It is no secret that millions of us are feeling the pinch at the moment.
With sky high inflation rates, rising costs and interest rates and stellar energy bills, not to mention tax increases and the freezing of allowances which research[1] predicts will bring over 1.2m people newly into higher rates of tax, surely we can rely on great trading conditions to steer us round from a now widely-predicted recession.
Or can we? While household budgets are being squeezed, and some sectors (mentioning no names all those energy companies with record profits) are doing very well, for many businesses, there are a number of tax challenges to overcome if we are to trade our way out of this economic dip.
First, the rate of rates of corporation tax on profits above £250,000 will increase from 19% to 25% from 1 April 2023. That means a decrease in post-tax funds for business investment, although the government argues the UK is still a great place to do business.
The small profits rate of 19% will stay for profits of up to £50,000, with taper relief applying to profits up to £250,000. However, inflation will quickly erode the benefit of this rate leaving most companies worse off. Where possible, companies could consider deferring the use of losses until 2023 which would save an extra 6% in tax, although delaying the receipt of the benefit of those losses.
The new 1.25% Health and Social Care addition to NI contributions, the effect of which on individuals has been blunted slightly with the announcement last month that the NI contribution threshold will be increased in line with income tax allowances, is still due to make a big impact on companies’ bottom lines. This increased charge also applies to employers NI, taking the main rate up to 15.05%, although these costs are eligible for a corporation tax deduction. Add to this the 6.6% increase in national minimum wage to £9.50 per hour from 1 April 2022, and some companies will see a significant rise in their wage bills. With inflation currently running at 7%, there is likely to be at least a similar hike for low paid workers next year.
But even if companies do start making higher profits, it isn’t all plain sailing, after all, income tax is not the only place where thresholds have been frozen. Corporation tax payment dates are also dependent on profits and companies and groups that make taxable profits of less than £1.5 million pay their tax nine months and a day after the end of the accounting period. Those with profits over this threshold have to pay their taxes earlier.
If profits increase in line with inflation companies will end up paying tax sooner. This will impact on cash flow and funding needs. More planning will be required to ensure that corporation tax payments are made on the due dates and that cash will be available to fund them.
Similarly, the threshold for UK companies having to comply with the full transfer pricing requirements are €50 million turnover and a balance sheet total of €43 million.
Companies that have been outside the transfer pricing regime may find themselves needing to put transfer pricing documentation in place. It will be worthwhile for these businesses to start considering documentation requirements ahead of hitting the thresholds. Waiting until HMRC sends a documentation request is unlikely to produce the best results!
While calls for an energy windfall tax have fallen on mostly deaf ears up to this point, given how crucial SME business is to the economy, perhaps we can hope that the Chancellor will offer some aid and incentives to business in his next Budget, to help ease that pinch and to allow the economy to grow again.
[1] analysis by the House of Commons Library commissioned by the Liberal Democrats
