The political fury over the abolition of the 10 per cent income tax band has allowed another hit to slip by largely unnoticed, a leading accountant has warned.
Johnathan Dudley, a partner at accountants Horwath Clark Whitehill in the Midlands, said: "While attention has been focused on the ten per cent income tax band, a third increase in the rate of Small Companies Corporation Tax in three years has slipped under the radar.
"While it was strange that it took political commentators and many MPs a year to realise the effect that the abolition of the ten per cent band would have since Gordon Brown announced it in his March 2007 Budget, he also announced at the same time that corporation tax rates would change, with a lower rate for companies with large profits and a higher rate for those with small profits.
"While much was made of the lower rate for large companies, with the rate falling from 30 per cent to 28 per cent on April 1 very little was said about the higher rates for small companies."
Companies or groups with annual profits lower than £300,000 now have to pay a rate of 21 per cent, up from 19 per cent in 2006 and 20 per cent in 2007.
"From April 1, 2009, the rate will again increase to 22 per cent – the abolition of the ten per cent income tax rate seems to have overshadowed almost a 16 per cent increase in the rate of corporation tax for small companies," said Mr Dudley.
"Nationally the number of small companies far outweighs the big companies that are benefiting from the cut from 30 to 28 per cent and it seems very petty and possibly counter-productive to penalise those firms to whom we are looking for the next generation of growth and success. Smaller companies need to make sure they are making use of every possible tax allowance in order to minimise the impact of this increase in tax on their profits."
And, qualifying for Chancellor Alistair Darling’s much heralded ten per cent Entrepreneurs’ Relief is not as straightforward as the Treasury would have us believe, according to HCW.
Graham Apperley, tax director in the Midlands, said: "When the Chancellor announced his capital gains tax changes there was an immediate outcry because they represented an 80 per cent increase in the tax burden for owners of small businesses planning to sell.
"Gordon Brown’s CGT taper relief regime came to an end on April 5, and it was only following a political storm that the new Entrepreneurs’ Relief was introduced.
"In theory it enables the owners of small businesses to achieve a ten per cent tax charge on the first £1 million of any gain from the sale of the business but while Mr Darling has been keen to give the general impression that ER does the same job as the old taper relief so that ten per cent rate will apply, in practice ER has different conditions and is harder to obtain than taper relief was. Not only that but ER is a lifetime limit whereas the old taper relief could be claimed as many times as circumstances allowed."
To qualify for ER a shareholder in a small trading company must own at least five per cent of the share capital and be an employee of the company.
Mr Apperley said: "If you think you may qualify for ER, you need to act now.
"Review your circumstances and seek advice on the ownership of shares in family companies and businesses to ensure if possible that ER can be obtained on a subsequent sale.
"The ER conditions must be met for at least a year before a sale is made."