’s [corporation tax] a tax rise on company profits. But only on the larger, most profitable companies. And only in two years’ time.”
OK, he uses the term ‘most profitable companies’ rather than ‘big businesses’, but the implication is clear. To the layperson, it appears as though he’s talking about the mega-companies that are always in the headlines for not paying or avoiding their tax liabilities.
According to MerchantSavvy, there are over 5.7 million businesses in the UK. Of those, 99.9% are small to medium-sized enterprises (i.e., they have between 1 to 259 employees). Drilling down further reveals that of those SMEs, 96% are microbusinesses (9 employees or less).
So, let’s look at the detail of the Chancellor’s corporation tax increase.
The good news is that for businesses with profits of £50,000 or less, the current rate of 19% will remain, which is about 70% of companies. Only those with profits of £250,000 + will pay corporation tax at the higher rate of 25%, about 10% of businesses. There will be a tapered rate for those that fall between those two amounts depending on how close to the higher profits level they are.
Mark Williams, CEO of London-based IT company Pensar, perfectly summed up the situation in smallbusiness.co.uk. He said, “the revised corporation tax rates are extremely disappointing and are another slap in the face to SMEs that form the bedrock of the UK economy. A company with profits of £300,000 is in a different world altogether to a company with profits of £300m. Just because you’re turning a profit of more than £250,000 doesn’t suddenly make you Google.”
Corporation tax, your profits and covid
The question of tax (whether corporation or personal) is always going to be controversial. There are winners and losers; that’s inevitable.
The timing of our current ‘once in a lifetime pandemic’ sucks and makes life harder for everyone – even the government who have the unenviable task of rebuilding our shattered economy.
Few SMEs have benefited from the pandemic. Those that have adapted and survived will bear the scares for many years to come. The bounce-back won’t be quick, but according to research from Starling bank, four in five (80%) of UK SMEs are confident they will recover from Covid, returning to pre-pandemic profit levels by the end of 2021.
That’s great news for SMEs, but just watch out. With the hike in corporation tax coming in 2023, you could be in for a bigger bill.