Its official, the Chancellor has cost small business a minimum of £32 million per year in red tape, and this is just due to the introduction of the non-corporate distribution rate (NCDR) and starting rate of corporation tax.
The figure comes from a Regulatory Impact Assessment on Changes to the Corporation Tax Structure published with the budget. The RIA considers the impact of tax changes on small companies, notably the decision to abolish the NCDR and small companies rate. It costs corporation tax compliance out at a mere £50 per hour, which seems dubiously low.
Some 720,000 companies are affected by these measures, and the financial impacts would vary according to the profit level of the company.
Background to the tax changes
In the 2004 PBR the government issued a discussion paper on small business, the self employed and the tax system. By the closing date on 29 April 2005 more than 30 responses had been received from, among others, the Confederation of British Industry, The Federation of Small Businesses, and the Small Business Service.
The key issues raised were the need for simplicity and certainty in the taxation of small business, but apparently there was no consensus on future developments. Whether this means that HMRC did not agree with responses or that respondents did not agree with each other we do not know.
Since then HMRC have had a chance to review a report on the impact of the timing of tax payments on business, and KPMG have been paid over £5 million to look at red tape and calculate just how many hours businesses spend completing forms and calculating their tax liabilities.
In the, PBR 2005 the government announced its intention to remove the 0% starting rate of corporation tax and the NCDR (option 3 below). A partial RIA was published, inviting comments particularly on the compliance costs of the starting rate and NCDR.
The options were:
Do nothing
The £23m compliance costs identified by small companies in administering the NCDR would remain. This assumes the total compliance time for a company to be 1.5 hours at a time cost of £50 per hour.
Remove the NCDR and leave the starting rate of corporation tax in place.
Return the corporation tax structure to that which existed before the introduction of the NCDR in 2004. This would achieve a simplification of the structure, but is not good from the Treasury's perspective as there is a large risk that incorporations would increase which produces 'unfairness of businesses exploiting the incentives simply to reduce their tax and NICs liability'.
The compliance cost is £9 million, assuming it takes 0.25 hours at £50 an hour to calculate the marginal relief on a company's corporation tax.
Remove both the NCDR and starting rate of corporation tax
Removing both the NCDR and the starting rate, and replacing them with a single small companies' rate. The corporation tax incentive to retain profits would be removed, but first year capital allowances (FYA) increased to 50% for 2006/07.
It is estimated that the saving to business would be £23 million per year from removing the NCDR and £9 million from removing the starting rate.
In short the RIA is there to justify the changes to CT rates, and an extra 10% in FYA is not going to promote investment by business in anything that will have a substantial impact on its success in the future.
Nichola Ross Martin