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As of today’s date 24 MPs have signed an Early Day Motion which on the face of it is supportive of small businesses but in actual fact is totally pointless. In fact it could be evidence, if such is needed, that MPs really have no idea of the realities of business life.

The motion reads:

That this House recognises that small businesses across the United Kingdom provide employment to 13 million workers and are facing difficult financial pressures due to the economic downturn; and asks the Government to reconsider its plans for a further 1 per cent rise in the small companies rate of corporation tax announced in Budget 2007 to take effect from April 2009.

Of course it might also be that the call is just a cynical ploy designed to ensure some nice PR for the MPs because the fact is that even if the Government complied with the motion it would have absolutely no impact on business cash flow during the recession. In other words it would be totally pointless.

Unfortunately although I know that more often than not politicians are most concerned about their PR profile, in this case I think it more likely that the MPs genuinely think they are trying to help but calling of the planned 1% increase but simply do not understand one of the basic concepts of our tax system – the timescale of when tax is payable.

It is simple enough. Corporation Tax is payable on profits made during a company’s accounting period. That period can end on any day of the calendar year and is set by the company when it is registered though it can be changed within certain limitations at a later time.

Irrespective of the date the period ends, tax is computed at the rate or rates which applied during the whole period so that if a rate changes half way through the period half of the profit will be charged at one rate and the remainder at the second rate.

Currently the rate of corporation tax on small company profits (up to £300,000) is set to increase from 21% (to 22%) from 31 March 2009. It will therefore only be payable on profits made after that date. Furthermore corporation tax is not due to be paid to HMRC until 9 months after the end of the accounting period.

So, some examples based on some common accounting period end (p.e.) dates:

p.e. 31 March 2009 – Subject to corporation tax of 21%. Payable 31 March 2009.

p.e. 30 April 2009 – Subject to tax at 21% on 11 months profits and 22% tax on 1 month’s profits. All payable 30 January 2010.

p.e. 30 September 2009 – Subject to tax at 21% on 6 months profits and 22% tax on 6 months profits. All tax payable 30 June 2010.

p.e. 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? Such a reduction will have no effect on their cash flow before January 2010 at the very earliest.

Perhaps the saddest thing is that the Early Day Motion has been backed by the Federation of Small Business. You would have thought they would have had a better grasp of the realities of the tax system than the MPs!

4 Responses to “Call for Cancellation of Small Company Tax Rise is Pointless”

  1. James Green says:

    Thanks Brian. Perhaps is Mr Darling read this blog he might learn something. But then I suspect he has a closed mind.

  2. Brian Seymour says:

    Well Mr Darling has announced the delay so he clearly doesn’t read Link4BusinessInfo. Shame on him!

  3. GeorgeK says:

    Apart from you James, the only person who pointed out that this was not a helpful idea was Vince Cable. What a pity this guy isn’t in charge of the economy and is unlikley to be (unless there is a hung parliament and Gordon Brown makes him Chancellor).

  4. David Irwin says:

    Thanks for this James. Most useful. I see that Mr Darling has announced the delay in making the increase but as you say it will make no difference to the current problems of small and medium sized businesses. SPIN – pure and simple and instigated by a Conservative MP. You would have thought George Osbourne would have pointed out the facts which you have explained.

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