One element of the 2013 Budget we didn’t cover in any great detail was the announcement by Chancellor George Osborne of a further lowering of the Main Rate of Corporation Tax in 2015. Why didn’t we mention it? Well, because all Crunch clients pay the Small Profits Rate, so it’s not strictly relevant.
At 24% until recently, the Main Rate fell to 23% for the 2013/14 fiscal year (the Corporation Tax year starts on the 1st April rather than the 6th like the Personal Tax year – more info here), and will fall again to 21% for 2014/15. Announced in the Budget was a subsequent drop to 20%, due to come into force in April 2015.
This is an aggressive move by the Chancellor – the Main Rate stood at 30% just five years ago. The UK will have one of the lowest rates of corporate taxation in Europe, and certainly the lowest amongst the larger EU countries (France has a corporate tax rate of 33%, Germany around 30%, and Spain between 25-30%).
Importantly, this move to a 20% Main Rate will bring it into line with the Small Profits Rate, meaning a ‘harmonisation’ of the two rates will be possible.
While many freelancers and small businesses may feel paying the same rate of Corporation Tax as huge multinationals is somewhat unfair (especially given they lack the ability to run rings around the taxman à la Amazon or Starbucks), the introduction of a single rate would make accounting and reporting for growing businesses significantly easier.
Currently, businesses which have annual profits above the Small Profits Rate of £300,000, but below the Main Rate threshold of £1.5 million are subject to what is known as “marginal relief”.
This is essentially a mechanism to “ramp up” the amount of Corporation Tax paid between the two rates. Those with profits only slightly above £300,000 will receive more relief, meaning they only pay slightly more Corporation Tax (instead of jumping straight from the Small Profits Rate to the Main Rate).
Conversely a business with, for example, annual profits of £1.4 million will only receive a small amount of marginal relief, and will move onto the full Main Rate once they cross the £1.5 million threshold.
Marginal reliefs are a complicated bit of legislation (not to mention they serve precious little purpose when there is only a 1% difference in the two Corporation Tax rates, as there will be from April 2014), and by creating a single Corporation Tax rate HMRC could reduce confusion amongst business owners as to their actual tax rate, and make accountants’ jobs that little bit easier.