In the fight to get business backing, taxation has become the latest battleground in the UK general election. The Conservative and Liberal Democrat coalition government claims to be more business friendly and the Labour Party claims that small businesses have been harshly dealt with. Neither, however, have put forward a coherent set of policies to solve the current problem of small businesses bearing the brunt of the tax burden.
In their last budget before the election, the Coalition announced a reduction to the main corporation tax rate from 21% to 20% – the lowest ever. The Labour Party has promised to reverse this if elected. It has promised to use the revenues to reduce the level of business rates on 1.5m small companies. Business rates are dependent upon values assigned to property. Labour has also promised to reduce the corporation tax rate for small companies, which it claims are harshly dealt with by the coalition.
Making sense of the changes
To make sense of this we need to look at the UK tax regime for different types of companies. Historically, companies have been divided into two categories, small and large. A company with annual taxable profits of up to £300,000 is considered to be small and pays tax at the small company rate. A company with profits of £1.5m or above pays tax at the main rate. And those with profits between between £300,000 and £1.5m are liable to pay the main rate but can obtain marginal relief, with the result that tax in the band is tapered.
In 2010, when the coalition government came to office, the main corporation tax rate was 28% and small companies were taxed at 21%. But in March 2015, the government announced it was aligning the two rates and as of April 1 2015 the rate is 20% for all companies. Under the coalition government, the reduction in the headline tax rate for large companies has been much bigger than the tiny cut for small companies. And in addition large companies have used other strategies – not necessarily through government policies – to secure tax advantages.
Parliamentary hearings have shown that large companies are adept at creating complex corporate structures to shift their profits through transfer pricing, royalty programmes, intra-group interest payments and management fees to low or no tax jurisdictions. They have the resources to hire large accountancy firms to craft novel tax avoidance schemes to reduce their effective tax rate. They can also second staff to HM Treasury working parties to influence tax legislation and secure favourable concessions. Small companies do not share this luxury.
In contrast, small companies tend to be, at their largest national, but more often confined to local and regional areas and do not have global operations. Their capacity to avoid taxes is low and their effective tax rates are likely to be high.
Using corporation tax statistics published by the UK government, the graph above shows how the total amount of corporation tax receipts fluctuates. In 2000-2001, when the main corporation tax rate was 30%, the tax receipts from large companies, excluding North Sea companies, were £26.316 billion.
This was reduced to £22.448 billion for the financial year 2013-2014, partly as a result of a reduction in the main rate of corporation tax. And, while in the interim years receipts have been higher and have fluctuated, the unmistakable trend is downwards, as the graph below shows.
Meanwhile for small companies, when the small company rate was 20% in 2000-2001, the corporation tax receipts were £4.433 billion. For 2013-2014 the amounts were £13.361 billion. The unmistakable trend has been upwards.
Need for forward thinking
Today’s small companies are tomorrow’s business giants. The conventional political wisdom is that they should be nurtured and supported, but instead their effective tax burden has increased. Labour may be able to help small companies by reducing their business rates, but that still does not amount to a reform of business taxation in its various guises.
Meanwhile, despite shrinking budgets, local authorities are expected to finance local infrastructure to support local businesses. They are allowed to retain some portion of the revenue generated by business rates. So higher business rates are partly a response to the austerity policies that have squeezed local government finances. This needs to be addressed – but no political party has put forward a coherent set of policies. Even then, the difference in power between large and small companies will remain and these cannot be addressed by ad hoc tax cuts or business rate subsidies.