Wednesday, November 12, 2008

Cancelling the small company tax rise won't help NOW

This morning I posted a blog in which I explained why none of the headline demands for tax cuts would have the desired impact. Quite simply because they won't reduce the taxes payable in the immediate future.

I have another example of such a tax cut to add to the list. And this one I'm afraid emphasises how out of touch are the MP's who vote on these matters.

The alternative view would require me to attribute a high degree of cynical game playing to the 18 MPs who signed a parliamentary motion. Is it really possible that they only did so for the PR that has followed despite knowing that the tax to which they refer will not be payable until 2010. So, even if the Government did as requested the impact would have NO IMPACT at all on cashflow during the recession.

Sadly - I think it more likely that the MPs genuinely think they are trying to help (and secure some positive PR) and are wholly unaware of how ineffective would be a successful outcome to their demands. ie: they do not understand even the most basic of points about our tax system - ie: when tax is payable.

According to press reports the MPs have called on the Government to "back down on the plan to increase corporation tax on small businesses from 21% to 22%". Amazingly the claim is being supported by the Federation of Small Business which I would have hoped did understand how the tax system works.

Quite simply corporation tax is payable on profits made during an accounting period. The rate of corporation tax on small company profits (upto £300,000) is to increase by 1% to 22% from 31 March 2009. It will only be payable ON PROFITS MADE AFTER THAT DATE. And corporation tax is not payable until 9 months after the end of an accounting period.

By way of example - assume 12 month accounting periods ending:
  • 31 March 2009 - Subject to corporation tax of 21%. Payable 31 December 2009.
  • 30 April 2009 - Subject to tax at 21% on 11 months profits and 22% tax on profits in April 2009. All payable 30 January 2010.
  • 30 September 2009 - Subject to tax at 21% on 6 months profits and 22% tax on 6 months profits from April 2009. All tax payable 30 June 2010.
  • 31 March 2010 - Subject to tax at 22%. Payable 31 December 2010
So tell me, how does cancelling the increase from 21% to 22% help small companies facing the recession at the end of 2008?


  1. Yes. And in fact most small companies actually have to pay out all their profits for the directors to live on and don't pay CT at all. The small companies rate is largely irrelevant, but it does get people excited (as I found out when I said this at an FSB conference) !

  2. The correct the payment date for the first of your bullet points is of-course 31 December 2009, not 31 March 2009.
    A tax cut which would really help small businesses would be to reduce employers' national insurance.

  3. Thanks Rebecca. I've corrected the typo now.

    Whilst a reduction in employer's NICs would be an immediate help for small business employers, it would do nothing for the 3.8 million self employed or for those other small businesses that have no employees.