21 February 2018

Are SMEs now paying a higher tax rate than big businesses?

Call for government to consider re-introducing a lower corporation tax rate for SMEs

SMEs could for the first time be paying a higher effective rate of tax than bigger businesses.

The effective rate of corporation tax* paid by SMEs (businesses with a turnover of less than £25m) was 21.7% in 2016. This is higher than businesses with a turnover of more than £1bn, who paid an effective rate of just 20.1% (based on an analysis of over 10,400 companies).

This reverses the position smaller businesses were in just a few years ago, when they benefited from a corporation tax rate discount of one quarter on the full rates.

In 2010, SMEs paid a headline corporation tax rate of just 21% compared to the main rate of 28%. However, since 2010 the main rate has been progressively lowered to match the rate paid by smaller companies.

Re-introducing a lower corporation tax rate for SMEs would provide a much needed boost for smaller companies, especially in the earlier years of their development. The move would also ensure owner-managers could leave more money in their company to reinvest in growth.

One reason that large businesses often pay a lower tax rate on their profits is they are often better informed to make use of the many tax reliefs on offer.

Recent tax rate reductions have focused far more on encouraging larger businesses than SMEs. 

Re-introducing a corporation tax discount for the SME sector would be timely to further encourage the dynamic enterprise culture the UK aspires to and support the much needed drive for growth.

The above statistics suggest that larger corporates may be somewhat better at identifying and claiming the available reliefs than their SME counterparts.

Furthermore, there are several tax reliefs targeted at SMEs like Research and Development tax credits and 100% capital allowances reliefs, but despite this they remain stubbornly under-claimed, mainly through lack of awareness.

SMEs see less benefit from recent corporation tax cuts – as large corporates have their corporation tax rate cut by almost a third in the last seven years

* Takes into account taxes on company profits - excludes VAT, employers NI and other taxes

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