Small Business Corporation Tax
The Importance of Small Business
Small business is vitally important to our economy. It is the component of the private sector that delivers 60% of all its jobs. The smallest, particularly if they are young or just starting out are crucial for the role they play in manintaining competition, thereby keeping the market on its toes. Some of these, possessing good ideas, drive and innovation will grow to be big corporations and major employers in their own right one day; just as long as they are allowed to.
Corporation Tax Changes - Budget 2005
In 2005 Gordon Brown as Chancellor delivered a hammer blow to small companies with profits below £50,000 when he changed the rules for calculating their corporation tax. This has not only had a severe effect on their profitability but most crtitically their cashflow. Since it came into effect in 2006 it has also undoubtedly been a constraint on jobs among these.
Marginal Relief
Marginal relief had long been recognised as a method of nurturing small companies who choose to retain profits to finance future growth. In 2005 Brown scrapped this for businesses with profits between £10,000 and £50,000. In addition the convention that a business with profits below £10,000 should pay no corporation tax was also scrapped. The following demonstrates what this means for a small company with taxable profits of £11,000, fixed assets b/fwd of £5,000 and new fixed assets acquired of £1,500, with depreciation set at 25%.
Not so Stealth Taxation
It is true that this is an extreme example as the level of the tax increase falls away sharply as profits rise towards the £50,000 benchmark but it never decreases. A company making £20,000 for example is still paying 73% more tax in 2009, which is equivalent to raising income tax for those paying at just the basic rate from 20% to 34.5%. Also it should be remembered that for a company with profits marginally below £10,000 they are now expected to pay tax of £1,916 whereas in 2005 and before they would have paid none; equivalent to scrapping personal allowances altogether.
If on the other hand the figures for this business are multiplied x 1000 (i.e. profit £11,000,000 fixed assets b/fwd £5,000,000 etc.) to turn it from a very small one into a very big one; the tax charge actually goes down - By 2% as opposed to the 1054% increase in the example above.
Gordon Brown Quotes on Small Business
Budget 2004 – I have cut the rate of small business tax
Budget 2005 – I am not cutting small business support – I am enhancing it
Budget 2006 – It is right today to back our enterprise culture
Budget 2007 – I shall take action in a way that will not raise the tax burden on small business
................. Really?
4th February 2009
© Figurewizard.com This article may not be reproduced without our express permission
Please use this area to contribute your opinion to this article whether its to add detail, critiscise or correct we really appreciate your input
Small business is vitally important to our economy. It is the component of the private sector that delivers 60% of all its jobs. The smallest, particularly if they are young or just starting out are crucial for the role they play in manintaining competition, thereby keeping the market on its toes. Some of these, possessing good ideas, drive and innovation will grow to be big corporations and major employers in their own right one day; just as long as they are allowed to.
Corporation Tax Changes - Budget 2005
In 2005 Gordon Brown as Chancellor delivered a hammer blow to small companies with profits below £50,000 when he changed the rules for calculating their corporation tax. This has not only had a severe effect on their profitability but most crtitically their cashflow. Since it came into effect in 2006 it has also undoubtedly been a constraint on jobs among these.
Marginal Relief
Marginal relief had long been recognised as a method of nurturing small companies who choose to retain profits to finance future growth. In 2005 Brown scrapped this for businesses with profits between £10,000 and £50,000. In addition the convention that a business with profits below £10,000 should pay no corporation tax was also scrapped. The following demonstrates what this means for a small company with taxable profits of £11,000, fixed assets b/fwd of £5,000 and new fixed assets acquired of £1,500, with depreciation set at 25%.
| year | 2005 | 2009 |
| net profit |
11,000 | 11,000 |
| add: depreciation |
1,625 | 1,625 |
| less: capital allowances |
1,850 | 2,500 |
| taxable profit |
10,775 |
10,125 |
| tax rate |
19% | 21% |
| gross tax |
2,047 | 2,126 |
| less: marginal relief |
1,863 | 0 |
| tax payable |
184 | 2,126 |
Not so Stealth Taxation
It is true that this is an extreme example as the level of the tax increase falls away sharply as profits rise towards the £50,000 benchmark but it never decreases. A company making £20,000 for example is still paying 73% more tax in 2009, which is equivalent to raising income tax for those paying at just the basic rate from 20% to 34.5%. Also it should be remembered that for a company with profits marginally below £10,000 they are now expected to pay tax of £1,916 whereas in 2005 and before they would have paid none; equivalent to scrapping personal allowances altogether.
If on the other hand the figures for this business are multiplied x 1000 (i.e. profit £11,000,000 fixed assets b/fwd £5,000,000 etc.) to turn it from a very small one into a very big one; the tax charge actually goes down - By 2% as opposed to the 1054% increase in the example above.
Gordon Brown Quotes on Small Business
Budget 2004 – I have cut the rate of small business tax
Budget 2005 – I am not cutting small business support – I am enhancing it
Budget 2006 – It is right today to back our enterprise culture
Budget 2007 – I shall take action in a way that will not raise the tax burden on small business
................. Really?
4th February 2009
© Figurewizard.com This article may not be reproduced without our express permission
Your Comments
Its high time this got more exposure. I know from clients that jobs are being affected by this. This is particularly so in the case of part timers.
Comment by BWJ
Comment by BWJ
How can anybody be surprised? Brown's fixation with big business is what got us unto this mess in the first place. Perhaps he disapproves of people strating a small business when they could be adding to the numbers in the public sector instead who can be relied on to vote labour to protect their so called jobs.
Comment by dan alden
Comment by dan alden
year 2010
net profit/Loss -4,000
add: depreciation 1,625
less: capital allowances 4,500
taxable profit/Loss -6,875
I want to verify, the companies loss is -2,375 or -6,875
Is it possible/correct to increase the Loss by claiming Capital allowance?
Or just leave without claiming the CA, as the NBV will remain unchanged until the next year?
Comment by Kris
net profit/Loss -4,000
add: depreciation 1,625
less: capital allowances 4,500
taxable profit/Loss -6,875
I want to verify, the companies loss is -2,375 or -6,875
Is it possible/correct to increase the Loss by claiming Capital allowance?
Or just leave without claiming the CA, as the NBV will remain unchanged until the next year?
Comment by Kris
Please use this area to contribute your opinion to this article whether its to add detail, critiscise or correct we really appreciate your input
Bookmark with: