As an SME are you paying too much Corporation Tax?
30th April 2019
As an SME are you paying too much Corporation Tax?
SMEs paying more corporation tax than big business
A recent study by firm Moore Stephens has shown that businesses qualifying as SMEs are, on average, paying a higher rate of Corporation Tax than bigger businesses. In their report, it showed that the average rate paid by SMEs in 2016 was 21.7%, whereas those businesses with a turnover of more than £1bn paid an effective rate of just 20.1% during the same period.
The difference is attributed to the fact that larger corporations may simply be better at identifying and claiming the reliefs available to them, with a lack of expertise and advice on available tax reliefs for the smaller firms.
If you are an SME owner or director, then you should be aware of several reliefs available specifically for small business that may improve your financial efficiency depending on your circumstances. In this briefing we explain some of the reliefs that you could be looking at for your business.
What is Corporation Tax?
All UK limited companies, foreign companies with UK branches or offices and clubs/co-ops/unincorporated associations such as sports clubs, regardless of size, are subject to Corporation Tax. The tax is based on profits, with businesses required to contribute through taxes when certain profit thresholds are exceeded.
Corporation Tax is paid on the HMRC’s tax year basis, and the amount depends on when a firm’s accounting year starts and ends. Although the tax year is April to April, a business’ accounting year may run from January to January. Depending on the accounting year dates will impact when profits must be declared, which will impact any allowances and relief eligibility.
For the financial year 2020/21, Corporation Tax is set at 19%. Government revenues are dependent on these taxes as a source of revenue and so this area is strongly regulated and the variations and exemptions are quite complex.
SME Tax Reliefs
Small businesses educating themselves on tax reliefs is essential to being able to reduce their tax bills. There are various reliefs specifically targeted at SMEs such as Research & Development tax credits and Capital Allowance reliefs but, despite their availability, they are currently under-utilised by some businesses. Engaging an internal or external professional resource/accountant, who can support in identifying and applying these reliefs could bring financial benefit to qualifying firms.
To help build your awareness of the reliefs that may be available to your business or those investing in your business, we have created some quick guides on the key areas of SME tax relief.
- Capital Allowances and Annual Investment Allowance
- R&D Tax Relief
- The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) ( Though technically a relief for individuals rather than businesses, these are still useful reliefs to be aware of. )
- Creative Industries Tax Relief
- Entrepreneurs’ Relief (HMRC link)
As with all complex financial areas, we would advise consulting your accountant or financial professional for advice on these matters prior to making any decisions. If you would like to discuss your individual business circumstances, please do connect with one of our friendly team members.
