The Tenon Think Tank report published in June has triggered renewed speculation that there will be a rise in corporation tax during the term of the present government. According to their research 53% of small to medium enterprises (SMEs) expect there to be a rise. Tenon suggests that this reflects a belief amongst SMEs that businesses will bare the brunt of the perceived public spending deficits.
What the speculators fail to report on is what the other 47% Tenon respondents think. A healthy minority, 32% of those questioned, thought that corporation tax would in fact stay the same.
The 32% were not questioned on where the extra money might come from instead; there is more than one way to skin a cat after all. The truth is that there is a number of ways the government could fund their commitments and as history proves, no amount of speculation will give the answers ahead of the announcement. There was speculation last year for example on a Value Added Tax (VAT) rise and that never came to fruition.
If it were the turn of corporation tax to go up, it would be the first change since 1999, apart from the addition of the 19% non-corporate distribution rate in 2004. A rise in corporation tax would impact not only those businesses with tight margins, but also those self-employed workers who choose to receive the lion’s share of their money via dividend payments from a limited company. How much of an effect this would have is clearly dependent on the size of the rise however, if the ‘black hole’ isn’t filled with additional corporation tax, it’s perhaps unrealistic that the self-employed will escape entirely unaffected from new measures. There are various reasons why rises on Income Tax and National Insurance Contributions are less likely but that doesn’t mean neither will happen.
There is an argument that the amount collected through corporation tax increases every year in any case due to the fact that the profit bands don’t change to reflect inflation, unlike those for Income Tax. The government might wish to continue collecting increasing amounts every year without drawing the attention to corporation tax, which a direct rise in the rate would inevitably bring.
Whether or not there are changes to corporation tax there will be ways and means for contractors to genuinely benefit through limited company structures without fear of reprisal. Whether this is through their own company or a service provider’s the best provision that can be made now is to ensure the company structure is capable of withstanding changes in the tax system and is acceptable to HM Revenue & Customs.
Lisa Underwood
Head of IOM Sales & Marketing
Charterhouse Group International