Corporation tax rise – it’s only right that small businesses are exempt

In chancellor Rishi Sunak's Budget speech earlier this year, it was announced corporation tax would be increased for larger businesses in order to help pay off the estimated 40bn borrowed by the UK throughout the pandemic.

Corporation tax rise - it’s only right that small businesses are exempt

In chancellor Rishi Sunak‘s Budget speech earlier this year, it was announced corporation tax would be increased for larger businesses in order to help pay off the estimated £40bn borrowed by the UK throughout the pandemic. As it stands, the UK’s rate of corporation tax is currently set at 19% but the change will see this increased to 25% as of April 2023.

Of course, no-one would argue against the need to increase government income to pay for the costs of coronavirus. All of the furlough scheme payments, Covid-19 loans and other financial support measures that have been implemented over the past year have created a hole in the UK’s finances that needs to be filled relatively swiftly. 

However, I believe it is only right that our SMEs – the smaller businesses who have been the worst affected by the pandemic – should be shielded in the short term from this financial payback to the Exchequer. 

With the vaccine rollout in the UK moving at speed and deaths/infections steadily declining as the result of our lockdown measures, it is tempting to presume that we are already in a pandemic recovery stage – but this couldn’t be further from the truth for many small businesses. SMEs need to have a period of recovery when restrictions are lifted in order to have a chance at survival. I am thankful that what the Chancellor said about corporation tax and the extension of furlough during the Budget speech  will mean SMEs can start to recover without the extra pressure of additional tax to pay. 

That said, there are still measures the government can take to protect smaller businesses at a time when the pandemic continues to take a heavy toll on them.

SMEs: The backbone of the UK economy 

The SME sector is the backbone of our economy, representing around 99% of businesses in the UK – some 6 million businesses in total. The sector represents a fountain of innovation and, because of their smaller size, these small businesses have the ability to operate in an agile and effective way. Crucially, they can also create innovative solutions to new problems – which will be a key element in the UK’s ongoing response to Covid-19 and our future economic recovery. 

Unfortunately, while small businesses tend to be those in most need of protection and support, they are also regularly overlooked in favour of larger enterprises when it comes to changes in tax, legislation and financial support. Even when furlough support was first announced, it was soon evident that it favoured large businesses rather than traditional SMEs – and it was only after three months of Covid impact and much pleading from within the industry, that the Chancellor finally announced more generous income support for smaller businesses. 

Despite the expansion of the scheme, however, there were still more than half a million workers who remained excluded from it. And it was only during Mr Sunak’s Budget speech this March that news finally came that newly self-employed people who had submitted a tax return could qualify for the fourth and fifth grants – giving roughly 600,000 more people access to crucial financial support. 

The concern is that this may be too late for many newly self-employed people and contractors, who have been hit by over a year’s worth of the damaging impact of Covid-19. Even those who have been eligible for support and successfully navigated the complex process of applying for aid have reportedly experienced lengthy delays in receiving the funds they so desperately need. If smaller businesses cannot easily access – and swiftly receive – financial support, they could struggle to survive. 

Existing challenges for small businesses during the pandemic

Disruptions to businesses of all sizes and across almost all sectors have forced a change in day-to-day work routines. With less profit being generated at a time when businesses must adapt to remain relevant to the market, payments to small businesses have moved down the hierarchy of importance. 

For small businesses  who need a regular income and cashflow to keep themselves afloat, the scourge of late payment is an all-too familiar story. However, our own research into payments shows just how badly the issue has accelerated during the pandemic. 

We found that the number of invoices sent by UK SMEs and freelancers plummeted by 33% during the first lockdown (April-June 2020), primarily as a result of a decline in ordinary day-to-day business. At the same time, the level of late payments has remained high, with a whopping 46% of invoices paid late. 

Maintaining a steady income is fundamental to a small business’s survival, but we know that many are struggling with getting paid on time and keeping their cashflow healthy. It is therefore important that every small business that can come through the crisis as a sustainable enterprise is provided with the support it needs to stay afloat. A rise in corporation tax would have had the opposite effect and would likely be a crushing blow that debilitates small businesses who are not at a point where they can afford to pay more.

The solution

As already mentioned, unlike their larger counterparts, small businesses are commonly dependent on month-to-month success and do not have the same footing larger corporations do to simply stay afloat. Therefore, it is only correct that the future tax rise is only introduced for larger, stable companies that are capable of contributing, rather than smaller, more vulnerable businesses. 

While I sympathise with companies who may resent the prospect of reaching into their pockets while others are exempted, I believe the priority should remain in helping smaller businesses who will be key to reinvigorating the economy. As larger, more stable companies that can absorb the costs more easily, I believe that the initial financial burden of the pandemic should fall on our broader shoulders first – at least until others have recovered sufficiently enough to join us in repaying the debt. 

Mr Sunak’s decision to keep small businesses exempt from the rise in corporation tax might well end up being the saving grace from what could have been a death knell for many in the SME sector. It’s a reprieve that will help them recover as we approach what is (hopefully) the end of the tunnel with the pandemic, and which will ultimately benefit the UK economy.

Ed Molyneux
Ed Molyneux

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